The stock market guide for beginners
Lately, more and more people find their way to the stock market, which is accompanied by recurring questions. In this beginners guide I want to make it as easy as possible for newbies to get started and help build a basic understanding. I give reading tips & video suggestions and write short texts, hoping to make the early days easier for any prospective newbie. This post is a very rough orientation to get started. More in-depth information should be researched by everyone, adapted to their interests.
Disclaimer: I am just a guy on the internet writing down his opinion on how to get a good basic understanding of the stock market & investing. I am not an investment advisor, accordingly this is not investment advice or should be taken as a call for securities trading. Of course, I am caught up in my own subjectivity, so this article has a personal touch in addition to facts and information. That is precisely why it makes sense to listen to the opinions and assessments of other investors. Under point 6, I link to some posts from the past that are worth reading. However, new, value-added posts are published on Getquin almost daily.
Preface: Before the post starts, I'll give you a few important principles right at the beginning:
Think in the long terminvest only money, which you will not need in the next in the next 5-10 yearsinvest only in what you understand & do not pay Others to invest your money, when you can just do it yourself yourself.
Outline:
1. shares
1.1 What are shares and the stock market?
1.2 How to buy shares?
1.3 Why do you buy shares?
1.4 Taxes
1.5 Compound interest effect
2. etfs
2.1 What is an Etf?
2.2 An example
2.3 How do I find a suitable Etf?
2.4 What is the advantage of Etfs?
2.5 Savings plans
2.6 Risk minimization through long-term investment
3. bonds
4. cryptocurrencies
4.1 Crypto exchanges
5. should you book seminars?
6. further reading tips & video suggestions
1. shares
1.1 What are stocks and the stock market?
Shares are company shares in a stock corporation. The value of a stock, and therefore the entire company, is negotiated on the stock exchange through buying and selling. When you buy a share, you actually own part of the company. If the company increases in value, your share also increases in value. Exactly the same in the other direction when the value decreases.
Most shares you can buy also include voting rights. As a shareholder, you can be involved in decisions and vote. Realistically, however, it has to be said that most private investors hold such a small portion of companies that voting is completely lost next to the large investors such as investment houses and other companies or foundations.
Video suggestion: Shares simply explained https://www.youtube.com/watch?v=R2ZFgLROtTY
Video proposal: Stock market explained for beginners https://www.youtube.com/watch?v=TBRhvxEMu4U
1.2 How to buy shares?
Stocks are usually bought through a so-called broker. The broker is, so to speak, the intermediary between the private person and the stock exchange. The private person gives the broker the order to buy shares of a certain company at a certain price. Nowadays, there are brokers that you can operate as an app on your smartphone and buy and sell shares there conveniently and cheaply. Behind the broker is always a bank, which holds the shares for the shareholder. However, the share does not belong to the bank at any time, but exclusively to the shareholder, i.e. the person who bought the share.
At the moment, cheap and well rated brokers that you can use on your cell phone are the neo-brokers "Trade Republic" and "Scalable Capital". Neo-brokers, i.e. new types of brokers, are characterized by the fact that they cost little (e.g. 1€ per share purchase or sale, free savings plans) and are very uncomplicated, which makes stock trading, with all its opportunities and risks, easily accessible to everyone. Neo-Brokers are still relatively young companies with fewer employees than a house bank like the local savings bank. As a result, customer service is not as fast in case of problems and queries, but my personal experience is that the one time I needed Trade Republic's customer service, I was helped within a couple of days. If you're still looking for a neo-broker, you can ask someone who has already opened a securities account there if he or she will send you an invitation link, there's usually something free for both in return.
Of course, you can also open a share deposit account at a house bank. Usually, the customer service is better there, which is usually accompanied by higher fees. If you want to open a securities account at your house bank, it is best to contact your bank.
Reading tip: Trade Republic vs. Scalable Capital: https://app.getquin.com/activity/JODAHlHcum
1.3 Why buy stocks?
There can be different reasons why people buy stocks. However, I would argue that the number one reason is a profit motive. There are two ways to make a profit on stocks:
1. Dividends: A corporation can distribute a part of the profit to its shareholders. For example, if you hold shares of company "Example" worth 100€ and the company distributes a dividend worth 2% per year, you will receive 2€ per year in dividends. Since the value of the company decreases by exactly this 2% in the short term when the dividend is paid out, in the long term there is another factor that is important in order to achieve profits with shares.
