How do you start investing?
Starting to invest can be very exciting. We know! Because how do you actually start without losing money and where do you start? This article tells you exactly how to start investing and why it is wise. We also discuss different types of investing and parties where you can do it. Read along quickly. By the way, did you know that thousands of women have already started investing at Elfin?
What is investing
An investment is a form of investment in which money is committed for a longer or shorter period of time for the purpose of future financial gain.
Investing can be done in several ways. You can invest in the stock market, such as stocks, bonds or ETFs. You can also invest in real estate. Or in cryptos. Or in gold. It’s about diverting your money to something, assuming that your money is going to be worth more. With the caveat that you also accept that money may become worth less (temporarily), because there are risks involved in investing.
Read more about investing here.
Why is investing interesting?
Investing is interesting because it helps build your wealth. It’s a way to turn your money into more money. Investing your money is the action you have to do, but after that you don’t have to spend a whole lot of time on it. Once your money is invested, time will do its work. So that means your money is going to work for you while you do other things.
There are different ways of investing and they all have different investment of time in addition to different risk. We will come back to this later. First, we want to explain exactly how that works: turning money into more money.
Also read the article: why investing is smart.
How does investing create more money
There are 3 ways to make money investing. The first is compound interest, or: compound return. We reflect on that so extensively. The second is when your investments become worth more. Suppose you now buy a stock for €100, and the price of this stock rises to €110, you have “earned” €10. You only benefit from this gain if you would then sell this stock again. Finally, you can make money through interest or dividends. We also consider the latter aspect in detail a little later in this article.
Composite returns
With investing, you are dealing with compound returns, or compound interest. This means that you receive returns on your invested money, and then on that initial deposit + interest, you size up returns again. Compound interest means that over time your wealth can increase exponentially in value. Albert Einstein called the fact of compoundins the 8th wonder of the world.
A small example:
Suppose you invest €100 and the return in year 1 is 5%, then your €100 will be worth €105 after year 1. So in year 2 you start with €105 and also that year the return is 5%. Then it will not be €110, but €110.25. A small difference, but that difference is going to change your life. Just look at the figures below if you extend this example:
Year 1: €105 / Year 2: €110,25 / Year 3: €115,76 / Year 4: €121, 55 / Year 5: €127,63 / Year 6: €131, 1 / Year 7: €137,66 / Year 8: €144,53 / Year 9: €151,76 / Year 10: €159,35
Even small amounts like €100 have become worth as much as €60 more after 10 years. And every year the interest you get paid is higher. Imagine investing a monthly amount, say €50 or €100, which is going to pay off for you. Also, use the calculation tool at berekenhet.nl to see what your final amount could be if you start investing with amount X now.
How do you take advantage of compound returns?
Ultimately, your gain or loss is not real until you cash out. So when you withdraw your money, you experience what your return has been all these years. But you don’t want to do that too soon, because the longer you invest your money, the longer this compound effect can do its work. Suppose at some point you have a ton of assets, and you make a nice return one particular year. Then you can withdraw the profit amount, and use it to live on. You can let the rest of your already accumulated wealth sit to “do its work” and return again.
Read more about compound returns here
What are shares?
When you buy stock, you buy a small piece of the company. So stocks are very small pieces of a company. So technically, you own part of the company. If that company makes a profit, then through your shares you often receive a piece of that profit in the form of dividends. And if the underlying stock price rises, you benefit from the price increase. Of course, the other way around is also possible; a stock price increase can also be a stock price decrease, for example, if the company or the economy is doing badly. If you bought a stock for €,-100 euros, and it is now worth €90 euros per share, you make a loss of €10 euros per share related to the decline in price.
What is dividend
When you invest you can make money from your investments in 3 ways:
- The value of your investments increase. A stock you bought for €100 is now worth €110.
- Compound interest. Your wealth is going to trigger the interest or interest effect.
- Dividend.
In addition to the rising stock price, a company sometimes pays dividends. Dividend is a piece of the company’s profits that it gives to its shareholders. When you buy a stock, the stock’s description says whether and what percent dividend they pay and how often.
