Content of the article
Is investing in the stock market risky?
Why invest in the stock market?
How to start in the stock market
- Learning to invest
- Invest the money you don't need
- Define an investment strategy
- Choose between free management and managed management
Where to invest in the stock market?
When should you start investing in the stock market?
Investing in the stock market is a great way to make your money work for you.
That is, to put your hard-earned money to work for you to grow your wealth.
Especially when you decide to invest your money for the long term.
There are many ways for beginners to start investing easily depending on their own situation - and no matter what your budget.
In this article, we'll explain how to invest in the stock market and everything you need to know before you get started.
What is the stock market?
The stock market is a bit like cricket. Many of us have heard of it, but we don't know exactly what it is.
Anyway, it's not just guys in suits yelling at screens.
The stock exchange is simply a market place, a place where buyers and sellers meet to exchange. It can be about different things, such as shares (which we will present next), bonds, raw materials...
So there is not really only one "stock exchange", but several which are specialized in particular fields or areas.
Here, we are mainly talking about the stock market in the sense of the stock market.
Stocks
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This is what we usually have in mind when we talk about investing in the stock market.
A stock is a small part of the capital of a company. When you buy a share or shares, you buy a part of the ownership of this company.
You become what is called a "shareholder".
Note
The term "stock" is also used to refer to a share (since it is a form of ownership).
Why do shares exist? Simply to allow companies to develop and grow thanks to the financial contribution of its shareholders. You "support" the development of the company with your money.
Once you own this small piece of the company (your share), you can then sell it to anyone who wants to buy it.
Bonds
Bonds are different from stocks, and are not related to the "stock market" per se.
However, they are one of the most popular asset classes along with stocks. So they are also important to know when you start thinking about investing in the stock market.
A bond is simply "a piece of debt issued by a company, a local authority or a State" (you can find a complete definition here ).
This means that you yourself are going to lend money to a company or a government for a given period of time. The institution to which you have lent this money will then pay you back with interest.
Generally speaking, bonds tend to be less risky than stocks (although this depends on the bond in question).
But they do have a lower return.
So they will help limit the risk in your financial portfolio.
Financial markets
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You have probably already heard about "financial markets"... without necessarily really understanding what they are.
Here is the definition given by the AMF, an institution whose goal is to protect your savings by regulating the financial markets:
Un marché financier est un lieu, physique ou virtuel, où les acteurs du marché (acheteurs, vendeurs) se rencontrent pour négocier des produits financiers. Il contribue au financement de l'économie, tout en permettant aux investisseurs de placer leur épargne.
The terms market and exchange are generally used interchangeably.
Is investing in the stock market risky?
Many people tend to think that the stock market is too risky. This can of course be the case when it is badly used.
This is why financial investment products are often presented with many warning messages.
And this is for example also the case at the bottom of all our articles on the investment term.
However, by investing in the stock market in the long term, the return in relation to the risk is generally very interesting.
When we talk about risk in the stock market, there are two main things to take into account.
Volatility
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When you put your money in a savings account, you know in advance how much interest it will earn.
This is not the case with the markets, which fluctuate: they are said to be volatile.
For example, the price of a stock may vary greatly over time - up or down - from the price at which you bought it.
The magnitude of these changes can be very large, and the asset is said to be highly volatile.
The risk of this volatility is that you may have to sell your investments in a period of decline.
This is why it is essential to invest for the long term (which limits the risks linked to volatility) and to secure your assets progressively as you move towards the date when you will need to recover your money. We will develop this point a little further down in the article.
Successful investors also accept periodic losses, setbacks, and unexpected events. Disastrous falls do not scare them.
Peter Lynch - Author of What if you knew enough to win in the stock market?
Risk of loss
Depending on how you invest, there is also an outright risk of losing money.
If you buy a stock and the price of the company falls and never rises, or the company goes bankrupt, you can simply lose your investment.
Note
In the stock market, however, you don't lose anything until you sell your stock.
Let's say you bought a stock called MNLO, at 100$.
After 6 months, the share price has dropped to 70$. Panicked, you sell the stock and take the 30$ loss.