2. Price gains: If you have bought the shares of company "Example" for 100€, let's say 5 shares at the price of 20€ per share, you can of course sell them again. If the price rises from 20€ per share to 21€ per share, your investment is worth 105€ (5 x 21€ = 105€). You have recorded a book profit of 5%, which you could now realize by selling your position.
1.4 Taxes
Realized gains on shares are subject to capital gains tax in Germany. As of 2022, the capital gains tax is 26.375% - 27.995%. Depending on whether one is subject to church tax or not. As of January 1, 2023, every citizen in Germany is entitled to an exemption amount of 1000€ (married couples 2000€) per year in tax-free investment income. Previously, this amount was 801€ per year. This means that if you sell your shares of the company "Example" for 105€ and made 5€ profit, you don't have to pay tax on these 5€ as long as you haven't already used up your 1000€ tax-free amount. After this sale you would still have 995€ of the tax allowance open.
Since the capital gains tax is a withholding tax, it must be collected immediately. Therefore, with brokers that operate in Germany, such as Trade Republic, Scalable Capital or the Sparkasse, you will never receive the gross amount of your profit, but always the already taxed net. Therefore, it is advisable to specify in the settings of your broker under the aspect "Taxes" the tax-free amount that you want to use. If you have no other investment income for which you use the tax-free amount, e.g. a building society savings contract, you can specify the full tax-free amount with your broker. If necessary, you can also split the tax-free amount as you wish.
Every cent, which is realized above the annual tax-free amount, must be taxed. Therefore, it is advisable to save this tax event as long as possible, i.e. to postpone it, as this way more money works for you. Because the greatest friend of the long-term thinking investor is the compound interest effect.
1.5 Compound interest effect
Nothing and nobody in the world is as easy to satisfy and at the same time gives you back as much as the compound interest effect. Because you receive long-term profits on profits and not just on the paid-in capital, future profits increase, which means that subsequent profits increase even more and even average earners can become millionaires. This sounds abstract, but it is quite logical:
Let's assume you don't sell your shares of the company "Example" for 105€, but hold them. You have achieved a 5% return and are sitting on a profit of 5€. But because you now have 105€ working for you instead of 100€, the next 5% return will bring you 5.25€ instead of 5€, even though you did nothing at all for it. After this second 5% return now 110.25€ work for you and with the next 5% return you achieve 5.51€ profit. This game continues and the difference between profit by original capital and profit by compound interest becomes larger and larger. Now it brings little to invest 100€ once and hope for the compound interest. Actual return, which can be used for private retirement or general wealth accumulation, requires more capital and more compound interest, i.e. more time in which the money works.
Let's say you want to invest money for decades to come and take advantage of the compound interest effect. How can you know that the company "Example", in which your money is invested, won't go bankrupt or the share price will drastically decrease in value? The answer is simple - you can't know. I don't know, your hairdresser doesn't know, not even the CEO of "Example AG" knows. That's why it's important for long-term investments to be diversified. Diversification is what you call it when you don't just invest in one or a few companies, one industry, one region or one technology. To make sure that you don't have to sell your shares at some point because the company "Example" doesn't offer the profit prospects in 20 years as it might do now, you can diversify by investing in Etfs. Etfs are not the only way to diversify, but they are the easiest.
Video suggestion: compound interest explained simply https://www.youtube.com/watch?v=kyYguppNaqE
2. etfs
In order to take advantage of the compound interest effect, it is crucial not to have to sell or switch (from one stock to another). The sale of the shares would trigger a tax event. That you have to pay taxes on your profits is clear, but the compound interest effect can develop better if this taxation happens as late as possible. Preferably only when you want to get your hands on the money, i.e. in your retirement if necessary. One possibility that exists for this, a financial product that you can hold forever, can be Etfs.
2.1 What is an Etf?
An Etf is an investment fund, which is not actively managed. It is a bundle of different investment products, in the case of equity ETFs these are mainly equities. An Etf tracks an index. An index is a basket of securities that contain a market, a region or a certain segment. The Etf is the possibility to invest in such an index.
