Shares, ETFs and funds simply explained
In addition to the return, other points play an important role when investing, such as the distribution of risks, the cost of the money invested and availability. Of course, we should also understand how we invest our money and feel comfortable with it.
Investing in stocks, funds and ETFs is a way of building long-term wealth and, thanks to digitization, is now quite easily accessible to everyone. Anke Pauli, founder of the financial education portal www.finanztheke.de explains the 3 investments in more detail:
1. Company shares
Are there products in your everyday life whose quality convinces you and which you really enjoy using? Be it cosmetics, food products, your smartphone, laptop or your car?
Check it out – there’s a good chance it’s a publicly traded company!
In fact, we use or consume public company products every day without even knowing it. And if we are convinced of these companies in the long term – if possible after a small analysis – we can even participate in their corporate development and generate returns.
This is possible by buying shares! All you need is a securities account.
When you buy a stock of a company that is listed on the stock exchange, you own a part of that company.
Then, if the price of that stock goes up and is at a higher price than what you paid, you can make a profit on the sale.
You can, of course, consider holding a stock instead of selling it immediately when the price rises. Perhaps the company is developing very well and you remain convinced? Stocks are good for long-term wealth accumulation of 5 years and more.
Many companies also distribute their profits in the form of a dividend, which you receive in your account. A very welcome rain of money! This requires that you have the shares in your securities account at the time of the general meeting.
As a shareholder of a German company, you are invited to the Annual General Meeting every year and have the right to vote and speak there, depending on the type of share.
If you buy or sell shares, there are costs in the form of order fees, which vary depending on the custody account provider.
With stocks, you can pick out companies that you are convinced of – their company figures and their business model. And there are countless stock corporations, not only in Germany!
However, stocks are not necessarily for the faint of heart, as stock prices can go up as well as down. Especially in times of crisis, there can be sharp falls in prices. With stocks you can lose 100% – on the other hand, there is no upper limit!
If you want to invest in individual stocks, you should find out more about it beforehand and be sure to heed the stock market saying “Don’t put all your eggs in one basket” – in other words, don’t put all your money on just one stock!
2. Funds as a safe bank
With investment funds, or funds for short, you don’t just invest your money in a single company like a single share, but in several companies at the same time.
You can think of funds as a kind of pot into which investors pay money. In order to achieve the highest possible return for us investors, this money is invested. In this case, a fund manager selects the securities in which the respective fund invests and selects them according to certain criteria.
Funds invest in stocks, bonds, real estate or other securities. Due to the active intervention and management by people, these funds are also referred to as actively managed funds. Fund managers constantly try to achieve the highest possible return through active selection.
Funds are not traded on the stock exchange like stocks. You can usually buy fund shares through your bank or directly through the fund company.
As with stocks, funds also incur fees when buying and selling. If you buy fund shares, there is usually a so-called front-end load.
In addition to the transaction fees, there are also ongoing fees for managing the funds, because the fund managers also have to be paid for their work.
3. ETFs: Simple and cheap entry into the stock market
We want to achieve the highest possible return on our investment, and costs are always a factor that reduce this. Due to the relatively high costs of actively managed funds, ETFs, short for Exchange Traded Fundswhich is why it has been very popular among investors for some time.
In German, ETFs are also referred to as index funds because they only replicate an index. The 40 largest stock corporations in Germany are listed in the DAX German stock index. If you now buy an ETF on the DAX, then invest in these 40 companies via your DAX ETF.
ETFs give you the opportunity to invest in a large number of companies at the same time. And not just in Germany, but worldwide and across various industries.
The broader you are with your investments, the better you can spread possible risks.
Since ETFs are traded on the stock exchange just like stocks, they are also subject to market conditions and can therefore fluctuate strongly.
ETFs are particularly suitable for long-term asset accumulation of 10 years and more. Many investors use this as an additional pension plan.
If you sell your ETF shares at a higher price than when you bought them, you will make a profit, just like with shares and funds.
In addition, ETFs have a dividend that you can choose to have paid out to your account or reinvested.
Transaction fees are usually incurred when buying and selling ETF shares. ETF savings plans, with which you can automatically invest in ETFs every month, are now even available free of charge from many custody account providers. There is no front-end fee for ETFs, as there is for actively managed funds.
Running costs that are incurred each year are significantly lower with ETFs than with active funds.
The similarities between stocks, active funds and ETFs
With all 3 forms of investment, you will not get rich overnight – you should have staying power here, because stocks, funds and ETFs are primarily intended for long-term asset accumulation of 10 years and more.
You pay tax on the profits from the sale of shares as well as on the dividend. You should therefore make sure that you set up an exemption order.
In contrast to real estate, you can dispose of your money quite quickly and sell shares. For stocks and ETFs via your securities account during stock exchange opening hours, for funds via your bank or the fund provider.
It is important for all types of investment: deal with it intensively in advance and inform yourself well so that you understand how to invest your money and remain relaxed even in times of crisis!
About the expert
Anke Pauli is the founder of the financial education portal www.finanztheke.dewhere she shares practical financial knowledge with other professionals on financial planning, retirement planning, investing in stocks, ETFs, crypto and more.
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Disclaimer: Stocks, ETFs, funds and other securities always come with risks. This article and the notes and information do not constitute investment advice or recommendations. They have been taken from public sources to the best of our knowledge and belief. All information provided (all thoughts, forecasts, comments, hints, advice, etc.) is for educational and entertainment purposes only. Nevertheless, no liability can be assumed for the correctness in each individual case.
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