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Why buy shares? Shares promise high returns in the long term.
The question “Why buy shares?” is quickly answered: There is no alternative to buying shares and other securities to build up wealth. In times of low interest rates, shares offer what savings accounts, for example, have long since ceased to offer: Yield. With shares, you can therefore build up your assets with more opportunities and, for example, polish up your old-age provision.
But what should I pay attention to as a beginner when trading in securities? How important is the stock market price when entering and exiting the stock market? How can I invest my money so that it increases? These questions are asked by everyone who has a little money on the side and wants more than the measly interest on the current account.
Successful investors achieve returns of more than 10 percent per year on the stock market. The secret of their success: they never put all their eggs in one basket when buying shares and spread their risk over several securities from different sectors. In addition, they only buy shares in carefully selected companies with a convincing business model and promising future prospects.
How do I buy shares?
Investors can usually place the order to buy shares in person via an advisor at their bank or by telephone, e-mail or fax. With online brokers or direct banks, you can easily place the securities order online. All you need is the securities identification number (WKN or ISIN) of the share certificate you wish to buy. The remaining steps are usually self-explanatory. Before you can start trading in shares, however, you need a securities account.
How much money do you have available for securities trading?
As a beginner, start with small amounts and share purchases. In addition, you should only invest capital in the stock market that you do not need in the short term. If the markets run in the wrong direction, you will not have to sell at a loss because a costly car repair may be due. Securities trading on credit is taboo, especially for beginners, and at best suitable for investors with many years of experience.
What risk are you willing to take?
Determine what risk you are willing to take. Anyone who trades securities and invests in shares must also expect temporary price declines. Share prices often fluctuate strongly, so that within a few weeks or months 10,000 euros can become not only 12,000 euros but also 8,000 euros.
What return do you expect from your investments?
Determine what return you would like to achieve with your stock market investments in time period X. Focus on long-term, not short-term returns! In a securities portfolio, return assumptions in the range of five to ten percent per year are realistic. Remember: Most of the time, investors fail on the stock market because they want too much too fast and buy too risky shares, for example. Investor legends of the calibre of Warren Buffett do not focus on quick returns in securities trading, but on good companies. Then success usually comes automatically in the long run.
Which shares to buy? Putting together a securities portfolio
Once you have answered the above questions, you can turn your attention to the basic composition of your securities portfolio – and the question: Which stocks to buy?
Those who pursue a wise investment strategy will be successful on the stock market in the long term. Which securities investors should buy depends largely on their risk tolerance. While security-oriented investors tend to buy securities such as bonds or mixed funds, investors with a greater risk tolerance often opt for equity funds and individual shares. When buying shares, newcomers should – depending on the type of investment – opt for growth shares, value shares or a mixture of the two.
Experienced investors therefore do not put all their eggs in one basket when trading in securities. Instead, they buy shares in several companies from different sectors and different regions/countries. In this way, any losses on individual shares can be offset with gains from other securities investments.
Investments in companies that are active in growth markets (so-called “growth stocks”) can be extremely lucrative, as these companies often strongly increase their profits. This usually also has a positive effect on the share price. On the other hand, trading in growth stocks is also riskier than trading in “value stocks”, i.e. well-known companies that operate in established markets and have been market leaders there for years. Value shares often do not offer as many opportunities, but they also carry a lower risk of loss. Value stocks also often offer higher dividend payments than growth stocks. Dividends have a positive effect on the return of your equity investment.
Avoid the biggest beginner’s mistake in securities trading
Many beginners make the same mistake when trading securities. They invest their money in just one security, usually a rather speculative stock. This can go well, but in most cases it goes wrong. Avoid such a single value risk and the danger of sitting on double-digit losses at the very next downward movement or negative company news. Never put all your eggs in one basket on the stock market! Instead, spread your risk by spreading your investment over several promising stocks.
Buying shares – inform yourself in detail beforehand
On the stock market, money is not lying around on the street. Bear in mind that as a buyer of a share you will always meet a seller who is of the opinion that it is better not to own the security. As a seller, it is the other way round. So always question your opinion from this point of view before buying securities. If you want to increase your assets with securities in the long term, you should therefore choose your investments carefully and always keep yourself informed about your securities before and also after the purchase.
Especially when buying shares, the following applies: Before buying a share, inform yourself comprehensively about the investment and follow the example of the most successful investors of all times, such as Warren Buffet, George Soros, Benjamin Graham or Peter Lynch. They only invest in securities of companies whose business they fully understand.
Let profits run, limit losses
While traders tend to aim for quick returns, investors are keen to invest in successful companies for the long term and to participate in their success by buying shares – for example, in promising sectors such as water treatment with water shares. Nevertheless, even with long-term investments it is advisable to question them if success fails to materialise or the share is heading in the wrong direction.
Experienced stock exchange traders act according to the old stock exchange motto “let profits run and limit losses”. However, many investors are thwarted by psychology. They often realise their trading profit even after small price increases. When prices fall, on the other hand, they do not sell and hope to see their purchase price again at some point. Not infrequently, high losses then accumulate.
When to buy shares?
Finally, we turn to one of the most important investor questions: When is the best time to buy and sell shares? Many investors who want to build up wealth through stock market trading ask themselves the question of the right time to enter and exit the market. The somewhat sobering answer to this is: the perfect moment to enter the market or exit a stock market commitment cannot be predicted. Despite all the possibilities, investors only hit the right moment with a lot of luck. The fact is: If you wait for the right moment, you have already missed it. The following methods can help to at least get closer to the perfect entry point.
Various economic indicators can give signals for future price developments. These include, for example, various performance reports on the economic situation of a country (GDP figures, etc.), the inflation rate, the oil price trend and the ECB interest rate trend. The most important methods for finding the best time to buy shares are technical analysis and fundamental analysis.
Technical analysis examines the past price development of a share or an index for conspicuous price formations – depending on the chosen strategy or method, other patterns/signals are important. As a rule, technical analysis analyses charts, which is why it is also called “chart analysis” or “chart technique”.
Fundamental analysis, on the other hand, takes a close look at various fundamental data of shares and companies. The aim is to find out whether it currently makes sense to buy or sell shares. The price-earnings ratio (P/E ratio) of a share, for example, is a particularly popular fundamental indicator. The P/E ratio helps to track down favourable share certificates.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 87,8% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.