It is 1 PM on the second Wednesday of the month. I step out of the elevator continuing my day after a well-deserved lunch break. It is time for the Fixed Income Meeting. Together with my colleague, I am walking through the dealing room to the fixed income desk. While routing to the fixed income desk, we are discussing the last details before we start the fixed income meeting. As an Investment Analyst, I am involved with constructing the presentation for a senior associate, so most of the time, I also have a seat at the table during the meeting with our fund managers. Those meetings are meant to discuss past performance of our funds and markets and to explain some investment decisions. Those meetings are one of the coolest things I have ever seen. It is toe-to-toe, due to the extreme sharpness of our fund managers.
Due to my work as an Investment Analyst and my experience of own risk investing, I have some knowledge about investing equities or fixed income securities. This article is about the fundamentals of investing into equities and some basic techniques to analyze your options.
For most students, real investing is hard due to a lack of money. But it is more reachable than most of you think. Of course, theoretically, there is no minimum amount to invest, but practically there is. When you are thinking about opening an investors account, you should consider the transactions fees, as well as the monthly fee to the broker. For example, if you have an investors account at ING, your variable transaction fee is 4 EUR plus 0.04% over the total transaction made. Besides, you must pay a fixed yearly fee of 16 EUR plus 0.24% over the total value of your portfolio. So, if you have a portfolio of 1000 EUR and make eight transactions of 500 EUR in a year, your total transaction costs will be 32 EUR (8*4=32) plus 1.60 EUR (0,04%*500*8=1.60) is 33.60 EUR. Then you have your fixed fee, which will be 16 EUR plus 2.40 (0.24%*1000) is 18.40 EUR. Your total costs will be 52 EUR for that year. That’s already 5.2% of your total portfolio. Given a year-to-date return of the S&P 500 of 15.2% (Index at 11th of April), that is, roughly speaking, one-third of your return. Imagine what will happen when you make a lot more transactions per year (which is quite common because eight transactions per year is very little). Therefore, it is very important to decide whether you are going to make a lot of small transactions or a few big transactions per year when choosing a broker. In other words, are you going to invest actively of passively?
After you have decided which broker to take into arms, you should determine your own risk aversion. You can do this by doing some online risk aversion quizzes, or just by asking yourself some questions. What amount of risk are you willing to take? What is your goal? How much do I mind when I lose this money? Etcetera. When you have determined this, you are ready to setup an investment strategy.
An investment strategy is what will either make or break you. This is a crucial part in early-stage investing. Once you have determined whether a stock is under- or overvalued, you should make some agreements with yourself. How much loss am I willing to take on this stock? One of your options is to place a stop-loss order when you have a long position. A stop-loss order is an order which executes automatically when the price of a stock falls below the stop-loss price of your order. For example, when you are investing in Unilever, which is currently trading for 40 EUR per share, you could place a stop-loss order for 36 EUR immediately after buying the stock. If the stock price of Unilever falls below 36 EUR, your order will be executed automatically and will sell for 36 EUR the moment the stock price hits the 36 EUR. This could limit your loss. For a rising stock price, it is also important to decide when you are satisfied with your profit. Investing is all about rationality, so do not let your emotions control your investment behavior because of some good or bad days.
For the first moments, I would recommend to practice your investment skills and get used to placing buy and sell orders in a financial markets simulator. In most of the simulators, you will get a starting capital of 100,000 EUR what you can invest in a limited amount of markets. Most of the time, you have the main commodities, derivatives, options, and equities to invest in, but that is enough to get a feeling with financial markets and to practice before you start investing in real life. You can learn how markets react on different information, and how macro-economic and political events influence sectors. I will discuss this in more detail during the next part of this column. Most of the simulators are free to use. You could even sign up with Facebook. For the Dutch readers, you can use “RTLZBeursspel” or just google “online investment simulator” to find a proper one.
Next time, I will discuss how to fundamentally and technically analyze investment opportunities, and how, in my experience, markets react on macro-economic and political events.