Buying your first share: five steps to becoming a shareholder

Germans have no idea about shares and no time to deal with them either. At least that’s what researchers at the Frankfurt School of Finance say. They asked 3000 German citizens why they, or rather why they don’t put money into shares. The two most frequent answers were "I don’t know!" and "No time!". Both sound like excuses, because people in this country are not dumber than Americans or Brits and no one needs to come up with a lack of time either. Finally, in times of Corona crisis, bars, cafes, sports fields, theaters, in short, many places where you can spend time are closed until further notice.

Why not try out equities? After all, shares are nothing more than small parts of companies. If a company is doing well, so it produces things that many people want, be it iPhones, noodles or toilet paper, its profits rise. Many full have the share of the company and that drives the price. The principle of supply and demand also prevails on the stock market.

Now, in times when more and more companies are asking for money from the state or complaining about their losses because of the Corona crisis, there are certainly less exciting occupations than buying stocks and quite frankly, it also takes some courage or better hardy nerves, but it can be worthwhile to get in now. Because since only few want to buy shares, they are cheap or at least cheaper than in February when the German leading index DAX stood at over 13000 points, higher than ever before.

With these five steps, the path to your first share becomes almost a walk in the park.

1. The depot

If this is too much work for you, you should look for an online broker. Most online banks such as ING, DKB, Comdirect or Consors are also brokers. They offer a mostly free checking account and an equally mostly free securities account from a single source. In addition, there are pure brokers whose clients can only trade securities. The money for this comes from the current account of the respective customer, which is used as a so-called "clearing account" is deposited with the broker. These brokers are called for example Onvista, Degiro, Flatex or Smartbroker. They are, in terms of trading fees, usually cheaper than the direct banks. The securities account itself does not cost anything, provided the customer places an order at certain intervals, i.e. buys or sells securities. Those who order only once and leave their shares lying around usually have to pay a custody fee.

2. Which share to buy? Or buy a fund?

So newcomers to the stock market have two options: The first, they pass the buck and buy a fund that invests in many different stocks. The second, they deal with companies, read annual reports, consider what things are in particular demand at the moment, who makes them and whether it is worth betting on this or any trend. A small example that it can be worthwhile to bet on a trend: Anyone who believed at the beginning of 2007 that the iPhone would revolutionize the way we communicate and bought Apple shares for around 10.50 euros each at the time could now sell the stock from back then – which has become seven since a stock split in 2014 – for around 1800 euros.

Funds and ETFs: difference, similarities

With the actively managed funds there is a fund manager or a team of managers. They decide which stocks and or other securities like bonds or commodities to buy according to rules given to them by themselves or the fund company. Their goal is to always outperform the market as a whole or the benchmark index. Whether a fund with the German benchmark index DAX, on the "world stock index" It is up to the managers or experts who rate the funds to decide whether the fund should be rated according to the MSCI World or another index. Independent ratings such as the Euro Fondsnote, which rates funds from 1 (very good) to 5 (weak), help investors distinguish between good and not so good funds.

Actively managed funds can outperform the market, i.e. beat their benchmark and the mass of other funds, but they do not have to. As a rule, it is assumed that in the long run, only one fund out of ten will outperform the market in the long run. In addition, actively managed funds charge a management fee of around one to two percent of the money invested.

index funds, i.e. ETFs, are much more favorable, with them not humans, but computer programs decide, which shares are bought and they orient themselves stubbornly at the index. An ETF on the DAX only buys shares of the 30 companies listed on the DAX, strictly according to their importance within the index. For example, the software group SAP has more weight in the DAX because of its stock market value than, say, the aircraft turbine manufacturer MTU. However, this also means that the ETF always develops in parallel with the index. If the DAX loses a quarter of its value within a few days, the ETF is in the mix. A good active fund might get away with a ten percent loss.