But if you had waited 12 months, the share price would have risen to 110$. If you had sold at that time, you would have gained 10$.
That's why we recommend you to avoid buying individual stocks when you start, and to prefer diversified investments in the long term, for example through ETFs (which we will also present in detail later in the article).
The difference between investing and speculating
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Many people unfamiliar with the stock market tend to confuse investing with speculating.
However, the two are quite different and do not present the same risks.
- Investing is putting your money in order to get a return, usually over the long term. You want your money to work for you, with a positive return. You invest your savings to make it grow.
- Speculating is "betting" on the evolution of the markets and taking a lot of risk with your investments in order to try to obtain short-term gains well above the average... (very) often with less success. The risk of loss is much higher, and it requires knowledge (for example learning to do what is called fundamental analysis) and a lot of time related to the management of one's investments and to follow the financial news.
The vast majority of us should be looking to invest our money for the long term, rather than buying stocks as a casino game.
In the stock market, you have two choices: get rich slowly or get poor quickly.
Benjamin Graham - American economist, professor and investor
Why invest in the stock market?
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The stock market is simply a way to make your capital grow.
And often much more efficient than what can't be done with traditional savings books or with the euro funds of life insurance.
You can globally earn money in the stock market through two mechanisms.
Note
There are other ways to make money in the stock market, notably through what we call derivatives. As these are generally much riskier and should be avoided categorically by "ordinary" investors, I will not present them in this article.
Capital gains
Capital gains are the difference between the purchase price and the resale price of an asset (like a stock, for example).
You buy your shares at a certain price. Your goal is usually to have that stock appreciate in value, so that you can sell it for more than you bought it for.
By selling your stock for more than you paid for it, you make what is called a capital gain.
Dividends
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A dividend is simply a portion of the annual profits of the company in which you own shares that are paid to you.
Dividends are generally paid quarterly (although this may vary from company to company and from period to period), and they allow you to build up additional income without having to sell your shares.
The amount you can expect to receive depends on the number of shares you have in the company.
How to get started in the stock market
Getting started in the stock market is often less difficult than it seems.
But that doesn't mean you should just jump in without thinking.
A minimum of preparation is necessary to avoid costly mistakes.
Learn to invest
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The best way to fail in the stock market? Investing without thinking.
Like watching a YouTube video of someone showing you their portfolio with great results, and deciding to replicate it at home.
Or deciding to buy Tesla shares because you hear about it everywhere, and a lot of people say they have made a lot of money.
Investing requires a strategy, and above all, to take into account many personal criteria.
That's why it's essential to train and learn before you start.
This does not mean that it is necessarily very complex, especially if you choose to invest for the long term. It just means that there are some basics that you should master to avoid doing anything wrong.
A good way to educate yourself financially about investing is through books, which are full of advice from experts in the field.
Invest the money you don't need
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As we told you earlier, and as you have already heard in the disclaimers on the radio, "investing carries a risk of capital loss".
This simply means that you risk losing money by investing in the stock market.
It is therefore essential to invest money that you do not need in the short or medium term.
You could otherwise find yourself having to sell at a loss, and seriously impact your financial situation.
Then, as the maturity date of your project approaches, you should gradually secure your investments by allocating a larger portion to low-risk assets such as bonds or euro funds.
Also, before you start, make sure you have some precautionary savings in a savings account or any other easily accessible investment.
Define an investment strategy
You should think about your overall investment strategy - not just buy stocks here and there because you like them, or because you heard they're a good investment.
This will be critical to your long-term success, which should be your primary goal in limiting risk and getting things done.
This will allow you to avoid selling too quickly during periods of market downturns that could cause you to panic. And to remain calm during fluctuations, because you know anyway that your objective is far away in time.
Choosing between free management and managed management
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There are two main ways to manage your investments in the stock market: free management and controlled management.
There is technically no better or worse way: everything depends on what you prefer and the weight you personally give to each of the advantages or disadvantages.
Free (or direct) management
Free management is ideal if you are the type who wants to manage everything yourself. You want to choose directly in which stocks or ETFs you want to invest, and follow the performance of your portfolio yourself.
