Recently, more and more people are finding their way into the stock market, which is accompanied by recurring questions. In this beginner's guide, I want to make it as easy as possible for newcomers to get started and help them build up a basic understanding. I give reading tips & video suggestions and write short texts and hope to make the initial period easier for every future newcomer. This article is a very rough guide to getting started. Everyone should research more in-depth information according to their own 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 to trade securities. Of course, I am caught up in my own subjectivity, which is why this article has a personal touch as well as facts and information. This is precisely why it makes sense to listen to the opinions and assessments of other investors. Under point 6, I link to some articles from the past that are worth reading. On Getquin, however, new, valuable articles are published almost daily.
Preface: Before the post starts, I'll give you a few important principles right at the beginning:
Think long-termonly invest money that you won't need in the next 5-10 yearsinvest only in what you understand & do not pay others to invest your money, when you can just yourself yourself.
Outline:
1. shares
1.1 What are shares and the stock market?
1.2 How do you buy shares?
1.3 Why buy shares?
1.4 Taxes
1.5 Compound interest
2. etfs
2.1 What is an Etf?
2.2 An example
2.3 How do I find a suitable Etf?
2.4 What are the advantages of Etfs?
2.5 Savings plans
2.6 Minimizing risk 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 shares and the stock market?
Shares are shares in a public limited company. The value of a share, and therefore of the company as a whole, 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. The same applies in the other direction if the value falls.
Most shares that 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 proportion of companies that voting is completely lost alongside large investors such as investment houses and other companies or foundations.
Video suggestion: Shares explained simply https://www.youtube.com/watch?v=R2ZFgLROtTY
Video suggestion: Stock market explained for beginners https://www.youtube.com/watch?v=TBRhvxEMu4U
1.2 How do you buy shares?
Shares are usually bought through a broker. The broker is, so to speak, the middleman between the private individual and the stock exchange. The private individual instructs the broker to buy shares in a certain company at a certain price. Nowadays, there are brokers that you can use as an app on your smartphone, where you can buy and sell shares conveniently and cheaply. The broker is always backed by 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.
Currently, the neo-brokers "Trade Republic" and "Scalable Capital" are inexpensive and well-rated brokers that you can use on your cell phone. 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, making share 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 such as 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 few days. If you are still looking for a neo-broker, you can ask someone who has already opened a custody account there to send you an invitation link, which is usually a free gift for both of you.
Of course, you can also open a custody account with a house bank. The customer service is usually better there, which usually comes with higher fees. If you would like to open a custody account with 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 shares?
There can be various reasons why people buy shares. However, I would argue that the number one reason is to make a profit. There are two ways to make a profit with shares:
1. Dividends: A public limited company can distribute part of its profits to its shareholders. For example, if you hold shares in the company "Example" worth €100 and the company pays a dividend of 2% per year, you will receive a dividend of €2 per year. As the value of the company falls by exactly this 2% in the short term when the dividend is paid out, another factor is important in the long term in order to make profits with shares.
2. Price gains: If you have bought the shares of company "Example" for €100, let's say 5 shares at a 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
In Germany, capital gains tax is payable on realized gains from shares. As of 2022, the capital gains tax is 26.375% - 27.995%. Depending on whether you are subject to tax or not. From January 1, 2023, every citizen in Germany will be entitled to an allowance 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 in the company "Example" for €105 and make a profit of €5, you do not have to pay tax on this €5 as long as you have not already used up your €1000 tax-free allowance elsewhere. After this sale, you would still have €995 of your tax-free allowance.
As capital gains tax is a withholding tax, it must be levied immediately. For this reason, brokers operating in Germany, such as Trade Republic, Scalable Capital or Sparkasse, will never pay you the gross amount of your profit, but always the net amount that has already been taxed. It is therefore advisable to enter the tax-free amount you wish to use in the "Taxes" section of your broker's settings. If you have no other investment income for which you use the tax-free amount, e.g. a building society savings contract, you can enter the full tax-free amount with your broker. If necessary, you can also split the allowance as you wish.
Every cent that is realized in capital gains above the annual allowance must be taxed. It is therefore advisable to save this tax event for as long as possible, i.e. to postpone it, as this way more money works for you. After all, the compound interest effect is the long-term investor's greatest friend.
1.5 Compound interest effect
Nothing and nobody in the world is as easy to please and at the same time gives you so much in return as the compound interest effect. Because you receive long-term profits on profits and not just on the capital paid in, future profits increase, which means that subsequent profits increase even further and even average earners can become millionaires. It sounds abstract, but it is quite logical:
Let's assume you don't sell your shares in the company "Example" for €105, but hold on to them. You have achieved a 5% return and are sitting on a profit of €5. However, because you now have €105 working for you instead of €100, the next 5% return no longer brings you €5, but €5.25, even though you have done nothing for it. After this second 5% return, €110.25 is now working for you and the next 5% return brings you a profit of €5.51. This game continues and the difference between profit through original capital and profit through compound interest becomes ever greater. There is little point in investing €100 once and hoping for compound interest. Actual returns that can be used for private retirement provision or general wealth accumulation require more capital and more compound interest, i.e. more time for the money to work.
