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Why should you invest in shares?

You definitely don't have to be a stock market professional to invest successfully over the long term. In this article I will explain what it means to invest in individual shares and what other forms of share investment exist.

What does it actually mean to acquire shares?

As the owner of a share, you own a share in a company. Usually this is only a fraction of the total value. For example, with 10 Apple shares worth just over 1000 euros, one would own only about 18 millionths of the company.

By comparison, the Netherlands has nearly 18 million inhabitants.


So although you own a part of the company through the share, as a small investor you only rarely get a strong influence on the development of the company.




What is the advantage of owning shares?

When a public limited company is successful, it either distributes its profits to the shareholders as dividends or retains part of the profits, thus increasing the future viability and value of the company.

This usually also makes the associated company shares (stocks) more expensive.

This is because demand increases and there are still the same number of shares on the market.

Thus, the acquired shares increase in value.

Not only current positive or negative developments around a company have an influence on the respective share price, but also speculations about future success. This leads to the fact that stock corporations that are popular with investors often have a higher value on the stock market (market capitalisation) than one might expect if one compares current figures on turnover and profit.

One can realise the profit resulting from the increase in share value by selling the shares at the increased price.

Another option is to hold on to these shares and believe that they will increase in value even more in the future. In addition, one can then hope for further dividend payments in the future.

Since this balancing of selling is often not easy, a common method is not to sell all the shares of a company at the same time, but to take only a part of the profit.

The increase in company values on the stock market traditionally leads to a significantly higher yield (return on investment) compared to other forms of investment such as current accounts or savings accounts, for example.

In recent years, it has become even more attractive to invest in shares, as interest rates for other forms of investment have fallen significantly and the stock market has developed extremely positively.

Currently, you often have to pay fees for larger amounts in bank accounts instead of receiving interest. On the stock market, on the other hand, one can expect annual returns (dividends plus appreciation) of between five and ten percent over the longer term.

Example: If you would put money aside now, this money would double in about 14 years at a 5% annual return. The S&P 500 index has historically averaged a return of about 10% in the last decades, which would result in a doubling of just over 7 years.

So the big advantage of investing in shares is that you are very likely to have significantly more money left over after a few years.

You don't necessarily have to invest in individual shares, but can also choose funds, for example. You can find out more about the advantages of this and other options for successful share investment below.


Which shares should you buy?

One should basically be convinced that the respective company will develop positively. It is also advisable to agree with the company's activities. For example, it would probably make less sense for a convinced pacifist to invest in an armaments company that he would not want to support under any circumstances.

My own strategy is to only invest in a share if I feel comfortable with it in the long term. To do this, I need confidence, which I can gain through sufficient knowledge about the company in question.


Is it 100% certain that you will be successful with an equity investment?

No. There is a certain risk with every share investment. This is because you also participate with your money if companies perform badly and share prices fall.

For example, if you only own German shares and the German economy performs badly in the next few years, your own return will not be particularly positive either.

There are regular recessions or even economic crises in which the value of shares can fall sharply over a short period of time.

However, historically the economy and the capital market have always recovered from these setbacks, so investors have never had to accept long-term losses.

One should always observe this rule of thumb (applies to all forms of investment):

The higher the return, the higher the risk




Extremely speculative investments can make the investor extremely rich, but can also lead to a total loss.




An example of such a very risky investment outside the world of shares is the lottery:


While it is possible to become very rich by winning millions with a small stake, it is much more likely that you will lose your stake (the "investment").


Therefore, it is important to always be aware of the respective risk of the investment and to include it in one's decisions.

Nevertheless, it is very possible to invest in shares in such a way that the risk is limited and the return is high at the same time. The mix of somewhat more speculative investments and safe investments is very individual.

The art of extremely successful investment lies in recognising company developments earlier and better than other market participants. However, I can reassure you: Even without these skills you can achieve very good returns on the market!

It is very important to have a sufficiently broad diversification in the stock portfolio!

This means that you should invest in companies from different countries and sectors at the same time so that the overall risk is minimised.

In order to make this choice, you should either know the market very well yourself or get support from experts. You can find out more about the options below.


"I find company XY really promising and I have some money left over right now. Should I invest 100% of this money in the shares of XY?"

No, because diversification is extremely important when investing in shares!

Why? It can always happen that company XY, despite extremely positive prospects, suddenly gets into big trouble and, in the worst case, even becomes insolvent.

In this case, most of your invested money would be gone because the company would lose its value. If you were to own, for example, 20-30 shares in different companies, such a single case would still be very annoying, but positive developments in the other company shares could most likely absorb this loss.


Example: You have a share portfolio that you created at the beginning of 2020 and then completely forgot about.

