Before investing in stocks, you should know a bit more about what you are dealing with. Stocks, or ‘shares’ are very small pieces of a company. By buying shares, you are part owner of the company. If a company makes a profit, you often benefit from this in the form of a dividend. Plus if the underlying price of the stock rises, you benefit from the price increase. The dividend is always a positive, this is after all the company’s profit. But instead of a price increase, you can also face a price decrease, for example if the company or the economy is doing badly. If you bought a share at €100, and it is now worth €90 per share, you have a loss of €10 per share because of the price drop.
You have different types of shares, such as:
Growth stocks, cyclical stocks, defensive stocks and dividend stocks. The difference is not that trading the various types of stocks is different, they are just defined differently by the market. General Mills is a dividend stock, Facebook is considered a growth stock.
Which stocks should you choose?
Which stocks you should buy we can’t tell you. We have no crystal ball and are not analysts who analyze stocks and markets on a daily basis. Never take advice from people who are not analysts, but who tell you which shares you should buy.
Which shares are a good investment is entirely personal. Moreover, you do not need to invest in individual shares to build up successful long-term wealth. If you still want to invest in shares – which we understand, because it’s fun! – we recommend that you do your own research. Consider investing in stocks to be more risky.
Always remember that you want to minimize risk and you do that by diversification. If you invest in an ETF you automatically spread your money across many companies. With investing in individual stocks you bet on one horse.
When is investing in shares for you?
Investing in stocks is fun, but absolutely not a must for long-term success.
The goal of investing is to make more money from your investments. To let your capital grow. To do this successfully year after year, it is important to observe a number of rules, such as spreading your portfolio (not all your eggs in one basket), paying attention to the costs and keeping it for the long term.
In addition, a number of other aspects are important, such as keeping your emotions in check (don’t let them drive you by FOMO or fear), always making sure you minimize your risk and, above all, don’t lose money. Everyone wishes they had bought Tesla shares or a few Bitcoins in March 2020, but getting in for fear of missing the boat is not always a good choice as far as we are concerned. As stock market wisdom goes: let profits run, limit losses. The pain of losing money is greater than “if only I had…”. This is why we believe that investing in stocks is riskier, and not a MUST.
Some people are fans of investing and like to have shares in their portfolio, but if you are uncomfortable with this, don’t want to do all the research or get restless: no problem. Investing in stocks is not a MUST to build wealth.
Shares or ETFs?
Do you especially not want to worry about your investments and be as little involved with them as possible? Perhaps an ETF is a better product for you than shares. Do you like to follow the news around the company you have shares in and do you dare to take more risk? Then perhaps equity investing is for you!
How to buy shares?
You can buy shares on the stock market. Via a broker you have access to the stock market where you can buy the shares you’d like. A broker is the ‘middle man’ between you and the stock. Probably you’ve heard of some names, like BUX Zero, DEGIRO, Trade Republic and many more. How to choose the perfect broker for you is something we will touch upon later.
Looking for an easy brokerage where you can invest in stocks, even fractional stocks, without transaction costs? Check out this one!
Different kind of shares
Within the category of shares, you have different types of shares. In the following paragraphs we explain what the most common shares are.
A growth share is characterized by the expected growth of the company. Often this expected growth of the company is above the growth of the market as a whole. These types of shares are often issued by the company to raise money from investors so that the company can take advantage of this growth potential.
Growth stocks also generally do not pay dividends, the dividends – IF the company even makes a win – are reinvested in the company for even more future growth. Growth stocks are often purchased in order to possibly sell these shares at a profit at a later stage. Good examples of this are tech companies.
Cyclical stocks are stocks that are highly dependent on the state of the economy. If there is economic growth, cyclical stocks show a price gain. If the economy is not doing well, the price of a cyclical stock may fall sharply.
Especially in a recession, the probability of a drop in price is high. Some examples of cyclical stocks are ArcelorMittal, Randstad and Aperam. In short, a cyclical share is a share that moves with the economic situation. Is the economy doing well? Then the share rises. Is it bad for the economy? Then the share falls with it.
Defensive stocks are stocks that are relatively less sensitive to developments in the economy. They are low volatility shares, i.e. with a price that does not move as much. If a defensive share reacts to a development, it is often a violent one. Think of an accounting scandal or a corruption scandal.
Defensive stocks almost always show the same price results. If you own defensive stocks, then you don’t have to worry so much about your stocks suddenly being worth a lot less from one day to the next. Large price increases with big profits are, unfortunately, not common for these shares.
Defensive stocks often are companies that do not have much to do with financial products. Think of companies in the food industry, pharmaceutical industry or the gas, water and electricity industry. Some examples of defensive stocks are Ahold, Heineken, Unilever and Wolters Kluwer.
It is well known that you can make profit with shares. However, you can also make profits with shares by receiving dividends. Many companies pay out part of the profits to their shareholders. This profit sharing is called dividend.
A big advantage of dividends is that they can be passive income. You can reinvest this money in additional stocks, allowing your portfolio to grow exponentially. Or you can have the dividend paid out to you, using it as income.
When looking for high dividend stocks, it is wise not to just look at the companies that pay the highest dividends. For example, if a stock pays 7 percent in dividends, but declines 8 percent in value each year, you will end up with a negative balance.
When a company pays out dividends can vary. Dutch companies often do this once or twice a year. For American companies, however, it is quite normal to do this every quarter or even every month. So if you buy up shares smartly, you can build up a steady income from these shares.