Let's assume you want to invest money for the next few decades 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 at some point or that the share price won't fall drastically in value? The answer is quite 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 have a broad base. Diversification is when you invest in more than just one or a few companies, an industry, a region or a technology. To ensure that you don't have to sell your shares at some point because the company "Example" no longer offers the profit prospects in 20 years' time that it perhaps does 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 share to another). Selling the shares would trigger a tax event. It is clear that you have to pay tax on your gains, but the compound interest effect can unfold better if this taxation happens as late as possible. The best time to do this is when you want to access the money, i.e. possibly when you retire. One option for this, a financial product that you can hold forever, could be an ETF.
2.1 What is an ETF?
An Etf is an investment fund that is not actively managed. It is essentially a bundle of different investment products, mainly equities in the case of equity ETFs. An Etf tracks an index. An index is a basket of securities that includes a market, a region or a specific segment. The Etf is the opportunity to invest in such an index.
Etfs cost an annual fee, the "TER". The TER indicates the percentage that you pay annually for the Etf. Compared to actively managed funds or unit-linked pension insurance, Etfs are very inexpensive because they tie up far fewer staff. The TER, for example of 0.2% per year, is deducted daily from your ETF position in the custody account, so you don't even notice it. The following example is a bit of a limp, as the value of the ETF would not remain the same for a year, but for the sake of simplicity, let's pretend that for a €20,000 position in an ETF with a 0.2% TER, you would pay €40 in fees per year. That's a little less than 11 cents a day.
Video suggestion: 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 the MSCI World. "MSCI" is the issuer that created this index. "World" is the designation for the industrialized countries. This index contains around 1,500 stocks, many of which you are probably familiar with. Apple, Microsoft, Tesla and many other stocks are listed in this index by market capitalization, i.e. by size (based on 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 seem a little intimidating, but they always have useful designations that provide 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 into 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 = accumulating) and Dist (Distributing = distributing). Acc Etfs reinvest the dividends directly back into the Etf so that 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 do I find a suitable Etf?
Basically, you can find a suitable Etf by clarifying what you want to invest in. Do you want to invest broadly diversified in the global economy or do you want to make a sector bet on a specific region or industry? Personally, I have decided to invest in the global economy in a broadly diversified way and as simply as possible. My aim is to provide for my retirement with a healthy risk/reward ratio. Many roads lead to Rome and there are various investment strategies to achieve this goal. I have opted for this approach.
To cover the global economy, I need an ETF that includes the industrialized countries and the emerging markets. You can either mix two Etfs together yourself or choose an All World Etf. I watched videos about various Etf portfolios on YouTube and compared suitable Etfs on the "JustETF" website and decided on the "MSCI ACWI" (MSCI All Countries World Index Etf) from iShares. This is made up of approx. 89% industrialized countries and 11% emerging markets.
You can look up information on individual Etfs here: https://www.justetf.com/de
So ask yourself what your goal is. I would argue that it makes sense for many people to invest money monthly in the global economy in order to benefit from economic growth in the long term, but you can also invest in specific regions, sectors or technologies with ETFs if you want to. In principle, one does not exclude the other. If you have formed a stable core through Etfs, you can of course still invest in individual shares or sector Etfs. This strategy is called "core-satellite". Others do without ETFs and invest exclusively in companies that they have personally selected.
There are criteria that many etf investors apply, which I would also 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 can be compared with a benchmark index or other ETFs. Investing in ETFs is also known as passive investing.
2.4 What are the advantages of Etfs?
As already mentioned, an Etf always tracks an index. This index consists of the largest stock corporations in the market to which the index is limited. An All World Etf therefore contains the largest stock corporations in the world. When you invest in an All World Etf, you invest in the largest of the largest. In the case of the ACWI Etf, which I invest in monthly, there are 1,645 different stock corporations in which I invest through the Etf as at November 2, 2022.
The advantage is that if, for example, the company Apple, which is the largest position in the ACWI Etf, were to go bankrupt or lose significant value, it would sooner or later be removed from the Etf as it would no longer be represented in the index. My money is shifted from Apple to other companies within the ETF. Completely automatically and without tax events. People who bought Apple shares directly, i.e. not via an Etf, will have to sell their shares, probably even at a loss. If they are still able to save profits, these would have to be taxed and the compound interest effect would be slowed down.
A less dramatic example is that, should Apple lose value for whatever reason, the performance of the other shares in the ETF can compensate for this loss, whereas someone who is invested in a few shares is always dependent on the performance of these few companies. Whether individual companies will still exist decades from now is uncertain, but the global economy should still exist. And if not, we have other problems than our share portfolio.
2.5 Savings plans
It is fair to say that a readily diversified ETF is one of the simplest and lowest-risk solutions for investing your money on the capital market. For many people, it makes sense to set up a savings plan, as not everyone has a lot of capital to invest in one go, but can only invest a portion of their salary each month. These savings plans can be automated so that a fixed amount is transferred to the broker's clearing account by standing order and shares in the ETF or stock of your choice are automatically purchased each month (for example, always on the 2nd or 16th of the month) in the amount specified.
