Basic rules for shareholders

Anna steht mit der Fachzeitschrift und Michaen steht mit dem Fachbuch in den Händen

Before you order your first share, there are a few important basic rules to follow. After all, you want to reduce risks and move safely on the trading floor. The following five principles will help you to make a successful start on the stock market. 

Not all eggs in one basket: risk reduction through diversification 

A proven stock market motto is, "Never put all your eggs in one basket." Investors can lose their invested money if they put everything on one card. By betting on several stocks from different industries, or even better, from different countries, you avoid surprising price losses due to entrepreneurial mistakes or imbalances in entire sectors of the economy. If you also opt for different asset classes, e.g. equities, bonds, precious metals, real estate, then you are better prepared for crises. Such a diversification of your securities can reduce the risk of loss. 

Save time in times of need: Pay attention to sufficient reserves

Under no circumstances should you invest your entire savings or your current income in shares. Invest money that you have disposable and that you do not need in the short term. Otherwise it could happen that you have to sell your securities at a loss during unfavourable market phases. It is therefore important that you only invest money that you will definitely not have to spend in the near future. 

Read the small print: Beware of fees

Costs directly reduce your profit. There are two types of costs: direct costs in the form of bank charges for buying and selling, charges for maintaining the custody account and stock exchange fees. Compare the prices of banks and brokers before you decide on an institution, since comparisons on the Internet can help (Chapter 9). Keep in mind that there are indirect costs that can vary depending on the trading venue you choose, e.g. due to excessively large spreads between purchase and sale prices or prices that are not in line with market conditions. 

Especially at the beginning and the more long-term you are active, you should not constantly shift your portfolio by buying and selling. Back and forth emptying pockets is another stock market saying. Because every order also costs fees.

Barrel without a bottom: Never take out a loan

Under no circumstances should you finance your investments through loans. This investment is built on far too thin ice. If the share price falls, the loan could no longer be repaid. This can lead to a spiral of losses that threatens your financial existence. 

Orientation helps: Get tips from experienced investors and form your own opinion.

Anyone who wants to move safely on the floor in the long term and assess risks correctly can also consult other experienced investors and consultants, for example in specialist journals, books and financial portals. 

Or you can get advice from friends with stock market experience. Don't be afraid to talk about successes and mistakes with others. In behavioural capital market analysis, this is a good way to keep a clear head. 

Many webinars on the subject of investment are now offered on the Internet. The Frankfurt Stock Exchange also conducts such online workshops for beginners. 

It is also worth participating in the training courses and seminars of the Capital Markets Academy of Deutsche Börse. The instructive evening seminars provide investors with useful knowledge about the stock exchange. The lecturers are professionals with many years of stock market experience.

Set limits

Set a price limit on your buy and sell orders. This guarantees that you only trade securities at the maximum or minimum prices you specify. If the price of a purchase is higher than the limit you have set, or if the price of a sale is lower than the limit, the order cannot be executed.

Run profits and realise losses 

An often observed phenomenon with private investors is that they are sitting out losses. They keep their securities even though prices are falling. If you no longer actually believe in a company and at the latest when the company in which you own shares is obviously facing bankruptcy, it is advisable to sell these shares. The same applies to countries where you own government bonds: If the country concerned is threatened with insolvency, it is advisable to sell the bonds. These losses are also called book losses if they have not yet been realized. They are nevertheless losses, because you could also invest the money tied up in positions without prospects in other, more profitable stocks. 

You also have a chance of limiting your losses if you sell in time. This is also possible with stop orders, which are automatically executed when you reach the limits you have set. 

If, on the other hand, your securities are trading significantly higher, it may make sense to sell some of the securities, so that you take profits with you and can then invest in another share, for example. 

To buy at the right time, i.e. when prices are lowest and to sell when they have reached their peak, few succeed. Do not be annoyed by theoretical lost profits, but enjoy the returns you have actually achieved. 

Avoid impulse actions

Be cautious with your gut feeling and always keep a cool head when trading securities. And above all: Avoid the herd instinct. Stock market experts are constantly observing this phenomenon. Stocks are often bought only when their prices rise and not when they are cheap. A high price often gives inexperienced investors the impression of value, which need not be justified. Do not jump on every train, but act strategically and deliberately by recognizing and avoiding panic, euphoria or fear as such. 

The most important rules for shareholders at a glance:

  • Diversify your investment by investing in different securities and markets
  • Do not trade with all your savings; always ensure sufficient reserves
  • Find out about the cost of your transactions
  • Do not take out a loan to trade on the stock exchange
  • Let experienced investors, consultants and commentators give you more tips and then form your own opinion.
  • Set limits on your buy and sell orders
  • tend to keep rising securities and sell those whose value is falling
  • Don't get angry about lost profits; learn from mistakes
  • Do not let panic, euphoria or fear guide you in securities trading