Managed (or delegated) management
If you are more of the "the less I do, the better I feel" type of person, delegated management may be for you.
Your money will be invested and managed by these professionals. This can lead to higher management fees.
And why not a mixture of both?
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You can choose to use delegated management either for all your investments (for example by using a Financial Investment Advisor), or decide on a case-by-case basis what you prefer for each of your investments.
Nothing prevents you from varying the management methods according to your investments.
Where to invest in the stock market?
The first thing to know when you want to start investing in the different "types of accounts" in which you can put your money to buy shares or others.
Technically, this is called a "tax wrapper" (a very unsexy term indeed, but one you should know).
It's a two-step process: you'll first choose how you're going to invest in the stock market, and then decide which investments to buy.
Which tax wrappers to choose?
The PEA
The PEA (Plan d'Epargne en Actions) is a tax wrapper dedicated to investing in the stock market.
It allows you to invest in shares of many French and European companies.
The big plus of the PEA is its tax advantages which make it more interesting than its cousin the CTO (which we present a little further down).
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On the other hand, the investment options remain limited, as it only allows you to hold French and European shares directly, as well as funds composed of at least 75% of European shares.
However, it is also possible to invest in certain ETFs that allow you to gain exposure to shares outside the European Union.
The advantages of the PEA
- ✔ A very interesting taxation (taxation on capital gains only at the exit of the PEA, and only the social security levies are due if the PEA is more than 5 years old)
- ✔ The PEA is transferable to other establishments
The disadvantages of the PEA
- ✖ Any withdrawal before 5 years leads to the automatic closing of the PEA, but also to the withdrawal of all associated tax advantages
- ✖ Possibility to have only one PEA per person (or two per household)
- ✖ Payment limit ($150,000)
- ✖ Depending on the PEA opened, fees can sometimes be significant
- ✖ Intended for the purchase of European shares only, or funds holding at least 75% of PEA-eligible securities
The Ordinary Securities Account (CTO)
But unlike the PEA, this one has no restrictions in terms of geographical zones. You can therefore access all the world's stock markets.
On the other hand, it does not benefit from the (very) advantageous taxation of the PEA.
The advantages of the CTO
- ✔ Extremely flexible: you have no constraints on withdrawals, limits or payments
- ✔ You can have as many different CTOs as you want
- ✔ Access to international stock markets
The disadvantages of the CTO
- ✖ Taxation is less interesting then for other tax wrappers such as life insurance and PEA (here you pay the flat tax of 30% on your capital gains)
- ✖ You have to declare your CTO annually to the tax authorities even if you do not withdraw any money
Life insurance
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Life insurance is the favorite investment of the French: more than 53% of the French hold one according to an Ipsos study.
And this is a good thing, because it is a particularly advantageous savings product, especially in terms of taxation.
The life insurance allows you to invest in two types of supports:
- Euro funds. This is guaranteed capital support (i.e. you can't lose money). It is managed directly by the insurance company and generally invested in bonds.
- Units of account (or UC). These are funds that allow you to invest your savings in shares, bonds, or even real estate. Their management can be simple or controlled. The UC present a risk of capital loss.
The money invested in your life insurance is not blocked. On the other hand, the taxation is the most interesting after 8 years.
It also offers interesting inheritance advantages.
Be careful: avoid life insurance policies offered by banks, which are rarely the most interesting contracts and generally have very high fees.
The advantages of life insurance
- ✔ No ceiling of payment
- ✔ Here too, you benefit from tax advantages (these being the most interesting for contracts of more than 8 years)
- ✔ Inheritance advantages
- ✔ Possibility to open several life insurance contracts in several establishments
- ✔ Money placed in a life insurance the policy is not blocked, contrary to popular belief
The disadvantages of life insurance
- ✖ You must be careful when choosing your policy: some life insurance policies charge very high fees that can greatly impact your returns over the long term
- ✖ The investment options are more limited than with securities accounts
- ✖ It is impossible to transfer your contract to another establishment
What to invest in?
