By Opinno Editor de MIT Technology Review en español. Patricia Ruiz Guevara.
If you have savings set aside and you want to make the most of them, it could be a good idea to invest in stocks and shares. This is what you need to know about the stock exchange and the steps that you should take before making your first investment.
Films have often shown us stories of stockbrokers on Wall Street who become millionaires. Although we have all dreamed about this from time to time, it is a complicated utopia, but you can indeed make something of those savings that are gathering dust in the depths of your current account.
To do this well, it is important to first ask yourself a few questions. How does the stock market work? How much money do you need to have in order to start investing? How can you avoid ending up penniless? We’ll give you the key know-how.
What is the stock exchange?
By definition, the stock exchange is the economic institution where public transactions of purchase and sale of securities take place. To be more precise, “it is the place where companies are chopped up and people can buy a minority part of them and participate in their profits and growth”, explains economics expert and author of the book Investment in times of low interest rates, Alejandro Nieto.
The roots of the stock market are Belgian, and it owes its name in some languages to the Van der Buërse family, from Bruges (Belgium), which owned a building where commercial and trade meetings were held and very important economic transactions took place in the 13th century. This family of bankers’ coat of arms was none other than three leather purses or money bags. The economic activity that took place in the Flemish city began to be called Buërse, and over the years the word spread to other cities, until in 1602 the first official stock exchange for shares was formed in Amsterdam (the Netherlands).
Why do companies get listed on the stock exchange?
Companies have two main reasons for going to the stock exchange: to obtain capital in order to boost their growth and to generate liquidity for their private shareholders. Being listed on a stock exchange leads to additional benefits, such as gaining prestige and credibility.
Basic vocabulary: shares, traders and brokers
The lingo of the stock exchange is vast and complex, and it is easy to feel lost. The first thing to understand is what shares are: the stock that is traded on the stock exchange and which represent the parts into which an organisation’s capital is divided. The theoretical value of each one is the result of dividing shareholders’ equity between all the shares issued.
Among the players involved in the stock market, there are two key terms that you need to differentiate:
I want to invest – when is a good time to do so?
According to the experts, any time. “You have to get it into the head of any citizen, be they a civil servant, grocer or journalist, that in order to improve their lifestyle they should have an investment mentality, which is to say that they should put part of their savings into investments”, explains the co-founder and executive director of The School of Investment, Juan Haro.
How much money do you need to get started?
In figures, it depends on the market in which we want to invest. “In the futures market it is usual to start with around € 5,000 – € 10,000; where cryptocurrencies are concerned you can invest with € 5″, Haro indicates. Certainly, “I would never invest money that I may need within five years in the stock exchange – it is a long-term investment”, explains Nieto.
How do I reap the benefits?
Once you have acquired that little piece of a company, there are two ways of earning money:
Nieto makes a comparison with the property market: “If you have a home and you rent it, you get a monthly income; if the area around the building rises in price and you sell it, you will make a profit compared to when you bought it”.
These profits have to be declared to the tax authorities as savings income, and there are progressive taxation amounts. In Spain these are: up to € 6,000, 19%; between € 6,000 and € 50,000, 21%; and above € 50,000, 23%.
Where do I start if I want to invest?
How and where should I invest?
The key is diversification, both in terms of sectors and geographical areas. “You have to diversify and not gamble everything on one company, no matter how solid it seems”, says the economics expert Alejandro Nieto. You don’t have to stay within the stock market borders of your country, you can invest in any stock exchange from anywhere. “That is the magic of the financial markets. With technology, everything is accessible”, indicates Haro.
According to the Stock Exchange University, the ten main stock markets of the world are the New York Stock Exchange (USA) the NASDAQ (USA) , the Tokyo Stock Exchange (Japan), the London Stock Exchange (United Kingdom), the Hong Kong Stock Exchange (China), the Shanghai Stock Exchange (China), the Toronto Stock Exchange (Canada), the Deutsche Börse (Germany), the Australian Securities Exchange (Australia) and the Bombay Stock Exchange (India).
Tips and strategies for investing without going bankrupt
The advantages of investing in the stock market are obvious: making profits from our capital, earning some money that can be available when we want it, generating savings for the future and, why not, learning from the changing world of stock exchanges. However, there is also a striking disadvantage: the possibility of losing our investment, either through inexperience or due to the unpredictability of the market. To avoid such a situation, we should take the following strategies into account: