Investing for dummies

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Disclaimer: The article below provides information and advice on investing. The article is carefully and accurately written, however, we cannot fully guarantee the completeness and accuracy of the information.  The advice given cannot be considered as binding and it should be taken into account that any form of investing involves risks. 

Investing has often been seen in the news, on TV or on social media in recent years. For most people, investing is no longer an unknown concept and the corona crisis has also contributed to the trend that more and more people have started investing. Because investing is a topic of conversation on a birthday it seems that everyone is investing. But how can you actually start investing? What are the different ways to invest? And what is a broker? This article will answer these questions! In addition, we will discuss the things you should take into account before you decide to start investing and what the biggest pitfalls are once you have started. 

A first point to consider is the idea that you can get rich quick with investing. You should not assume that you can earn a substantial amount of money within a few months by investing. Investing is really for the long term. It is important that, if you want to make a good return, the amount you have invested is not available for decades. To cope with occasional expenses and to be able to receive a mortgage, it is wise not to immediately deposit your entire savings account in an investment account. A second point of attention is that you should think carefully about whether you want to invest entirely yourself, or whether you want to manage your investments through a bank. The advantage of managed investing is that you do not have to pay much attention to it yourself. Especially those who do not feel confident enough to start investing themselves will benefit from it. Reasons for managed investing can be a lack of knowledge and time. The disadvantage is that you have to pay a fee to the bank that manages the investment account for you. The next point to take into account if you want to invest yourself is that it is important that you acquire sufficient information and knowledge before you actually start. With this you are already working on your own investment strategy and you would also recognize your own pitfalls sooner. Reading this article is already a good first step! Finally, it is also important to know about taxes. In the Netherlands, you pay wealth tax on your fictitious assets. In 2021 a return of 5.69% on savings and investments applies. The first 50,000 euros are tax-free (1). On the benefit above the tax-free capital 31% income tax is levied (2). If you would like more information on tax, please refer to this article by Faces!

​​Once you have decided to start investing you can, in addition to managed investing at a bank, also start investing yourself. This can be done at brokers like Binq, eToro and DEGIRO. The advantage is that it is cheaper than at a bank. To create an account you often have to transfer a penny to the broker to verify that your bank account is approved. You also have to upload your ID. At DEGIRO, one of the best-known brokers in the Netherlands, you get to choose whether you want to create a standard profile or a Custody profile. With a Custody profile you have less risk, but you pay higher costs and have fewer options. This is because with a Custody account, your investments, such as shares and ETFs, are not lent out to enable transactions in leveraged products, such as futures and options. So you do not run the lending risk, but at the same time DEGIRO cannot profit from lending and therefore charges higher costs with a Custody account. Furthermore, you cannot invest in futures and options yourself, which means that a Custody account often generates less return than a basic account (3).  Above you will see a number of terms such as futures and options recurring. As a beginning investor it is important not to start with these until you have gained enough knowledge about them. 

“Furthermore, investing is not easy. Is something too good to be true? Then it often is.”

You already encountered the term “ETF” in the previous paragraph.  An ETF is an investment vehicle that tracks an index, such as the S&P 500 and the AIX. An ETF basically contains shares of an index in an identical ratio. The advantage of investing in an ETF is that you invest equally in many different stocks. So you can spread out in shares and over time and you’re also not in one category of companies in the same sector. Examples of ETFs are the MSCI World and VanGuard All World. There are often essential differences in the composition of the various ETFs, such as which countries and which industries the ETFs cover. Before you invest, it is important to thoroughly familiarize yourself with which ETFs there are and which ones you would like to invest in. Furthermore, it is possible that you come across terms on the website of a broker of which you have no idea what they mean and what you can do with them. For example, you have the ask price, which indicates at what price an investor wants to sell his stock, and the bid price, which indicates what people are willing to pay for the stock. As a novice investor, it is wise to go through all the terms before investing in a stock that is disadvantageous.

In addition, there are also different types of investment strategies that you should know about before you start. For example, you have day trading, where you can get in and out of a stock quickly based on current news. This is often done by large companies. As an individual consumer, it is often impossible to beat them because you often don’t have the right resources, equipment and time. Another strategy is the Switch trading strategy. In this strategy you own a stock for a longer period of time and you also follow the news again. The difference with day trading is that you are not involved in it every day and that it is mainly a strategy based on your own suspicions. The last strategy is the long term strategy. In this strategy you have chosen your stock and are less sensitive to market fluctuations. Regardless of whether the stock rises or falls, you often hold on to your stock for a while. Based on the above, I would like to give the following tip: it is impossible to time the market and it could well happen that the share you bought a week ago has dropped significantly in price. Do not let your emotions lead you to sell the share quickly. You have analyzed and bought the share and it is important to have confidence in it, even if the first results are disappointing.

But how do I get the right information about a stock you want to invest in? This can be done through financial websites such as Yahoo Finance and Google Finance. The website of the company you want to invest in is also a good source of information. It is especially good to consult the financial statements. Here you can see how much profit the company has made and what the expectations of the company are about the future. In addition, YouTube is also a very easy consult. Channels like Langzaamrijker.nl and Focus for Finance will help you a lot. I would like to recommend that it is important to be critical of yourself. Do not take everything for granted that you hear on Youtube. Even RTL Z can for example not be on the right track with their expectations. 

Should you really want to invest in individual stocks yourself in addition to an ETF, it is important to have a good mix.  For example, there are real “dividend stocks”. These companies pay an annual dividend, so you get a piece of the company’s profits. The counterpart to dividend stocks are “growth stocks.” These companies grow very fast every year and have more turnover every year. These stocks often have more risk than dividend stocks. If you like to speculate, you can also invest in the so-called “Turn-around stocks”. These are companies that have done very well in the past, but have now crashed on the stock market (for example, due to the corona crisis). It is important to have a good mix between the types of stocks and also invest in different sectors to keep the spread as wide as possible.

I want to end the article with my final tips. As mentioned earlier, it is important to have an amount in mind that you are really going to spend periodically and can also spare. Furthermore, investing is not easy. Is something too good to be true? Then it often is. For example, should you see a high potential return on a stock, there can also be a lot of risk involved. For the rest, it is important not to look too much at your own shares. The danger is that you start trading on the basis of emotion. Furthermore, you should also be careful not to incur unnecessary costs. So compare different banks and brokers, make informed decisions to keep transaction costs as low as possible and choose shares that can be traded on the same stock exchange. Finally, make your own strategy, have confidence in yourself and stick to it.