Depending on your situation, investing in the stock market can be a great way to make your money work for you.
That is to say, to put your hard-earned money to good use to grow your wealth over the long term,
There are plenty of ways for beginners to easily start investing in their own circumstances – and no matter your budget.
In this article, we explain how to invest in the stock market and everything you need to know before you start.
The stock market, what is it?
The stock market is a bit like cricket. Many of us have heard of it, but we don’t know exactly what it is.
In any case, it’s far from just guys in suits shouting in front of screens.
The stock exchange is simply a marketplace , a place where sellers and buyers come together to trade. It can be different things, such as stocks (which we present just after), bonds… and in many different sectors or geographical areas.
There is therefore in reality not really a single “stock market”, 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.
This is what we usually have in mind when we talk about investing in the stock market.
A share is a small part of a company’s capital . When you buy a stock or shares, you are buying a share of the ownership of that business.
You therefore become what is called a “shareholder”.
Why do stocks exist? Quite simply to allow companies to develop and grow thanks to the financial contribution of its shareholders. You therefore “support” the development of the company with your money. Too nice .
Once you own this little piece of the business (your stock), you can then sell it to anyone who wants to buy it. Since, you will have understood, a scholarship.
Bonds are different from stocks.
But it is nevertheless an asset class (a category of media in which you can invest) among the most popular with stocks.
They are therefore also important to know when you start thinking about investing in the stock market.
A bond is quite simply “a piece of debt issued by a company, a local authority or a State” (you can find a complete definition here ).
That is, you yourself will somehow lend money to a company or a state for a certain period of time. The institution to which you lent this money will then reimburse you with interest (if all goes well). It’s a bit like the company giving you a loan.
Generally speaking, bonds tend to be less risky than stocks, BUT this is not always true. It all depends on the bond in question.
On the other hand, they have a lower average yield. They can therefore in theory be used to limit the risks in your financial portfolio.
You have surely already heard of “financial markets”… without necessarily really understanding what it is all about.
Investing in the stock market, is it risky?
Many people tend to think that the stock market is always too risky. Which of course can be the case when it is misused.
This is also why financial investment products are often presented with numerous warning messages.
And this is also the case, for example, at the bottom of all our articles on the subject of investment.
However, by investing in the stock market over the long term, the return can be very interesting … provided that you invest according to the risks that YOU are ready to take and according to your situation.
When we talk about risk in the stock market, two main things are to be taken into account.
When you place your money in a savings account, you know in advance how much it will earn you in interest.
This is not the case with markets, which fluctuate : they are said to be volatile.
For example, the price of a stock may vary significantly over time – up and down – from the price at which you bought it.
The amplitude of these variations is sometimes very significant: we then say that an asset (what you have invested in) is very volatile.
The risk of this volatility is, in particular, having to sell your investments in a period of decline.
There are several ways to protect yourself from this volatility. Many experts recommend, for example , to invest for the long term (which limits the risks associated with volatility) and to secure your assets gradually as you move towards the date on which you will need get your money back. We develop this point a little further down in the article.
The risk of loss
Depending on how you invest, there is also an outright risk of losing money .
If you buy a stock and the company’s price falls and never recovers, or it goes bankrupt, you could simply lose some or all of your investment.
This is why choosing individual stocks yourself when you start out (i.e. choosing a few companies that you like, and buying the stocks one by one) is possible but can be complicated: you really need to research the companies you are interested in thoroughly, track their progress and results over time, etc.
Some favor diversified long-term investments instead, for example through trackers or ETFs (which we will also present to you in detail later in the article).
The CAC40 – a stock market index that tracks the 40 largest French companies – has, for example, offered an average annual return of 7.76% for 34 years.
And it is possible to invest in funds that aim to have the same performance as the CAC40 (the famous ETFs that I present to you just after – a little patience!).
The difference between investing and speculating
Many people unfamiliar with the stock market tend to confuse investing with speculating .
However, the two are very different, and above all do not present the same risks.
- Investing is placing your money with the aim of obtaining a return, generally over the long term. You want to make your money work for you, with a positive return. You invest your savings to make them 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 of success. The risk of loss is much greater, and this requires knowledge (for example, learning to do what are called fundamental analyses) and a significant amount of time related to managing your investments and following financial news.
If you are interested, you can therefore very well seek to invest your money over the long term , rather than buying stocks like a casino game.
Why invest in the stock market?
The stock market is simply a way to grow your capital .
With the possibility of receiving much more than what traditional savings accounts cannot allow (but with greater risk taking since your money is not guaranteed).
You can generally make money in the stock market through two mechanisms.
The capital gain is the difference between the purchase price and the resale price of an asset (such as a share, for example).
You buy your shares at a certain price. Your goal generally is for this stock to increase in value and for you to be able to resell it for more than you bought it.
By reselling your securities for more than their purchase price, you therefore make what is called a capital gain.
A dividend is simply a portion of the annual profits of the company in which you own shares that is returned to you .
They are generally paid quarterly (although this may vary depending on the company and the period), and they allow you to build up additional income without having to resell your securities.
The amount you can expect to earn depends on how many shares you have in the company.