Finally! You have taken the step and you have decided to invest. Leaving the money in the checking account is no longer an option because it does not give any profitability and, in addition, inflation is making you lose purchasing power year after year.
However, you are a novice investor and you don’t even know where to start. The first option that comes to mind is the stock investment, that is, the direct purchase of shares in one or more companies. But this is not the only alternative; there are other options such as ETFs or investment funds which are also interesting for small investors.
How to start investing in the stock market
The first option is to directly buy the shares of publicly traded companies at the market price.
Before you start investing in the stock market, you have to know how to do it. To do this, you simply have to open a securities account at a broker and transfer money to her. Once done, you can start buying shares of companies that are listed on the market.
What are the commissions of direct investment in shares
- Purchase and sale commissions: they are charged by the broker for carrying out operations with the shares. It can be a fixed amount or a percentage of the operation.
- Custody commissions, which the bank charges for being the depositary of your shares.
- Specific commissions for the collection of dividends, for capital increases …
Why invest directly in the stock market
The advantages of direct investment in the stock market are the following:
- You manage your own portfolio, in the sense that you are the one who buys and sells the shares at the time you consider appropriate.
- You can enter and exit a value with agility, since the investment in the stock market has a high liquidity.
- You get profitability in two ways: the revaluation of the share and the payment of dividends to shareholders.
Disadvantages of direct investment in stocks
However, investing in the stock market has some drawbacks that it is convenient to know.
- You need a great dedication, because you need to have analyzed the actions on your own before making a decision. For this, it is important to follow the economic news that may affect your portfolio, review the company’s balance sheets, etc.
- It is difficult to build a diversified portfolio, because you need to buy a large number of shares at the price set by the market. If you also want to buy from different geographical areas, you have to have access to other markets, which is not always possible.
Put a manager in your life: investment funds
Mutual funds are a type of product with which you can also start investing. The difference with direct purchase on the stock market is that our capital is contributed to a common fund where other investors also participate. Once you contribute part of your assets to the fund, you participate in its results.
Unlike the direct purchase of shares, in investment funds there is a management team that is in charge of managing the assets based on their investment policy. In exchange, they charge a management fee, which may be higher or lower depending on their strategy (for example, actively managed funds charge higher fees than passively managed funds).
Why hire an investment fund: advantages
By hiring an investment fund, you put a management team to work directly for you. With this you get four important advantages:
- Diversify your investment: in a fund you can have a wide variety of assets that make up the portfolio, among which are stocks. Normally, the portfolio is sufficiently diversified geographically and by sector, so that drops in the price of one security are offset by gains in others.
- A professional management: With the funds, you will no longer have to be on top of your investment on a daily basis. A manager moves your money according to the investment policy of the fund; this way you will avoid having to analyze the market to keep track of the best assets.
- Tax advantages: if you transfer your money from one fund to another you do not have to pay taxes on the accumulated earnings. Only when you redeem your shares in the fund and convert it into cash.
- Greater market access: professional management allows you to buy markets and assets that would be impossible to access as small investors. For example, thanks to index funds, you can invest directly in the world market with small contributions.
Disadvantages of investment funds
In investment funds, they are not all advantages. Some of the drawbacks are:
- They are not a product to invest in the short termMutual funds are designed to invest for the long term. The NAV is not updated in real time, but is determined daily based on the fund’s performance. This makes it impossible to know exactly at what price it is bought or sold.
- Management fees: having a manager at our service has an additional cost that must be paid. However, with index funds, this cost is significantly reduced, as the manager’s job is limited to tracking the performance of the benchmark.
- Commission per depositary: Along with the management commission, a commission must be paid to the depository entity where the money is.
- Commissions for subscription or redemption: Finally, and although they are not always applied, the funds may charge the participants commissions for subscription or redemption, that is, for buying or selling shares.
A middle way: investing in ETFs
ETFs (also called exchange-traded funds) are an investment product whose function is to replicate the behavior of an index, for example, the S&P 500. This product combines the diversification and low costs of index funds with the operational agility of investing direct on the stock market. In fact, ETFs are publicly traded like stocks of large companies.
In other words, an ETF is a product built in the image and likeness of an index (the Ibex, for example) to replicate what that index does, although in reality the operation is the same as that of any share that is listed on the stock market.
Why invest in ETFs: advantages
- Lower costs: As with a fund that invests in the Ibex, with an ETF you also invest in an index but, as it is a passive management product (as it does not have a manager behind it on a day-to-day basis), you do not have to pay commissions for its job.
- Operational capacity: ETFs are publicly traded just like stocks. At all times you know at what price you buy and sell and the daily fluctuations in its price.
- Diversification: with an ETF you are invested in all the values of the index (the 35 of the Ibex or the 500 of the S&P, for example) so the diversification is total.
Disadvantages of investing in ETFs
- The figure of the manager is lostAlthough it is not strictly necessary for it to exist actively, its presence can make a positive difference.
- It does not have the tax advantages of investment funds: ETFs cannot be traded directly. In other words, to sell one ETF and buy another, you have to pay the corresponding taxes on the capital gains obtained.
A product for each type of investor: where to invest
Once the pros and cons of each product are known, it is time to assess, which product is right for you?
As in any other area of investment, depends on several factors, such as the type of investor, the risk profile, the liquidity needs or the time horizon, among many others.
|Direct investment in shares||Equity investment funds||ETFs (exchange-traded funds)|
|Cost effectiveness||Company revaluation
|Investment fund appreciation||Index revaluation
|Diversification||According to the number of shares in portfolio||Wide. Various values in portfolio, although it can be total if index funds are chosen.||Total. Replicates all signatures in the index|
|Decision making||Free. It is necessary to be aware of the market.||Professional management of our investment||Free. By replicating the market, you do not have to be aware of the evolution of the market.|
|commissions||By purchase or sale
|Operational, by custody and by management||By purchase or sale
|Tax credits||None. You have to pay taxes on capital gains when selling.||Transfers are tax free. You have to pay taxes on capital gains when selling.||None. You have to pay taxes on capital gains when selling.|
Who is direct investment in the stock market for
In general, stock market investing is made for investors who have a higher risk profile, since there is a certain volatility to be assumed. However, within this risk, there are two well differentiated profiles:
- Little aggressive investors, which invest long-term in well-established companies (banks, electricity, telecommunications, etc.) to obtain their annual dividend in addition to the possible revaluation of the company.
- The most aggressive investors, who are looking for short-term opportunities to obtain good returns by buying and selling taking into account the volatility of the stock market. Typically, they focus on smaller companies with higher growth potential.
Common investors of mutual funds
The wide variety of investment funds that exist means that, in practice, these types of products are designed for any investment profile. However, typically, investors who bet on mutual funds do so because they do not have a clear preference for a specific company or want to spend time following the market.
In addition, they prefer to diversify their investment with the help of a manager or, directly, follow the evolution of the market through index funds.
What types of investors usually invest in ETFs
Investors who choose ETFs seek the advantages of index funds with liquidity offered by investment in the stock market. That is, they seek a diversified investment and, at the same time, know at all times the price at which the ETF is trading.
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