So when you receive dividends, you literally get money deposited into your investment account. You can use this money again to buy stocks or you use it to do something else with. If you use it to buy new shares again, your share count goes up and you receive more dividends the next time around. Again, this is a kind of interest on interest.
Example:
You have 10 shares of €100 and they pay a 10% return once a quarter. So then you will receive €100 in dividends. You can buy 1 more share from that. The next time you receive €110 in dividends. You buy another one and receive €120 in dividends the following time. And so on.
Of course, the value of the stock and the financial position of a company is very important. For example, during the beginning of the corona epidemic, there were banks that normally pay a lot of dividends, but did not for a while. Indeed, they expected to have to keep a lot of money in cash to absorb setbacks.
In addition, it is wise to be critical of companies that pay above-average dividends. Because yes, you get paid a nice amount of money, but can they live up to this financial commitment and keep enough money in the coffers to invest and innovate?
Read more about dividend investing here
What is an ETF?
ETF stands for Exchange Traded Funds. An ETF, also sometimes called a “tracker,” tracks an index. This index is a copy of the existing index, creating a basket that mimics price rises and falls of the sector or index in question.
Investing in ETFs gives a lot of diversification to your portfolio. In fact, you have a basket with a number of mini pieces from companies in different sectors. That way you also immediately spread the risk. Indeed, the likelihood of several sectors doing “badly” at the same time is not so high.
It is possible to invest in ETFs through almost any broker. The disadvantage of investing in an ETF is that there is an enormous amount of supply. This is not only because there are so many different markets to think of that you can invest in with an ETF but also because there are many different providers of ETF products.
Read more about investing in ETFs (aka: index trackers) here
How much money do you need to start investing?
Probably your first thought right now is “a lot. But fortunately, you can also start investing with small amounts. Before you start investing, though, make sure you invest with money you won’t need anytime soon.
The stock market is volatile (volatile in fancy stock market terms), especially in the short term. From day to day, the course stands differently. If you invest with money that you suddenly need again, then you are likely to have to liquidate it (withdraw your investments) when the price is just down. Or worse if the entire stock market goes down for an extended period of time (this is bound to happen once in your investment period). You’d rather not.
So yes: you can get in with small amounts, but we recommend making sure you have a buffer before investing. Make a solid financial plan for yourself where you calculate how much money you can spare per month to build long-term wealth.
Fact: it has been shown at Elfin that women who start with a small amount, such as €50 a month, grow their self-confidence tremendously! You will be introduced to investing, discover how investment platforms work and thus build your confidence to possibly start investing with larger amounts.
How do you invest with small amounts?
Even with small amounts, it is interesting to invest. Because even small amounts generate interest on interest. Ultimately, time in the market is also very important in building wealth. So rather start earlier with small amounts, than later with larger amounts.
See also this example.
Ellen invests €50 per month for 30 years (so a total of €18,000) and has an average 6% return per year. After 30 years, she then has: €48,963.
Ria invests €100 per month for 20 years (so a total of €24,000) and also has an average 6% return per year. After 20 years, she then has: €45,565.
Not only does Ria then put in €6,000 more, in the end she has almost €3,500 less accumulated assets than Ellen. So in this example, you can see that time is sometimes more important than the amount you invest with. The longer you can let time do its work, the more you will benefit.
So the time your money gets to enjoy that interest on interest is very important. The longer, the more the snowball of interest on interest begins to roll.
You can already buy securities (fancy investment term for products such as stocks or ETFs) with small amounts at several brokers. So maybe buy 1 stock or ETF every month. It’s up to you.
Tip: do look carefully at the cost. When you start investing you have to deal with costs, that makes sense. Investment parties such as banks and brokers also need to make a living. Common fees often include transaction fees, currency fees and management fees. Compare this carefully if you are looking for a party to invest with. Elfin can help you with this.
Read how to easily start investing with small amounts here.
What are the risks of investing?
The stock market is always going up and down, there are sometimes times when your deposit becomes worth less very quickly and vice versa. This is why investing is riskier than saving, because the money may not be worth as much when you need it. This is why it is important to invest for the long term, because while you will experience many highs and lows, invested money generally becomes more valuable. Unlike your savings account when inflation is very high. But to reduce risk, consider the following:
- Invest with money you don’t need. So that you don’t have to unexpectedly take that off the exchange at a time that is not convenient for you.