Speaking of losses: It may sound terrible if the DAX plunges by 20 percent within a week. Many journalists then calculate how many billions of euros have been lost as a result of the share price slide. Even if this crash also shows up in your own portfolio: Only when you sell the shares that have crashed, you have actually suffered the loss. Who does nothing, has only so-called book losses. They don’t actually hurt at first and you keep the chance that the shares will recover again. This means in reverse that one should not hold shares stubbornly. If a company is slowly going bankrupt, it makes sense to get rid of the stock now rather than later. During a crash, such as the Corona crash, many shares of healthy and profitable companies also crashed. If a panic breaks out, and a crash on the stock markets is nothing else, investors and computer systems sell everything, regardless of whether it’s a good or a lousy stock.

How to select shares, which key figures help

But there are a few ratios that give a rough indication of which stocks are worth buying:

The price-to-earnings ratio (P/E ratio): Current share price divided by earnings per share. The P/E ratio shows the number of years in which the company would have earned its stock market value if profits had remained constant. A low P/E ratio therefore means that the profits are particularly high in relation to the share price. The higher the share price rises, the higher the P/E ratio usually is. This ratio can give a rough indication of whether a company is overvalued or undervalued. But not every company with a low P/E ratio is worth buying. In addition, the P/E ratio is often based on earnings estimates rather than actual earnings.

The price-to-book ratio (P/B ratio): This ratio is a bit more complicated. The book value is equal to the equity of a company, minus all liabilities. So it is no different than the value of a company if it were to be liquidated. The book value is now divided by the number of shares in a company. If the book value is higher than the current price of a share, many investors see the share as cheap and buy it.

Return on equity: Return on equity is the ratio of a company’s profit to its equity capital. The higher the return on equity, the more economically a company operates. Consequently, it can be worthwhile to buy a share.

3. Trading – when and how to order

You can find out which ISIN or WKN is the right one on websites such as boerse-online.en. There are also share price charts and other information here, such as how high the dividend, i.e. the distribution of profits to shareholders, is. If the order was successful, the share is now in the custody account and remains there, even if the bank managing the custody account should go bust in the meantime. Securities accounts are not subject to deposit protection like savings or checking accounts; they are more like safe-deposit boxes, the contents of which the bank is not allowed to access. The portfolio can also be changed at any time. In this case, the bank is obliged to transfer the securities to the new bank within certain deadlines.

Also important, every shareholder of a company, even if they only own one share, gets an invitation to the company’s annual shareholders meeting. At this annual meeting, the board of directors is discharged, confirmed in office and it is decided how high the dividend will be.

4. Risk: Mastering the ups and downs

The motto here is: the more the merrier, or as financial market theorist Harry Markowitz once put it, "investors" shouldnot putting all eggs in one basket". Many actively managed funds do not do it differently, with ETFs the number of different positions is predetermined, i.e. in an index fund on the DAX there are 30 stocks, in one on the American S&P 500 there are the stocks of 500 companies. In addition, there are ETFs on the world index MSCI World, which includes over 3000 stocks. Spreading the risk costs order fees, of course, because it is cheaper to buy a share and leave it lying around. But a broadly diversified portfolio provides more stable returns in the long term than one that contains only three stocks, for example, two of which foolishly perform poorly over a long period of time. Those who take a closer look at the subject will notice that it is also worthwhile to buy other forms of investment, such as bonds that promise regular interest or gold, which does not pay interest or dividends, but whose value often increases when share prices fall sharply. This is why many investors see gold as a kind of insurance against crises.

5. Taxes:

Not only price gains are taxed, but also interest and dividends. If you sell a share below the value at which you bought it, you can offset the loss against a profit on another share deal and thus save taxes. If this happens within the same year and the same deposit, the bank automatically offsets the amounts. Further information on the subject of taxes can be found here.

The most important tip: Start!

The earlier you start, the better. Even with a savings plan of 25 euros per month, you can achieve a good return over a period of ten years.

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