Among other companies, you have each invested €225 in Wirecard and Hapag-Lloyd. With the Wirecard shares, a loss of almost €225 was made due to the insolvency. The Hapag-Lloyd shares increased in price from €75 to around €200, resulting in a profit of €375 (3*€125). Overall, you have most likely achieved a good return despite the Wirecard insolvency. Besides, Hapag-Lloyd also paid very high dividends, but we will leave that aside here.


"I have just one time 1000 euros left. Is that enough for a good spread?"

In my opinion, one should always have at least enough money left over so that one does not urgently need the invested money in the near future and can afford a few different shares. Diversification in shares is somewhat more difficult with little capital for several reasons:

  1. Some individual shares have a high unit value. For example, a share of A.P. Möller - Maersk (second largest shipping company in the world) currently costs around 1600€. So if you have €1,000 to spare, it is quite difficult to diversify with several different shares.

  2. Transaction costs are usually incurred. With many providers it is cheaper to buy a larger value of individual shares than to buy many small shares. For example, if it costs €5 per transaction, buying €20 worth of shares would be rather unfavourable, since you would have to achieve a price increase of 25% alone to cover the costs.

  3. Even though the stock market generally rises in the long term, it is logically better to enter when prices are relatively low. In order to catch these short-term lows, one can choose the strategy of investing again and again over a longer period of time and reduce the risk of the investment somewhat. More capital is required for this spreading of share investments over time, as the portfolio is regularly topped up with new shares.


So can you only invest sensibly in shares if you have a lot of money? 🤔

No, this is a relatively widespread misconception.

There are various good ways to invest even a small amount in such a way that you can achieve a good return with moderate risk. Thus, for example, it is also quite possible for students with little capital to invest money in an equity-based way.

Among other things, this is possible through:

  • Savings plans for individual shares: You can regularly pay in an amount for individual listed companies via a securities account and thus continuously increase your share in the company. This has the advantage that one can buy more shares at a lower price in the meantime, even if the share price is relatively low. Even with the previously mentioned example of the expensive Alphabet share, one could participate in the success of the company with only a little capital.

  • Equity funds: Funds consist of many individual company shares. This ensures the necessary diversification even with little money invested. Here, the investment decisions are made by the fund managers, so that as an investor you do not have to worry much about this. However, these professionals are of course also paid from part of the invested money in the form of a fee. Savings plans are also possible here.

  • ETFs ("Exchange Traded Funds"): This form of investment does not require a fund manager and still offers a large diversification. ETFs are funds that consist of shares of certain indices and are not actively managed. This results in lower costs. For example, with an ETF you can participate in the development of the S&P 500. In addition to the advantage of lower costs, however, there is also the disadvantage that an ETF is significantly more inflexible than a professionally managed fund and cannot react to individual developments. The return opportunities should tend to be higher with a managed fund than with an ETF. Savings plans also possible.

  • Copy Trading: In this principle, trading ideas of individual traders are automatically reproduced ("copied"). One example of this is the EToro platform.

  • Social Trading (Wikifolio): This is about exchanging ideas and sharing one's own ideas with others, similar to a social network.

There is also the possibility of replicating the investment strategies of others.

Some traders on this platform have model portfolios ("wikifolios"), each of which can be purchased on the stock exchange.

For this purpose, these wikifolios go through a long review process (among others by the Federal Financial Supervisory Authority), so that the safest possible product is guaranteed.

This certificate then gains or loses value depending on the performance of the companies it contains.

In simplified terms, the whole thing can be thought of as a share fund that is managed by the respective Wikifolio trader.

As an investor, you can profit from the positive development of the companies included.

Under the following link and on other areas of the Wikifolio platform, you will find a lot of well-explained information: https://www.wikifolio.com/de/de/hilfe/faq/social-trading/copy-trading On https://en.investpocket.net you can learn more about my work around Wikifolio.


Conclusion:

So why should you invest in shares and what should you keep in mind?

A good long-term investment in shares (in whatever form) offers you a great chance of good returns with moderate risk at the same time.

For investments in your future, such as a valuable piece of technical equipment, a car, a property or even a longer-term investment in your old-age pension, an investment in shares will very probably result in you having significantly more money left over.

That's why it makes sense to invest part of your money in the form of shares or share-based investment products (funds, ETF, Wikifolio,...).

However, you should make sure that you choose a serious form of investment and make your decisions with foresight and prudence.

I cannot give an ultimate recommendation for the best form of investment, as this is very individual. For investing in individual shares, one should be interested and have the time to regularly inform oneself about company developments.

The other forms of investment presented are less time-consuming.

If possible, one should decide in such a way that one knows the risk and the chances of return and can feel comfortable in the long run. Of course, one does not have to limit oneself to a single form of investment.


I personally like the concept of Wikifolio and therefore also promote it on Investpocket.

In particular I like the fact that you already know or can still get to know the "fund manager" (trader). On Investpocket, you even have the opportunity to communicate directly with me as a trader and have my decisions explained to you.


If you have any questions about this article, please do not hesitate to contact me or write a comment down below!

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