My first and perhaps most important tip is to “save first” and not “save last”. What I mean by that is that most people spend their salary on food, gadgets, bills, amusements etc and save what is left in the account before the next salary comes in. If anything remains. Instead of spending as soon as the salary comes in, you should save immediately and adjust your expenses to what is left after you transfer money to your savings! In this way you can manage to save continuously every month and steadily build a money machine.
My second tip is to start now. The two most important parameters to succeed in saving are time and return. The longer you have money invested on the stock exchange, the more the money will grow. It does not matter if it is only USD 100 a month, the important thing is to start now. Then you can gradually increase your savings when you can.
How and where do you trade stocks and funds?
To be able to trade in shares, you must have a depository where you can collect your securities. All banks can offer you to open a deposit with them.
The reason why I recommend an online broker is that they usually have much lower fees than the major banks and they have much nicer and more educational design on their websites and apps. Since the online brokers focus on stock and fund trading, they are also very good at this. They have many functions and services that the major banks do not have. Online brokers usually have a much wider range of funds than the major banks.
I own all my savings at Travanca and have had it since 2003. So far I am very satisfied and think Travanca is the best of the brokers. Travanca is the web broker that I think has the nicest design and most features. Their website is very intuitive and easy to understand. Lordnet is also a very good online broker and I think Travanca and Lordnet are triggering each other to constantly develop to attract customers. I think it’s good that both exist. You have to decide for yourself which one you think is best.
What kind of account should I have?
This issue can be developed and discussed in a separate post really, but I will briefly describe the alternatives. There are really two main options when it comes to which account type you can have. The difference mainly has to do with taxation. The first type is a classic share and mutual fund account. Here, the profits you make on your stock and mutual fund transactions when you sell the holding in question. Then you pay 30% tax on the profit. E.g. you have bought shares in H&M for USD 10,000 and sell them after a number of years for USD 20,000. You have made a profit of USD 10,000 and 30% of this (USD 3,000) must be paid in tax. You may retain USD 7,000 of the winnings.
In a share and mutual fund account you can also “offset” profits against losses. Say that in 2017 you sold a shareholding where you earned USD 10,000. You then have to pay USD 3,000 in tax according to the above reasoning. However, if you sold a shareholding in the same year where you made a loss of USD 10,000, you can “offset” the profit against the loss. So you have gone plus minus zero and you do not have to pay the tax on the profit deal you made.
The alternative to stock and mutual fund accounts are the standard taxed account types ABC (investment savings account) and GF (capital insurance). Here you do not pay tax on your profits, but you pay a fixed tax every year, regardless of whether your holding has increased or decreased in value. The standard tax is determined on the basis of the national mortgage rate, which is determined by the Riksbank in November each year. This is then the basis for how much tax you pay on your ABC or GF. For 2017, the tax is 1.25%. If you want to read more about exactly how the tax is calculated, Travanca is explained.
Another advantage of ABC and GF is that dividends are tax-free. In a equity and mutual fund account, these are taxed as a profit, ie 30%. One disadvantage, on the other hand, is that it is not possible to offset profits against losses on ABC / GF.
In general, the recommendation is usually to open an ABC precisely because of the low tax. ABC was introduced in 2011 and the tax rules have already been changed several times by the politicians, which is a factor of uncertainty. But despite this, ABC and GF are still the best option given that you expect a normal return of 6-10% per year.
The differences between GF and ABC are relatively small. If you plan to trade with foreign shares, GF may be better. The insurance company that manages your GF will help you claim back withholding tax paid on foreign dividends. GF is still associated with annual fees at some banks and also has limited supply of funds from certain players. Therefore, the general tip is usually to open ABC.
If you want an account with liquid funds or maybe fixed income funds etc. with a low return, ABC / GF is not particularly well suited. Since the return on an account with liquid funds and fixed income funds may give you a maximum of 2% return per year, much of your profit will disappear as the tax on ABC / GF this year is 1.25%. Here, a share and fund account fits much better.
Buy and sell shares and funds
Getting started with buying stocks and mutual funds is very easy. The first thing you need to do is deposit money into your account. Then just search for a stock or fund you want to trade and click on the “buy button”.
