The cost, of course, is the first point of interest for small investors as this determines a part of your return. The main cost for an investor will be the transaction cost. This is a certain amount of money you have to pay in order to buy or sell your stock. This depends on some different factors:

  • The product you want to buy (stock, turbo, tracker, option, fund, etc.)
  • The market on which that product is traded
  • The amount of for which you want to buy that product. There will be a cost difference if you buy €100 of stocks or €10.000 of stocks.
  • Fixed payment, variable payment or a combination of both. Most of the brokers charge a fixed cost for stocks (of course depending on the amount you buy)

A second very important point is the services they provide.

The third interesting motive for choosing a broker is the available markets in which you can invest.

A forth and final important factor is the product range: some brokers also give you the possibility of a savings account, some don’t. Others give you the possibility to invest in a number of external funds, but not all of the world’s funds are included in their platform. This is something you have to be aware of.

Here we first have to ask the question: what is risk? Even professionals still don’t know how to really measure risk, but volatility is the easiest one. Just the most basic example to begin: Imagine you invest all your money in one stock, but all of sudden its price falls down by 15%. How would you feel? As you clearly notice putting all your eggs in one basket is rather stupid.

How can you solve this problem? Therefore you first have to know that risk can be divided into 2 parts: risk you can diversify away and risk you can’t diversify away. Let’s focus on the first type of risk. How can you diversify away this risk?

First of all you can spread your money among different asset classes: stocks, bonds, cash and real estate. The weight of each asset class in your portfolio of course is a subjective personal opinion and depends on how risk-averse you are. However in this form of diversification it is still possible to invest 25% in one stock, 25% in one bond, 25% in cash and 25% in one building. This doesn’t sound right, does it?

Therefore we have the second level of diversification. This says you should invest into different kinds of stocks and bonds e.g. you buy stocks of BlackRock, ING, Robert Half, EY and some different government bonds. This already sounds a lot better, but imagine we’re back at the end of the nineties and the money we invest in stocks is all invested in tech stocks. In early 2000 we had the dotcom bubble in which a lot of technology firms went bankrupt and most of the technology companies saw a huge decrease in their stock price. This doesn’t sound right, does it?

We arrive at the third level: invest in companies in different industries with a low correlation. Some of the most important industries are banking, construction, IT, chemistry, energy, telecommunication and car manufacturing. Some of the new upcoming industries are biotech, nano technology, eco industry and renewable energy. But what happens if we invest in all those different industries in Japan and suddenly a nuclear plant in Fukushima explodes? This doesn’t sound right, does it?

This brings us to the forth level of diversification: international diversification. Not only for stocks, but also for bonds this is something very important. First we have the 4 big international currencies: dollar, euro, sterling and yen. Depending on your investment strategy it is advisable to hold assets in those different currencies.

For the beginning investor

  • Stocks
  • Trackers
  • ETFs
  • Bonds

For the well-trained investor

  • Options
  • Futures
  • Swaps
  • Turbos
  • Sprinters

The bid price is the maximum price an investor wants to pay for a certain asset.
The ask price is the minimum price an investor wants to receive for that asset.

Some final tips and tricks

Invest in what you know!

OK, you have to use the principles of diversification, but it doesn’t make any sense to invest in biotech companies if you don’t know how that environment works. Suggestions? Look at the jobs of your parents. Does one of them work in the construction industry? He or she might have some advice for you about some companies that could do it well in the future.

Second point of advice: look to your own interests. Or you are true football fan and do you know a lot about the Premier League? Then have a look at the stocks of Manchester United. You will probably have a better opinion on buying or not buying them than I have.