It helps to keep an overview of your finances and record how much money you spend each month. There are apps for this, such as "Haushaltsbuch: Money Manager". If you know how much you spend each month, you can set yourself a savings rate, i.e. a fixed amount that you invest each month. If you have an 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 creates a "cost averaging effect". By regularly buying at both high and low prices over a long period of time, an average purchase price, also known as the "buy-in", is formed. If you only look at the buy-in, the price fluctuations become smaller and smaller. This symbolizes the positive effect of the long term. One of the best-known 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" time with a few targeted investments.
Video suggestion: Step by step to an Etf savings plan https://www.youtube.com/watch?v=LCLpqN99_iU&t=35s
2.6 Minimizing risk through long-term investment
Return comes from risk. You wouldn't be able to make money on the stock market if you weren't exposed to risk. The risk to which you are exposed when you invest in shares or ETFs is the potential loss in value. You are exposed to price fluctuations. The price fluctuations that generate returns can also lead to losses. Why should you expose yourself to this risk?
My reasoning is based on the assumption 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 catastrophes are always causing damage to share prices, but in the long term the expected value of performance is positive. We therefore assume that the value of the ETF we are saving in will rise over the coming years and decades, as it includes the global economy. From this point of view, price slumps such as the outbreak of the Covid-19 pandemic are very good opportunities to buy cheaply valued shares. However, we also have to watch as the capital we have already invested dwindles.
Let's assume we had started investing in the MSCI ACWI ETF in November 2019. We would have seen a nice return of 8% in February, but just one month later a loss of 25%. We should have defied this downturn and the emotions that came with it. Not get cold feet and not sell. At times like this, it is particularly important to understand your investment. The market can be very turbulent and irrational and if you haven't informed yourself and don't have a strategy in place, you are vulnerable to selling your investments and realizing losses at such times. Saving regularly in 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 on to their shares were rewarded for their risk. Those who simply let their savings plan run during the crash were rewarded even more. The stock market is a risky place for private investors. But unlike the casino, which is why the comparison between the stock market and the casino is inadequate, the chances for private investors get better and better over longer periods of time. If you want to invest money responsibly, you should consider not only global diversification but also the long-term nature that is needed to reduce risk and increase the chances of returns. 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. Bonds are loans that are traded on the stock exchange. A state or a company can issue a bond with the promise to pay back the bond money at a fixed interest rate over a certain period of time. This allows companies to receive money without having to sell shares in the company. Private investors can buy these bonds on the stock exchange. Bonds issued by governments and companies with good credit ratings are seen as less risky than shares, so the expected return is lower. When interest rates rise, bonds become more desirable, as the interest rate on "relatively safe" interest rates increases. There are also ETFs that bundle government and/or corporate bonds.
Video suggestion: Bonds explained simply: https://www.youtube.com/watch?v=c8PXAs0IoU4
4. cryptocurrencies
Cryptocurrencies are considered to be very risky and are subject to high volatility, i.e. high price fluctuations. The largest cryptocurrency, Bitcoin, is a decentralized network which, like other cryptocurrencies, is based on blockchain technology. Due to its decentralized nature, Bitcoin relies heavily on network effects. Decentralization means that no individual, state or company can have control over the Bitcoin network. The blockchain runs across thousands of nodes that are operated by private and 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 rip-offs and scams occur time and again. One licensed and regulated crypto exchange is the "BISON App", which cooperates with the Stuttgart Stock Exchange. For beginners, this is a simple and reputable way to invest exclusively in established cryptocurrencies, including 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 would just like to say that there is an incredible amount of information available completely free of charge on the internet. In the 21st century, YouTube is a better teacher than many schools and offers a lot of added value. There are good books on money, business and investing. But as soon as someone promises to tell you secrets that nobody else knows, you'd better be wary, because the stock market has been around for centuries. The "secrets" of how to be successful on the stock market are well known. Someone who has to frantically 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 a number of posts by people who know what they're talking about and who really put a lot of effort into creating their posts. If you are interested in the topics, you can read through the posts or bookmark them to look at them 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 in which you could no longer decide for yourself: 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, Opportunities & 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 valuable content on YouTube. The important thing is to separate the wheat from the chaff. Flashy titles and promises should put people off rather than inspire confidence.
12 tips for beginners https://www.youtube.com/watch?v=pGIBJHQJcR8
Brief recap on the stock market and shares https://www.youtube.com/watch?v=h0lJ2goopnI&t=15s
Basics of retirement provision 1/5: https://www.youtube.com/watch?v=40fH_50aShk
Basics of retirement provision 2/5: https://www.youtube.com/watch?v=qiuoOgKHmmg
Retirement provision basics 3/5: https://www.youtube.com/watch?v=jcLOAzwF_Ns
Retirement provision basics 4/5: https://www.youtube.com/watch?v=y5L-XlF-aSc
Retirement provision basics 5/5: https://www.youtube.com/watch?v=f7GMgxC3qWo
How would I invest €50, €150, €300 per month: https://www.youtube.com/watch?v=RSo_LfsLLVI
Daily news (Wallstreet business days) about Wallstreet and macroeconomic events: https://www.youtube.com/user/kochntv