Etfs cost an annual fee called the "TER." The TER indicates the percentage you pay annually for the Etf. Etfs are very cheap compared to actively managed funds or fund-linked annuities, because they tie up much less staff. The TER, for example of 0.2% per year, is deducted daily from your Etf position in the portfolio, so you don't even notice it. The following example is lame because the value of the etf would not stay the same for a year, but for simplicity's sake, let's pretend: for a 20,000€ position on an etf with 0.2% TER, you would pay 40€ in fees a year. That's a little less than 11 cents a day.
Video proposal: Etf simply explained https://www.youtube.com/watch?v=YVB2TV0ziIE
2.2 An example
There is an index that tracks the industrialized countries. It is called MSCI World. "MSCI" is the issuer that created this index. "World" is the name for the industrialized countries. This index contains about 1,500 stocks, many of them you know for sure. Apple, Microsoft, Tesla and many other stocks are ranked in this index by market capitalization, that is, by size (in terms of the value of the company). There are Etfs on this index.
For example, the "iShares Core MSCI World UCITS ETF USD (Acc)." Such names can be a bit intimidating, but always have useful designations by which you can get information about the Etf.
This Etf is from "iShares", a product group of the world's largest asset manager Blackrock. "Core" stands for the product range in which this Etf falls. "MSCI World" stands for the index that the Etf tracks. "UCITS ETF" means that it complies with the EU guidelines for Etfs. "USD" means that the fund currency is the US dollar. "(Acc)" indicates the type of dividend distribution. There are Acc (Accumulating=thesaurating) and Dist (Distributing=distributing). Acc Etfs immediately reinvest the dividend back into the Etf, so the value of the Etf increases. "Dist" Etfs distribute the dividend to the owner.
Video suggestion: What is the MSCI World Index?: https://www.youtube.com/watch?v=H7atGYGGAdM
2.3 How to find a suitable Etf?
Basically, you find a suitable Etf by being clear about what you want to invest in. Do you want to invest broadly diversified in the world economy or do you want to take a sector bet on a specific region or industry? Personally, I choose to invest broadly diversified in the global economy as simply as possible. My goal is to provide for retirement with a healthy risk-reward ratio. Many roads lead to Rome and so there are different investment strategies to achieve this goal. I have chosen this way.
To cover the global economy, I need an Etf that includes the industrialized countries and the so-called "emerging markets". This can be done by either blending two etfs together myself or choosing an all world etf. I watched videos about different Etf portfolios on Youtube and compared suitable Etfs on the website "JustETF" and decided for the "MSCI ACWI" (MSCI All Countries World Index Etf) from iShares. This is composed of about 89% industrialized countries and 11% emerging markets.
Here you can look up information about individual Etfs: https://www.justetf.com/de
So ask yourself what your goal is. I would argue that it makes sense for a great many people to invest money monthly in the broad global economy in order to benefit from economic growth over the long term, however, you can also use Etfs to focus on specific regions, industries or technologies if you so choose. Basically, one does not exclude the other. If you have formed a stable core through Etfs, you can of course still invest in individual stocks or sector Etfs. This strategy is called "core-satellite". Others do without Etfs and invest exclusively in companies that they have selected personally.
There are criteria that are valid among many etf investors, which I would like to share with you: It is said that an etf, as long as it does not track very specific markets, should not cost more than 0.2% TER and have a fund volume of at least 100 million US dollars. Of course, it is best if it has been around for a few years and you can compare it to a benchmark index or other etfs. Investing in Etfs is also called passive investing.
2.4 What is the advantage of Etfs?
As already mentioned, an Etf always tracks an index. This index consists of the largest stock companies of the market to which the index is limited. So an All World Etf includes the largest file companies in the world. One invests, if one invests in an All World Etf, in the largest of the largest. In the case of the ACWI Etf, which I invest in monthly, as of November 2, 2022, there are 1,645 different stock companies in which I invest through the Etf.
The advantage is that if, for example, the company Apple, which is the largest position in the ACWI Etf, would go bankrupt or lose significantly in value, it would sooner or later fly out of the Etf, because it is no longer represented in the index. My money is shifted within the Etf from Apple to other companies. Completely automatically and without tax events. People who bought Apple shares directly, not through an Etf, will have to sell their shares, probably even at a loss. If they can still save profits, these would have to be taxed and the compound interest effect is slowed down.
A less dramatic example is that if Apple ever loses value for some reason, the performance of the other stocks in the Etf can make up for that loss, while someone invested in a few stocks will always have to rely on the performance of those few companies. Whether individual companies will still exist in decades is uncertain, but the global economy should still exist. And if not, we have other problems than our stock portfolio.
