02 Jul How to start investing
Mimmit sijoittaa (Chicks invest)
Pia-Maria Nickström is one of the authors of the popular Mimmi sijoittaa (Chicks invest) blog and a speaker at their investing-related events. In addition she’s getting her MBA at Aalto University. The blog has been around since August 2018 and the first investing events directed at young women began in January 2019. Nickström came to Wonderland’s Waffle Wednesday to share her tips on how to start investing at the stock market. The volume of the sign-ups was so high, that the event was moved downstairs to offer more spots!
Nickström herself became interested in investing when she realized she had no idea what the costs of the funds she had invested in were. She had gone to the bank to chat with a clerk, who suggested she invest in funds. Not knowing any better, Nickström agreed to the deal without fully knowing what it meant to invest in a monthly fund and what the costs were. This drove her to find out more on the topic of investing and soon after she had people around her asking for advice. A little while later, she started to share her insights through the blog and subsequent events, which encourage young women to start investing.
“Investing is so simple you’ll learn it in half an hour, trust me!” Nickström ensures her audience before the event and in hindsight, she was right. She went through the basics of the stock market, monthly investing, risks related to investing and the phenomenon of compound interest. Each listener got a set of tools to start investing. Read more on the basics of investing in the stock market below!
What is the stock market?
To put it briefly, the stock exchange is the place where shares are sold and bought. It’s a public space for trading which everyone has access to. The Helsinki Stock Exchange is located on Fabianinkatu in the city center, but you don’t want to rush there physically. If you want to buy shares, you’ll need a book-entry account where shares are kept. You can open an account at your bank or a separate investment bank. Stocks of listed companies in Finland are traded at the Helsinki Stock Exchange, which you can recognize through the symbol OMXH.
The stock exchange is for buying and selling shares of companies listed at the stock market. A share is a small part of the company. Once a company has been listed, can anyone buy or sell their shares. When you buy shares of a company, you’re investing your money in their operations. If the company is successful the value of your shares go up. If the company is doing poorly, the value goes down. This is a very simplified equation, in reality many things affect the price of shares.
If you want to buy a share, you’ll make an assignment of purchase to your trader. In it you let them know what stock you’d like to buy and at what price. If you’re looking to sell shares you’ll make an assignment of sale to the trader with the same information. When the selling and purchasing price match a deal is made. Alternatively you can invest in a fund that entails shares and securities from several different companies . Funds can be divided into active and passive funds.
Active funds have their own portfolio manager, who actively chooses shares that they feel suit the fund. This person is being paid by the bank, so naturally someone has to pay their salary. This is why active funds charge administrative payments regardless of how the fund is doing. Passive funds, or so called index funds, don’t have a portfolio manager because they follow the benchmark index. In these cases the fund should be free of admin charges, since you’re not paying anyone to manage the fund.
What are the risks related to investing?
When we invest in the stock market, there’s always a certain prospective yield for our investment. It’s important to remember that investing is never risk free. There will never be a guarantee that our investments will yield profit, even if in the past that has been the case. This is the name of the game and we have to accept it, if we’re willing to invest our assets.
We also have to accept that the stock market has upturns, downturns and recessions. In the long run stock rates have been inclining. The important thing is to avoid selling all your investments during a time of recession.
Ways to diversificate your risks are:
- Investing in different lines of business: don’t put all your money in one company or companies within the same field.
- Investing in geographically diverse companies: Make sure you’re not only carrying shares from the Helsinki Stock Market. In a time of a hard recession, crisis or a bubble there could be a situation when you would need to cash out some of your shares. In such a situation if you’ve only invested in Nordic shares, it probably isn’t an ideal time to sell. This is why geographical diversity is important.
- Investing over time: With a monthly saving contract you’ll acquire a smaller share some months and a larger share some months. In the long run you’ll get an average purchase price for the fund, when purchasing a little every month.
Let’s use an example where you invest a one-time sum of 100€ in the stock market. Your prospective yield is 6% in a year (the average increase of the stock market after inflation). After one year your capital has grown 100 x 1,06 = 106€, because your yield has been realized and your investment has collected interest. Let’s wait another year. After that, also your profit (6€) has gathered an interest of 6%. After two years your start capital (100€) has gathered a 6% interest (6€) again but also your first year’s profit 6€ has gathered a 6% interest (0,36€). In two years your capital is at 106€ x 1,06 = 112,36€. In three years it’ll be 112,36€ x 1,06 = 119,10€.
Two important things to keep in mind when it comes to compound interest:
- Perseverance: The first years won’t bring a profit of more than a couple of dozens of euros, but as time goes by the profit yielded by the interests will surpass the one from your starting investment.
- Cost efficiency: Avoid the trap of administrative costs. Admin costs shouldn’t be more than 0,5%. So you’ll get the most benefit by investing in funds that have no admin costs.