- Make sure you spread out well or in other words don’t bet on 1 horse.
- Don’t put in all your money at once, but spread it out as well. So you don’t have to time when you want to get in.
- Hold your investments, as buying and selling creates additional costs.
- Pay attention to the costs versus the deposit you make, so that you don’t spend a large percentage on the cost of investing right away.
Furthermore, with investing, you are also at risk:
- Market risk: The risk that your investments will become worth less due to the general economic situation is also called market risk by investors. This means that the entire market and almost all investments are falling in value.
- Specific risk: This risk does not relate to the entire market, but to the risk that specific companies will run into trouble and their stocks and bonds will become worth less. For example, because the company makes something, which consumers no longer need or because a company does something that is not allowed and gets fined for it.
- Credit risk: This is the risk that a company or country you invest in with bonds will (almost) go bankrupt and you will no longer receive credit (dividends or interest). If you invest in a company or country and they almost go bankrupt, they no longer pay you interest and your investments are worth virtually nothing. If they even go completely bankrupt, you also lose your deposit.
- Excessive fees: If the percentage you pay in fees is higher than the expected return, there is a good chance that your investments are not earning you anything, but rather costing you money. Excessive fees can also occur when you invest too little money. The fixed costs of investing can then be quite high in percentage terms.
Read more about the risks of investing in this article.
What should you pay attention to as a beginning investor?
As a novice investor, sometimes you can’t see the forest for the trees. Besides practical questions, it also feels very exciting to start investing actual money.
Therefore, here are some of our basic tips:
- Make sure you have sufficient knowledge. This will give you confidence and help you take that first step. For example, check out the “Starting to Invest” course that will give you all the knowledge you need.
- Find someone to do this with so that you can lean on each other to take these steps.
- Think about what your goal is with investing, which will give you that little push to actually take action. Make a financial plan, and then get to work on your investment strategy. This takes some time, but in doing so, you lay a solid foundation for your life.
Read even more tips in this article “7 Tips for Beginning Investors.
How to choose the right bank or broker?
The right bank or broker is an important choice because that is the party where you actually invest your money.
When choosing which party to invest with, the following are important.
- Is the party allowed to operate in the Netherlands?
Does the party possess the proper licenses and have this authority in the Netherlands. It is also important to check whether the provider is covered by the guarantee system. You can assume that large and well-known parties have this all in order. But if you’re looking at smaller, unknown party, it’s wise to check in advance that they hold the proper permits.
- Do you want to invest actively or passively?
We have explained in this article what the difference is and the choice you make affects the choice of broker / bank. Because if you want passive investing you look more at providers who invest for you and to whom you transfer money. If you want to actively buy stocks yourself, you can choose from brokers where you do the buying and selling yourself.
- Note the cost!
Each provider has its own fee structure. And those costs can weigh heavily on your bottom line. For example, some parties charge a fixed percentage per purchase and sale. But there are also parties that charge a flat fee or charge nothing on specific purchases. So if you know whether you want active or passive investing, look at the fees for each broker.
- Usability
This is entirely on your own feelings. But the user-friendliness and sometimes accessibility of, say, a customer service center can make it easy for you to execute your plan. This, of course, is very personal. So think to yourself when you go to check the bank or broker whether you like the provider’s online environment.
Read more about choosing a bank or broker here
What course can you do as a beginning investor?
This is shameless self-promotion, of course, but the “Starting to Invest” course has already helped over 2,000 women start investing. And 85% also report actually starting after that.
What will you learn in the course?
- All the jargon of the investment world easily explained;
- How the scholarship works;
- How to create an investment plan for yourself;
- What strategies investors use;
- How to invest sustainably;
- And even more information that will help you start investing.
You will benefit from the information in this course all your life!
In addition to learning how to invest, you also want to create a financial plan and learn how to create a personal investment strategy. Then become an Elfin member and in addition to access to Beginning to Invest, get access to our other 4 online courses, up to 12 knowledge sessions with advisors per year and up to 4 Q&As per year. Also, every year we organize bootcamps where we help you make your first investment in 4 to 6 weeks. You can learn more about Elfin membership here.