Why invest in shares?
If you invest in shares, you will achieve higher returns on average over time than with other investment products. However, there are certain risks and you must have some understanding of the financial markets.
Why invest in shares?
What are shares?
Shares are more than a mere receipt for goods from the company
concerned. A share is a portion of a business. You are
purchasing a certain percentage of a company's holdings. Large listed
companies 'distribute' their business in equal portions. There can be
millions of these. Such a portion is called a share. A shareholder is
co-owner and participates in the ups and downs of the company.
Why invest in exchange-listed shares?
By investing we increase the wealth of our economy. A listed company
uses the money that it collects at the stock exchange for new
investments, to create added value. Which in turn not only supports
the economy, but also the stock market price, thus ultimately
benefiting shareholders (investors).
You receive something of value in return for your money, namely a share of a company. And when economic climate allows, a share of the profit, in the form of a dividend.
Thus you anticipate the productivity of the companies in which you invest.
Investing in exchange-listed shares also involves
You may not get back the money you have invested. What's more, price gains and the payment of a dividend are not guaranteed.
If a company goes bankrupt, its shares may lose some or all of their value. The price of a share also depends on many different factors, like company risks (such as the company's results, its financial situation and the economic sector in which it operates), but also external events (such as political unrest, economic trends, and so on). The interplay of these factors and their unpredictability can cause considerable volatility on the stock market.
Investing in shares therefore requires full knowledge of the facts and careful monitoring of these price drivers. When you invest in shares you want to reap the benefits and keep risks as low as possible.
How can you reduce risks?
Firstly, you should buy different types of shares to spread the risk of loss. Simply put: by spreading shares sufficiently or diversifying, you don't put all your eggs in one basket but spread them over several different ones. If one breaks, the others are less likely to be damaged.
It's also important to invest over the long term. Investing in shares is associated too often with short-term thinking, which is essentially speculation. Yet investing paired with patience and long-term vision, is actually the very opposite of speculation. Warren Buffet summed this up nicely in the quote:
Someone is sitting in the shade today because someone planted a tree a long time ago.
The return on stock market indices shows that a combination of diversification and a long-term outlook pays in the long term. If we examine the returns of the European stock exchange (MSCI Europe Index) over the last 36 years, we see a positive annual return in 28 of those 36 years (almost 80%).
You can occasionally make a loss. However, a diversified portfolio ensures a greater chance of profit over the long term. Simply because you are investing in something tangible.
Spreading your entry: when is the best time and way to get started with shares?
Unfortunately, there is no such thing as the ideal moment to enter
the market . There are serious fluctuations every year. But don't let
that dissuade you. If you invest too late or not at all, you could
miss out on attractive returns. For you’ll make an annual profit in
eight out of ten years (according to the MSCI Europe Index). So start
investing as soon as possible, and don't wait for the 'ideal moment to
enter the market'.
As far as timing is concerned, there are two golden rules to keep in mind: better early than late. And be in it for the long haul.
Investing through funds
If you don't have the knowledge, time or inclination to build and monitor a diversified portfolio on your own, an equity fund can be a good solution. Although it's more expensive than investing in individual shares, it automatically provides a diversified basket of shares managed by experts. Moreover, equity funds are often the only way to invest in broad markets that are difficult to access or niche segments.
Mixed funds offer the opportunity of spreading risk even further by investing not only in shares but also in bonds, real estate, and so on. Some formulas also provide extra protection and limit risks.
You stand the greatest chance of success from a combination of broad diversification, self-control, patience and a long-term strategy. In short, the art is in finding investments that match your long-term objectives.
Do you want to manage everything yourself?
Then you must be prepared to invest time and expertise. For, just as in every other important aspect of life, successful investing requires time and effort.
Don't have the requisite time or knowledge to fully understand how
to optimally invest?
Then enlisting the help of an advisor is a sensible choice. Investing in something that you don't (sufficiently) understand will cost you more time and money than the price of an investment advisor who is knowledgeable and ready to help.