Hello Hello,
Are you interested in investing on the stock market, but can’t quite get your head around all the different possibilities?
Then you’ve come to the right place, because today I’m going to explain the main investments when it comes to stock market investing.
Are you ready? Then let’s get started!
First things first
First of all, these are all investment products. However, they differ in terms of their average expected return and their degree of risk.
Equities
A share is a form of ownership. When you buy a share, take Novartis for example, you become a shareholder and owner of part of the company. I’ve used Novartis as an example, but the principle is the same for Tesla, Netflix, etc. The value of a share can vary according to various factors such as the company’s performance, economic news (yes, you know… what you read in the newspapers, whose headlines are supposed to scare you, but which you shouldn’t always take literally ;)) and market trends.
As a shareholder, you have the potential to make a profit in 2 different ways:
1) By increasing the value of the shares (LONG-TERM please ;))
2) Through dividends
Speaking of the latter, dividends are a portion of the company’s profits that is redistributed to shareholders. This means that if Novartis makes a profit, depending on the company’s policy (we’ll get to that in a moment), part of that profit can be paid out to shareholders in the form of dividends.
For example, if you hold 100 Novartis shares and the company decides to pay a dividend of CHF 1 per share, you will receive CHF 100 in dividends.
But there you go. You should be aware that not all companies pay dividends, and that some prefer to reinvest their profits in the company to stimulate growth.
So when you invest in shares, it’s important to consider both the potential for capital gains, i.e. an increase in the value of the shares, AND the possibility of receiving dividends depending on the company’s policy.
In general, the expected return is between 5% and 8% and the risk is considered to be Medium-High.
Bonds
A bond is essentially a loan you make to a company, public authority or government.
When you buy a bond, you are actually lending money to the issuer in exchange for regular interest AND the promise that you will get your capital back at a future date – a date that is agreed in advance. This date is called the maturity date.
A bond is a more stable investment than a share, since the interest rate is fixed and you get your capital back at the end, provided the issuer doesn’t go bankrupt (this doesn’t happen very often, but I had to write it in bold anyway).
For example, in Switzerland, you could invest in a bond issued by the Swiss government. By buying this bond, you lend money to the Swiss Confederation and receive regular interest payments until the bond reaches its maturity date, at which point you get your initial capital back.
The expected return is lower than that on shares. It is between 1% and 5%. But a bond is less risky than a share. Its risk is said to be Low-Medium.
ETFs
An ETF stands for Exchange Traded Fund. It is an exchange-traded fund. Think of an ETF as an investment basket.
Because an analogy is always better! Imagine you want to buy several varieties of Swiss chocolate. Rather than buying each chocolate separately, you might decide to buy a basket of assorted chocolates. In the same way, an ETF is a basket of different financial assets, such as shares, bonds, commodities, etc., that you can invest in.
By buying a share in an ETF, you have the advantage of having a diversified portfolio, even if you have only made a single transaction. Because in a single transaction, you invest in several securities held in the ETF – isn’t that great?
For example, in Switzerland, you might decide to invest in an ETF that tracks the SMI (Swiss Market Index) – the Swiss stock market index of the 20 largest stocks listed on the Swiss stock exchange. You would have access to the entire market through a single transaction.
This gives you 3 advantages:
1) You spread the risk
2) You benefit from low transaction costs (because unfortunately, fees are the business model of many banks/investment platforms).
3) You waste less time because you don’t have to analyse each company in depth before investing in it.
There are equity ETFs, bond ETFs, specific market ETFs, thematic ETFs (e.g. IA) and ETFs that pay dividends.
The expected return is 6-8% and the risk is considered Low-Medium.
If you’re more of a video enthusiast, here’s the YouTube video covering the information in this article ?
Have a nice day ☀️
