It is not uncommon for those with no investment experience to approach the stock market with a certain degree of awe: you may be faced with a large amount of numbers, flashing screens and incomprehensible terms – quite another thing than keeping in a simple piggy bank your own cash or put it into a savings account.
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If you want to set aside money for the future – and are willing to wait at least five years – investing in the stock market can produce better results than a savings account, potentially offsetting the corrosive effects of inflation.
Below you will find an overview of the fundamentals of the investment world, as well as a look at how to approach buying stocks.
What does “invest” mean?
It is worth starting by explaining what “investing” means and why it makes sense to do so. Investing means using your money to generate a return (however, it should be noted that investments carry the risk of loss, except in the case of cash).
When you invest, you put your money into a variety of investments.
What are these “investments”?
There are four main types, which are referred to as “asset classes”, namely:
- Cash: savings held in a bank or other type of accounts;
- Bonds: also known as “fixed rate securities”. A bond is a bill of exchange that pays interest to the holder in exchange for granting a loan to the issuer. If the issuer is the Italian government, the bond can be for example in the form of BOT (Buoni ordinari del Tesoro) or BTP (Multi-year Treasury Bills). Corporations can also issue these bills, known as “corporate bonds”;
- Real estate: an investment in the brick, either to earn on the increase in value of the building or by renting the property, or a combination of the two;
- Shares: They are also known as “equity”. Investing in equities allows you to buy a stake in a company either directly, or through a fund (a form of collective investment where your money is pooled with that of potentially thousands of investors). As a shareholder, you partly own a business, and you will share both its financial successes and its downsides.
There are also other asset classes in which you can invest, such as fine wine, works of art or vintage cars, but the main financial products tend to be concentrated in the list just mentioned.
A set of assets is often referred to as a “portfolio”. Nothing prevents an investor from focusing on one type of asset, but putting all of their eggs in one basket obviously carries risks.
An excellent investment policy, known as a “diversification” strategy, is instead to distribute your money across different asset classes.
Risks associated with investments
Every investment carries risks, some greater than others. Generally, the greater the potential return on an investment, the greater the risk of losing your money.
When considered from the perspective of the risks associated with each asset class, the above list proceeds in ascending order.
For example, in the case of savings accounts, the risk of losing one’s money is practically nil for an Italian saver, thanks to the stringent repayment rules that come into play in the event that a credit institution gets into trouble. In this case, the savings are protected by the Interbank Deposit Protection Fund.
However, against this certainty, returns are modest at best, ranging from virtually nil to around 2% per annum. In Italy, inflation rose to 8.4% in August 2022 (ISTAT data): this means that the actual value of the money deposited decreases year after year due to the increase in prices.
Bonds are riskier than cash, because there is always the possibility that the issuer will not pay interest and go into “default”. Typically the interest rate is slightly higher than cash, usually between 2% and 3%.
Stocks and real estate have the potential to generate better returns, and as a result are at the top of the risk / reward pyramid.
Most investors enter the stock market by buying stocks, and so it is on these that we will focus the rest of this article.
Why buy shares?
Historically, the return on equity investments – between 3% and 6% per annum over the past 120 years, according to Credit Suisse – has outperformed that of any other asset class (although past performance does not guarantee future returns).
However, before deciding, it is worth reflecting: is investing in stocks right for you? And how can you do it safely?
Be prepared for the ups and downs
When investing in stocks, you must always keep your financial goals in mind and be prepared for the ups and downs of the stock market.
Whichever method you choose (see below), you must always consider costs. Opening an account with a commercial bank does not involve any cost. But when you buy stock, you will have to incur additional costs beyond the stock price.
Furthermore, investing in stocks also means thinking about the tax implications when, for example, you sell part of your portfolio.
Before investing in any stock on the market, ask yourself five questions:
- Do I need a financial advisor?
- Do I accept the risk level and can I afford to lose money?
- Do I understand the investment involved and can I easily withdraw the money?
- Are my investments regulated?
- Am I protected if the company with which I opened an account to invest (broker) goes bankrupt?
Types of investment
There are many different ways to invest. You can choose one, several or all. In the end, what matters are your goals and how actively you want to manage your portfolio. The main options are:
- Buy individual shares. This is probably the most time-consuming option. You will have to do a lot of research and make several decisions;
- Investing in ETFs (“exchange-traded funds”, or “exchange-traded funds”). ETFs are a cross between buying stocks directly (see above) and buying funds (see below). ETFs invest in a wide range of individual stocks and track an underlying equity index such as Borsa Italiana’s FTSE MIB. Investing through ETFs is equivalent to buying a share of the companies that are within the indices. ETFs are traded on exchanges just like corporate stocks, but offer greater diversification.
- Invest in mutual funds. These funds are managed by professionals, who look after the portfolios of stocks and other asset classes on behalf of the investors. Funds focus on specific countries or geographies or sectors (such as technology). In actively managed funds, managers decide which companies to include in their portfolios. Passively managed funds use algorithms to track the performance of a particular stock market index.
How can I start investing?
1) Open an investment account
For investors who decide to go it alone, the first step is to open an account on an investment platform or trading app. These kinds of platforms provide aspiring investors with a wide range of equity-related services.
Among the investment platforms, or brokers, you can find some of the main names in the Italian panorama of securities brokerage and fund management, such as Banca Sella, Fineco and Unicredit, together with international companies such as the online platform eToro. Many of these brokers offer a wide choice of ready-made portfolios that include a variety of investments based on the investor’s risk appetite.
Those who decide to invest can also choose to use the trading apps, the offer of which is increasingly wide.
Some platforms offer users a chance to practice trading using virtual money before they start getting serious.
There is no single app or investment platform that can satisfy all types of users. Personal preferences, graphic appearance and user experience will play a fundamental role in choosing the most suitable one. Beyond these considerations, it is important to rely on a provider that allows you to access the investments that interest you.
Also, find the platform that charges you as little as possible for trades and minimize any other administrative fees.
2) Choose a robo-advisor
If you have a lot of money to invest (let’s say € 10,000), but the idea of having to personally manage all the operations you carry out scares you a little, then you can always choose to rely on a robo-advisor.
Robo-advisors or “robotic financial advisors” are a simple and inexpensive way to invest in stocks, a cross between the do-it-yourself approach (see above) and a full-blown financial advisor (see below). You fill out a questionnaire containing information on various aspects, such as your financial goals and your risk appetite, and the automated system generates a ready-made investment portfolio.
Once started, the robo-advisor provides you with updates on the progress of your investments. It’s a convenient and relatively inexpensive approach – typically paying a couple of hundred dollars to get started – and it’s a quick fix: you can have a wallet invested in an hour or two.
However, by offering an automated strategy that uses user-provided data, robo-advisors do not provide intuitive recommendations. Depending on the platform chosen, the options available may be limited.
3) Choose a financial advisor or wealth manager
If you have a lot of money to invest, such as a six-figure inheritance, you can consult a financial advisor.
As with the other options, here too you will need to decide what kind of advice you need, and what goals you want to achieve. For example, are you investing with a particular horizon or event in mind, such as retirement?
You will also need to establish your degree of risk appetite, how long you want to commit your money and whether you need advice on various types of investments, such as those managed following ethical or environmental principles.
When talking to a consultant, be sure to get the following information:
- Are you an independent consultant or are you employed by a particular company? An independent consultant can access the entire market, not just the products of the company he works for.
- What level of advice do you want to receive? Do you need information to make a decision, or do you want the consultant to manage your investments?
- What are the costs? You may be charged an hourly rate, a flat rate, a monthly fee, or a percentage of the money invested. Fees can vary a lot, so it’s worth talking to different consultants.
- How is your advisor regulated? The consultant must appear on a register published by the Italian financial authority.