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We'll say it again, but it's because it's important: when you're just starting out, you should avoid day trading (speculating by buying and selling stocks on a very regular basis).
Those who invest passively are usually better off in the long run. And again, the goal is not to speculate, but to invest for your future and your projects.
Live stocks
Here again, beware: this is far from being the strategy we recommend, especially if you're just getting into the stock market.
Yet, buying stocks directly - or what is also called stock picking - is what many people tend to have in mind when talking about how to invest in the stock market.
For example, how many people wanted to invest in La Française Des Jeux when it went public, without knowing anything about investing or FDJ's financial performance, but simply because their cousin's wife told them it was a "great opportunity"?
Instead of picking individual stocks and crossing your fingers, define your financial goals and build a diversified portfolio, with funds or ETFs for passive investing.
Even if you decide not to listen to us (we're a little disappointed, but we don't hold it against you), really take the time to educate yourself about investing before you jump in. This book of Peter Lynch can be interesting to begin.
Investment funds
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Building a diversified portfolio by buying many individual stocks is possible, but it requires a significant investment and time spent researching.
But you can also invest your money in investment funds.
These are the ones behind the complicated acronyms you may have heard of UCITS, SICAV, FCP...
Instead of investing directly in shares or bonds, you invest your savings in these funds will themselves manage and invest the money entrusted to them.
One of the advantages is generally a better diversification than choosing the shares yourself, and letting professionals make the investment decisions for you.
The disadvantage, especially compared to the ETFs that we will present next: the higher fees, especially to pay all these professionals.
Therefore, find out about the fees charged and analyze the Key Information Documents (which indicate past performance, fees charged, etc.) provided with each investment before making a decision.
ETFs
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ETFs, also known as index funds or trackers, are investment funds listed on the stock exchange, whose objective is to replicate the performance of a stock market index.
They are basically baskets of several securities (stocks, bonds, etc.) that you can buy or sell just as you could with a single stock (precisely because they are "listed").
Except that you buy directly into this fund which contains hundreds of different stocks, without having to buy them all yourself!
As for their objective of "replicating the performance of a stock index", here is more explanation.
A stock index is an indicator that measures the performance of a group of stocks. The CAC40 and the S&P500, for example, are indices.
Here, the ETF will try to have the same performance as the index it represents. You can therefore invest in CAC40 or S&P500 ETFs.
If the CAC40 increases by 7% in one year, this will be more or less the case for your ETF too.
Investing in ETFs has many advantages, starting with a wide diversification (which allows you to limit the risks of your investments), and much fewer costs than traditional investment funds because they are not actively managed.
This is the most often recommended type of investment for those new to the stock market (and honestly even for many people who know about investing).
When should you start investing in the stock market?
People often wonder when is the right time to invest, either personally or economically.
Here are some guidelines to answer this question.
Depending on your personal situation
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When thinking about making your first investment in the stock market, you should start by asking yourself why you want to invest.
Or more globally, define your financial objectives. Because as we saw above, they will be the ones that will allow you to know what type of investment will be best for you, and at what level of risk.
Note
When opening an account or an investment contract, the broker will have to collect a certain amount of information about you before proposing a financial investment. In particular, you will fill out a risk profile questionnaire.
But there are also many factors to take into account beyond your financial objectives: your age, your family situation, your professional situation...
On your side, take an honest look at your finances. If you are accumulating consumer loans or have no security savings, focus first on resolving these problems before investing.
And in any case, only invest money you don't need.
Depending on the economic or stock market situation
There is an expression in English: "Time in the market beats timing the market."
For lack of an easy translation for those who didn't take English LV1, it simply means that time in the market (i.e. the period of time your money is invested in the stock market) is much more important than timing the market.
Timing the market is an investment strategy that consists of trying to get higher returns by trying to invest or sell at the right time by trying to predict market movements.
Here, we are more in the notion of betting than investing. The markets have an upward trend, which means that in the long term, they tend to rise.
Invest when you are ready, without trying to figure out if the markets will go up or down in the near future. Either way, as noted above, you should be committed for the long term.
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