2.5 Savings plans
It is fair to say that a ready diversified Etf is one of the easiest and least risky solutions to invest your money in the capital market. For many people it makes sense to create a savings plan, because not everyone has a lot of capital to invest in one go, but can only invest a part of their salary every month. These savings plans can be automated, so that by standing order a fixed amount is transferred to the settlement account of the broker and every month (for example, always on the 2nd or 16th of the month) shares in the Etf or stock of his choice are automatically purchased in the amount of the fixed amount.
It helps to keep track of your finances and how much money you spend each month. There are apps for this purpose, such as "Haushaltsbuch: Money Manager". If you know how much you spend each month, you can set yourself a savings rate, a fixed amount that you invest each month. If you have irregular income, this step is more difficult, in which case I would postpone investing until you know for sure how much of your current monthly salary you still need and what you can invest.
Investing regularly provides a "cost-averaging effect." By buying regularly over a long period of time, at both high and low prices, you build up an average purchase price, also called the "Buy In". If you only look at the buy in, the price fluctuations become smaller and smaller. This can be seen as an allegory for the positive effect of the long term. One of the most famous stock market quotes is "Time in the market beats market timing", i.e. the time you spend in the market, provided you buy in regularly, beats any attempt to hit the "perfect" moment with a few targeted investments.
Video suggestion: Step by step to the Etf savings plan https://www.youtube.com/watch?v=LCLpqN99_iU&t=35s
2.6 Risk minimization through long-term investment
Return comes from risk. You would not be able to make money on the stock market if you were not exposed to risk. The risk you are exposed to when you invest in stocks or Etfs is the possible loss of value. One is exposed to price fluctuations. The price fluctuations that provide returns can also provide losses. Why should you expose yourself to this risk?
In my rationale, I assume that we are talking about long-term investments in a broadly diversified portfolio, preferably through one or more Etfs.
The global economy is growing steadily. Crises and disasters always inflict damage on stock prices, but over the long term, the expected value of performance is positive. So we assume that the value of the etf we invest in will increase over the next years and decades, because it contains the world economy. From this point of view, price drops like the outbreak of the Covid-19 pandemic are very good opportunities to buy cheaply valued shares. However, we also have to watch our already invested capital dwindle.
Let's say we started investing in the MSCI ACWI ETF in November 2019. We would have seen a nice 8% return in February, but a 25% drop just one month later. We would have had to brave this downturn and the emotions that came with it. Not gotten cold feet and not sold. In such moments, it is especially important to understand your investment. The market can be very turbulent and irrational and if you are not informed and do not have a strategy, you are vulnerable to selling your investments and realizing losses at such times. Regularly saving a diversified etf to build wealth is already a strategy that has worked for many people. Keep it simple, you don't need a master plan à la Jogi Löw to build wealth.
Share prices recovered dramatically after the Covid-19 crash. Those who held their shares were rewarded for their risk. Those who simply let their savings plan run in the crash were rewarded even more. The stock market is for private investors, a risky place. But unlike in the casino, which is why the comparison stock exchange and casino is also inadequate, the chances for the private investor become better and better with longer maturity. Anyone who wants to invest money responsibly should consider not only global diversification but also the long-term nature of the investment, which is needed to reduce risk and increase the chances of return. At this point, compound interest beckons, which is also happy about long-term investments.
3. bonds
Bonds are a way for governments or companies to borrow money. Thus, bonds are loans that are traded on the stock market. A government or company can issue a bond with the promise to pay back the money in the bond at a set interest rate over a period of time. This allows companies to get money without having to sell shares in the company. On the stock exchange, private investors can buy these bonds. Bonds issued by governments and companies with good credit ratings are considered to be lower-risk than stocks, and accordingly the expected return is lower. When interest rates rise, bonds become more desirable, because the interest rate of the "relatively safe" interest, rises. There are also Etfs that bundle bonds of governments and/or companies.
Video suggestion: bonds simply explained: https://www.youtube.com/watch?v=c8PXAs0IoU4
4. cryptocurrencies
Cryptocurrencies are considered very risky and are subject to high volatility, i.e. high price fluctuations. The largest cryptocurrency called Bitcoin is a decentralized network, which, like other cryptocurrencies, is based on blockchain technology. Bitcoin relies heavily on network effects due to its decentralized nature. Decentralization means that no individual, state, or company can have control over the Bitcoin network. The blockchain runs across thousands of nodes operated by private as well as institutional users worldwide. The more people maintain the Bitcoin network, the more stable and secure it becomes. There are many different opinions on the subject of Bitcoin. It is best to form your own opinion and then decide to what extent Bitcoin or other cryptocurrencies should play a role in your portfolio.
