The stock market is not just for experts. Anyone can invest in the stock market. In fact, it does not require in-depth knowledge or an inordinate amount of wealth. It is even regrettable that only a fraction of insiders enjoy the benefits of the stock market, because it is a source of income and purchasing power accessible to all. In this article I have concocted a summary of what you need to know to make your savings grow on the financial markets: Here is how to start in the stock market!
What is the stock market?
In common parlance, the stock market is generally assimilated to the financial market. And who says market, says place of exchange. In this sense, the financial market is not very different from the market where you shop for fruits and vegetables, but instead of fresh produce, you buy financial products. Note also that financial markets are completely dematerialized today.
In the press, we also often refer to stock market levels: “the stock market is rising”, “the stock market is reaching new records”… In these cases, the term “stock market” actually refers to a stock market index: the CAC 40 for the French stock market or the Dow Jones, for example, for the American stock market.
A stock market index groups together a group of companies. For example, the CAC 40 is the 40 largest multinationals listed on the Paris stock exchange: LVMH, Sanofi, BNP, etc. If the CAC 40 rises, this indicates that, taken as a whole, the shares of these companies are appreciating. It is therefore an indicator of the stock market trend; a clever way of saying that prices are rising.
What you need to know to get started in the stock market
Before entering into the practical aspects. It seems useful to me to clarify some fundamental concepts.
Stocks
Stocks are the most popular financial securities for individual investors. A stock is simply a piece of property representing a fraction of a company. If you buy Apple stock, you become an owner of a small portion of the company, along with thousands of other shareholders.
Being a shareholder gives you two basic rights:
- vote at shareholders’ meetings (which is not necessarily your goal, as a small holder);
- to receive a portion of the company’s profits in the form of dividends.
The second point is of course the most important. But dividends are not the only reason you should buy stock. Let’s explore that right now.
Why do one earn in the stock market?
Stocks offer two sources of income:
- dividends;
- and potential capital gains, when you sell your shares.
An analogy can be made here with real estate investment, which allows you to receive rent (the equivalent of dividends) and to realize a potential capital gain. With stocks, capital gains are generally the most important wealth factor because a growing company will often reinvest its profits in its business to continue growing. This explains why a company like Amazon, which has not paid dividends for years, has nevertheless been an excellent investment.
What stocks should I buy?
Buying stocks increases your wealth through dividends and capital gains. But which stocks to buy is a thorny question that many experts have struggled with. And, the most valid answer to date is “All stocks”. This may seem like a paradox because so many people spend a lot of energy trying to find THE right stock, but it’s almost impossible to know in advance which stock will perform best in the future. And to remove this paradox, you just have to understand that if you are able to identify a golden move, other investors are too, so the price of this stock will automatically increase due to rising demand, making it less attractive.
A mistake often made by those who are new to the stock market is to invest in only a few stocks, usually the one they know best. On the other hand, if you buy “all the stocks”, you are not putting your eggs in one basket; you are diversifying. This diversification allows you to reduce the risks without reducing the potential gain. On top of that, you save yourself the headache of trying to pick one stock or another.
But how do you buy “all the stocks” without spending hours? The truth is, you’re not going to buy all the stocks, but rather the top stocks. And you’re not going to do it yourself, but rather through an investment fund.
Investment funds and ETFs
An investment fund is a basket of several dozen stocks. So with an investment fund you buy a ready-made “basket” rather than buying each stock in it one by one.
There are two types of investment funds:
- traditional funds, which you can find under the terminology of SICAV or OPCVM; they are managed in the old way by a team of managers.
- ETFs, also known as trackers, are investment funds listed on the stock exchange that replicate a stock market index. They are managed almost automatically and charge 5 to 10 times less fees. Thus a CAC 40 ETF will invest in the 40 stocks of the CAC.
Without surprise, these are the ETFs that I recommend. Thanks to low fees and a very good diversification, they will allow you to obtain a better performance. This “passive” strategy, which simply consists of buying ETFs, is the one I recommend to individual investors who are new to the stock market. But actually, I also recommend it to more experienced investors because it is very effective.
Now that we’ve covered the key concepts, let’s look at what you can earn in the stock market.
What you can earn in the stock market as a beginner
When you are a beginner, and even if you are not an expert or a professional, I recommend to set up a passive management based on ETFs. And if you take a look in the rear view mirror to evaluate the performance of such a strategy, you can see a performance of about 8.5% per year on average. So that’s what you can expect to earn over the long term. Let’s clarify two things:
- when I say long term, I mean at least 10 years, and more like 15 to 20 years;
- even with a well-diversified ETF, performances are irregular: 12% one year, - 8% the next, then 5%, etc. On average you can expect 8.5%.
The stock market is therefore a profitable investment if you are patient enough. What counts is to ride the upward trend in the long term and not to worry about the fluctuations the rest of the time.
In practice: how do I get started in the stock market?
If you’ve read all of the above, then congratulations! You know almost everything you need to know to start in the stock market and earn, on average, 8.5% per year. All that remains is to put all this into practice and start your first stock market investment.
- Choose a type of account (or fiscal envelope).
- Choose the right stock broker
- Choose the right ETFs
- Place an order
- Stay calm and relaxed
Following these 5 steps will take you only a few minutes to get started. Finally, what will take you the most time is to wait for the validation of the opening of your account. And, what will take the most effort is to adopt the right behavior if the stock market falls: remain stoic, keep your cool and remember that it is in the long term that you win. Stay the course!