Investing in shares yourself is easy. You can contact your bank, log on to online banking or use an internet broker, and with a few clicks of the mouse you are up and running. When you buy shares, you can put them in a share savings account or in a regular depository.
You can also have a pension, set up a deposit and invest the pension in shares. A pension depository is part of a closed universe. In this case, this means that if you put money into a pension scheme for which you buy shares, you cannot get the money out until you retire. You can of course buy and sell the shares, but the money you earn from a sale remains part of your pension savings. On the other hand, contributions to pension schemes are often deductible.
If you invest in shares via a share savings account, you pay less tax on the return. However, you must be aware that you pay storage tax. This means that you pay tax on your investment every year – regardless of whether you have sold the shares or not.
The third option is an ordinary custody account, which you create via the bank. Here you only pay tax when you sell the share.
In addition, you must choose whether you want to invest directly in a specific share or via ETFs or mutual funds. In other words, you can knit your investment together just the way you want. We will return to what ETFs and mutual funds are in a moment.
How do you get started with investing?
You want to start investing but don’t know how to start? First of all, you don’t need to be an expert to get started, but you can quickly become smarter with the multitude of blogs, podcasts and newsletters that exist on the subject.
First of all, decide how much you want to invest. Never invest more than you can afford to lose. A lot of people usually start up with a smaller amount to learn how to invest, then they increase the money over time if they have success.
Next you have to decide what you want to achieve with the investment. This include when should you use the money and how big a risk you are willing to take.
If you want to invest yourself, there are a number of platforms you can use, but many start with the help of others, e.g., various robotic solutions. If you don’t have good time to do your investment it can be a good idea to let professionals invest for you. A lot of people do this by buying ETFs or Funds.
As you become smarter about investing, your interest will probably also increase and you will be better able to invest yourself. Other people might ask you to help with their investment, but don’t invest others money if you aren’t a professional.
Although it’s easy to get started with stock investing, there are some concepts that you need to master. You will come across the words mutual fund and ETF. Because it means roughly the same thing, keep your tongue straight. Let’s go through them one at a time.
What is a mutual fund?
A mutual fund takes care of investing in shares on your behalf. Investment associations typically have a specialist area. For example, a sector – it could be medicine – a region – for example Asia – US shares, global shares or an area such as sustainability.
If you have a desire to invest in shares within certain areas, e.g., medicine and sustainability – then you must invest through different investment associations, each with their own special area.
When you invest in shares through a mutual fund, you get an investment certificate. The investment certificate corresponds to the money you have invested with the investment association.
In some cases, mutual funds and mutual funds are mixed up. In many respects, the idea in investment funds and investment associations is the same. But where investment associations are regulated in detail by Danish law, investment funds can cover several different constructions.
What are ETFs?
ETF stands for Exchange-Traded Fund. Just like mutual funds, your money is spread over different shares within, for example, an industry, sector or geography. ETFs usually have several pools in the form of companies, sectors, regions etc. than mutual funds.
Therefore, there is a better opportunity to spread your money out on different shares. And thus, less risk by investing your money in this way.
The disadvantage of ETFs is that the tax rules are a bit more complicated. Another challenge is that ETFs only follow a passive strategy, so if you dream of beating the market, ETFs are not for you. You can read more about passive and active strategy a little further down.
How risk-averse are you?
As we have reviewed above, you can invest in shares via mutual funds and ETFs. You can also choose to invest directly in a share yourself, bypassing associations and ETFs. If you know of a particular company that you think will do better than the competition, it may be right for you to invest in the selected stock. It is called an active investment.
There is a greater risk involved if your investment in shares is an active investment, as you are investing your money in certain shares which may take an unexpected fall. On the other hand, there is also a chance that the shares will rise a lot. The thinking behind making an active investment is that you invest in carefully selected stocks to beat the market average.
If you are not so risk-averse, you can invest in shares via what is called a passive investment. This means that you have no preferences for which companies you invest in and that you simply want a return that follows the general stock market.
If your investment in shares takes place via ETFs, you invest via a passive investment, whereas mutual funds can act according to a passive or active strategy. Some mutual funds have a passive strategy, while others have an active one. Therefore, you must decide what you feel most comfortable with when you choose which investment fund you want to buy shares through.