Reading tip: Cryptocurrencies for beginners part 1: https://app.getquin.com/activity/buTJFYxcSD
4.1 Crypto exchanges
The crypto world is not yet as regulated as the stock market, which means that there are always rip-offs and scams. A licensed and regulated crypto exchange is the "BISON App", which cooperates with the Stuttgart Stock Exchange. For beginners, a simple and reputable way to invest in exclusively established cryptocurrencies, by the way, also via a savings plan, although there are other providers that are no less good.
Reading tip: crypto exchange comparison: https://app.getquin.com/activity/PfAxjKLYpc
5. should you book seminars?
At this point, I simply state that there is an incredible amount of information, completely free of charge on the Internet. Youtube is a better teacher than many schools in the 21st century and adds a lot of value. There are good books about money, economics and investments. But as soon as someone promises to tell you secrets that no one else knows, you better get suspicious, because the stock market has existed for centuries. The "secrets" of how to be successful in the stock market are well known. Someone who has to convulsively create a sense of panic or fear of missing out (called FOMO) in order to sell seminars cannot, in my opinion, show you how to get rich. After all, he doesn't seem to be rich enough himself to simply live off his stock market secrets and tricks.
6. further reading tips & video suggestions
On Getquin there are some posts, from people who have a clue and really put effort into creating their posts. If the topics interest you, you can read through the posts or bookmark them to watch later.
Statistical manipulation and emotional trading:
https://app.getquin.com/activity/GDlzIDdeHe
How to value stocks:
https://app.getquin.com/activity/laOUVhfFDI
Investment strategies from a dividend investor's perspective:
https://app.getquin.com/activity/BzmjNGXgex
Partial exemption for etfs and equity funds: https://app.getquin.com/activity/CtjdOjCclh
Physical gold and paper gold:
https://app.getquin.com/activity/ApWcaXFtjm
9 years of stock market experience: https://app.getquin.com/activity/cYKFAoIizD
How to find a (new) job:: https://app.getquin.com/activity/XwCqxSnoLb
The Derivatives Guide:
https://app.getquin.com/activity/rRSPMsiSXp
The Marketing 1x1 for Getquin: https://app.getquin.com/activity/onpCOHgXPm
Bitcoin and Energy Consumption: https://app.getquin.com/activity/LKwJTNGvOZ
Estate Planning and Providing for a Situation Where You Couldn't Make Your Own Decisions: https://app.getquin.com/activity/kaGUVfDlsJ
Investing for Your Kids: https://app.getquin.com/activity/sIqAFiFsiF
Tax Changes in 2022: https://app.getquin.com/activity/NzwvRzCssw
Risks, rewards & morality of P2P lending:
https://app.getquin.com/activity/uxmZCFjVXq
Book Review "The Only Book You Should Read About Finance." https://app.getquin.com/activity/cbGjEJiKHY (by me)
There is a lot of serious and value added content on Youtube. The only important thing is to separate the wheat from the chaff. Exciting titles and promises should discourage rather than inspire confidence.
12 tips for beginners https://www.youtube.com/watch?v=pGIBJHQJcR8
Short repetition around the topic stock exchange & shares https://www.youtube.com/watch?v=h0lJ2goopnI&t=15s
Basics of retirement planning 1/5: https://www.youtube.com/watch?v=40fH_50aShk
Basics of retirement planning 2/5: https://www.youtube.com/watch?v=qiuoOgKHmmg
Basics of retirement planning 3/5: https://www.youtube.com/watch?v=jcLOAzwF_Ns
Basics of retirement planning 4/5: https://www.youtube.com/watch?v=y5L-XlF-aSc
Basics of retirement planning 5/5: https://www.youtube.com/watch?v=f7GMgxC3qWo
How would I invest 50€, 150€, 300€ monthly: https://www.youtube.com/watch?v=RSo_LfsLLVI
Daily news (working days of Wallstreet) about Wallstreet and macroeconomic events: https://www.youtube.com/user/kochntv
