Leonardo DiCaprio as stockbroker Jordan Belfort throws money: Stock trading for private investors is not quite as spectacular as in the film “The Wolf of Wall Street”.
In times of low-interest rates, many investors are drawn to the stock exchange – because an investment in stocks can generate high returns.
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Can I buy shares on the stock exchange myself?
If you’ve seen the movie “The Wolf of Wall Street” before, you might get a few images of how stock trading could work: with drug and alcohol escapades, wild sex, and most of all – with a lot of money.
But the reality is different. Outside of Hollywood, stock trading is much more civilized. It is less about the quick money that can only be made with great risks. Rather, as a private investor, you can benefit from an investment in shares in the long term. However, you should know exactly what the difference is, how trading works – and how you can start trading stocks.
What is stock trading anyway?
Stock trading is trading, buying and selling, with stocks, i.e. shares of a company on the stock exchange. By trading stocks, you can benefit when a company’s value on the stock market rises or falls.
For example, suppose you own a company that is growing in value by inventing a new, innovative product. In this case, the company’s share usually also rises. You can now sell the stock at a higher price than you bought it. This results in so-called price gains for you.
You can also benefit if the company shares its shareholders, called shareholders, in part of its profit. This distribution is called a dividend, your profit is the so-called dividend profit.
There are basically two different types of stock trading:
Day trading: The so-called day trading, which means up-to-date stock trading, means that investors watch the stock market every day: depending on how a stock develops, they sell it – or buy new ones. In this way, investors try to benefit from daily price gains. They are not concerned with long-term investment, rather the focus is on short-term profit opportunities. The shortcoming: The risks here are much higher. After all, no expert can predict whether a stock will go up or down in value.
Long-term investment: With a long-term investment, investors buy shares once or invest in a so-called equity fund and wait for their value to increase. An equity fund is a kind of basket in which there are many different stocks. This way you spread your money and reduce the risk of loss. A special equity fund is a so-called ETF or index fund. A computer algorithm simulates a stock index. This is why ETFs have a low risk compared to individual stocks – and are therefore particularly suitable for private investors.
The second option is recommended for beginners. The reason: If you are not yet particularly familiar with stock trading, you can easily make mistakes and losses. It is best, therefore, to spread your money widely using a stock or ETF savings plan and to invest long term over a period of more than ten years.
What are the benefits and risks of buying stocks?
When you buy stocks, you can participate in a company’s performance and increase your money over the long term. Many public limited companies also distribute a so-called dividend, i.e. part of their profit, to the shareholders.
In times of low interest on savings books or overnight accounts, investing in shares or equity funds, i.e. bundled shares, can be worthwhile. Because with a long-term investment comparatively high returns can be expected.
But be careful: the higher the potential return, the higher the risk of making losses. You should keep this in mind when investing so as not to lose your money.
A popular way to invest in stocks is through stock picking. That means buying individual shares from selected companies. However, this is less suitable for private investors. Because it increases your risk of making losses if you only invest your money in individual company shares instead of spreading it widely. This contrasts with investment in equity funds or ETFs.
An ETF (Exchange Traded Fund) is a so-called exchange-traded index fund: In this, a computer algorithm replicates a stock index like the Dax. If you buy a share in an ETF, you spread your risk more broadly than with the purchase of individual shares.
Investing in an ETF is also easier than stick picking. Because the risk is less, you don’t have to keep an eye on the company and decide whether to buy or sell a stock.