Choose your investment strategy carefully
Before you start investing in shares, it is a good idea to create an investment strategy. And stick to it. Whether you are investing a small amount of money or want to save a larger portion of money for your retirement, it is important that your investment strategy is realistic.
Should I choose an active or passive investment strategy?
When creating an investment strategy, you must start by assessing how risk-averse you are. If you want to try to beat the market average, you can dive into investing in carefully selected stocks via an active investment strategy. If the thought of big swings in stock prices gives you sleepless nights, a passive investment strategy might be better for you.
When you choose the stocks, you want to invest in yourself, you use an active investment strategy. You can also choose the active strategy if you use a mutual fund. Here, the investment association will try to analyze the market and the companies, and try to time purchases and sales as best as possible. If successful, you as an investor will be rewarded with a return that is higher than if you had passively followed a sector.
On the other hand, you may run the risk that you or the investment association will hit on some stocks that underperform, and you will therefore be left with a worse return than the average.
If your investment in shares is via a mutual fund or ETFs that use a passive strategy, it is easier for you to keep an eye on how your investment is performing. Let’s say you have invested in a passive ETF that follows the Nasdaq 100. When it says in the newspaper that the Nasdaq Index has raised by 15% last year, you know that you achieved the same return on your investments.
In addition, an investment strategy must contain a plan of how you expect your investments to develop. Remember that the rates can drop significantly in value in shorter periods. If you have made a good plan – both with regard to the size of your investment in shares and your time horizon – you will not lie sleepless at night when the stock market fluctuates a lot at times.
If you go anyway and worry about your investments, you may have invested too much money. Investing in shares must not give you a stomach ache. If it does, you should invest less.
When you are looking for stocks, just remember just because a stock as rised a lot the past year, doesn’t mean it will do the same the upcoming year.
It is important to spread your money across different shares or areas so that you do not lose all your money if a share plummets. It is therefore a good idea to invest both in individual shares and ETFs or mutual funds, where you spread your investment across different industries, sectors and different corners of the world.
If you choose to invest in individual shares, you should spread your investment over 10-20 different shares.
The closer you get to the time when you need to spend your money, the more important it is to adjust the risk down. Otherwise, you run the risk of having to sell the shares during a period when the stock market has taken a major plunge.
Find your risk profile
If you go to the bank and ask for help and advice on investing in shares, the bank will create an investment profile. Such a risk profile is made based on how big a return you want, where the pain threshold for loss lies, and how long you want to invest.
You can create a risk profile yourself. Search the web and get help finding the balance between how much risk you are willing to take in order to achieve a given return. If you invest in ETFs, it is easy for you to adjust your profile to suit the risk and return you want.
Just remember the higher risk you take the more can your both win or lose on your investment.
The return on investment in shares
The return on your share investments consists of capital gains and dividends. The capital gain is the difference between the price you buy the shares for and the price you sell them for.
In addition to the capital gain, there are some shares, ETFs and investment funds that regularly pay out dividends. The dividend is paid quarterly, half-yearly or annually.
It is always a good idea to keep an eye on which investments are performing well and poorly. Even small differences in percentages or parts per million can have a big impact over a long period of time if compound interest is factored in. Often, the stocks that give you the biggest returns in the first few years will be the ones that continue to give well year after year. That’s why you need to hold on to your winners.
What are the costs of investing in shares?
There are some costs involved in trading stocks. First, you need a depository. In the past, the bank charged a fee for you to have a depository to store the shares. Today, many banks have waived that fee, and now you only pay the trading costs – or brokerage as it is called in professional language – if you stick to Danish shares. If you trade in foreign securities, there will be a fee for currency exchange on top of that.
It is usually cheapest to buy and sell the shares yourself via internet banks or through your online bank. If you ask the bank to handle your investment in shares for you, it will be somewhat more expensive.
To avoid paying too many trading costs, you should think about how often you trade. For example, if you want to invest a percentage of your monthly salary, you can keep the cost percentage down by trading once a quarter or every six months instead of buying every month.
When you choose which ETFs or mutual funds you want to invest in shares through, you can see, under Central Investor Information, how big the costs are associated with the investments. The APR figure (annual cost as a percentage) collects all the expected costs in one figure. The cost percentage is typically between 0.1% – 3%
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