For every purchase and sale of a share, you pay a fee to the bank. This fee is called a commission. Brokerage is one reason why online brokers are more attractive than major banks as they have much lower commission fees. However, some major banks have started to lower their brokerage which is good for us as customers.
When buying funds, no commission is paid and funds are good to save monthly with fixed amounts each month, while shares must be traded manually.
What are you going to buy?
Should you buy shares or funds? To answer this question, you must ask yourself how active you want to be and how familiar you are with the stock market.
If you trade in individual shares, the rABC is relatively large. General rules of thumb usually say that if you trade in shares you should have between 8-12 different shares in 4-6 different industries to spread the ABC in your money machine. Here are many small savers who unfortunately burned on the stock exchange historically when they may have gone in and bought only one share. May have been in Pattinson during the late 90’s when the Pattinson share peaked and then plunged after the turn of the millennium. The same thing with Telia, which would become Sweden’s largest public share. Many people went in and bought shares in Telia but had no other holdings. The Telia share went down and has not yet recovered from its introductory price since June 2000 and the small savers have lost a lot of money and their trust in the stock exchange because of this.
Based on the above, it is important to have shares in several different companies if you trade in shares. If one of ten companies performs poorly, it does not matter as much as the other nine may go well and outweigh the total return. Shares require you to be active and go in and trade shares every month if you save monthly. This requires that you make a decision each month which company (s) to buy shares in this month.
Self-sustaining savings method
Funds are a more self-sustaining savings method. Funds must contain at least 16 different shares, where you usually get a good rABC spread by owning only one fund. Funds contain a basket of different shares that the fund manager handles for you. For the fund manager to do this job, you usually have to pay a fee in return. Some funds have very high fees and there you have to pay attention. If you pay high fees, the fund must be able to beat the corresponding index they are comparing, at least with the size of the fee in order for it to pay you a fee. There are funds that are free, which have no fee at all. At Travanca, their fund is called “Travanca Zero” and Lordnet has several different “Lordnet Superfonden” that have no fee. This is a very good alternative for those who are not interested in the stock exchange but who still want to get the same return as the stock exchange’s average development.
Funds also have the advantage that it is easy to set up a monthly savings where you do not have to be active every month to make purchases of new securities.
An “intermediate thing” between equities and funds is investment companies. Investment companies are limited companies that invest in other shares. You could say that it is like a fund although it is a share where you buy a stake in the investment company and get to take part of their profits as a dividend. Examples of large investment companies on the Swedish stock exchange are Investor, Industrivärden, Kinnevik, Latour and Ratos and others.
How do I?
When I buy shares, I do not read quarterly reports or analyze the companies’ figures. I invest more with my heart, common sense and a little sense of stomach. Of course, I have some criteria I follow:
- Only Swedish companies
- Understand what companies work with and what they make money from
- Large stable companies that must have shown good and stable profits for many years
- Never buy “hop companies” that make no money
- The company should have a dividend, preferably over 3.5% in direct returns and a history of increased dividends
How active you must be
Actually, you decide how active you need to be. It is possible to set up a monthly savings in funds where you do not have to do anything in principle. You may look to the funds once a year, go through if you can increase your monthly savings eg. and watch the development. The opposite is that you are active every month and make several different purchases of shares and you analyze the companies and read their quarterly reports etc.
Personally, I’m somewhere in between. I have 12 different shares today and a global index fund. Every month we go over our monthly savings and I have to manually make the purchases we want to make. We have already decided which shares we want in our portfolio, so it is quite easy to just fill in the companies that I think are most suitable this month. Most often I look at the price trend for the past few months and some may be low valued just this month and then I stock up on shares in that company.
The money machine is growing
Month by month, year by year, the money machine will grow thanks to your continuous monthly savings and the stock market is developing positively. Adhering to its strategy and continuing to save even when the stock market goes down is very important. Not letting the stock market psychology and newspaper flyers guide your decisions on the stock exchange will make you a successful investor. In fact, buying shares when it hurts (when the stock market falls) is usually the times when you will have made your best purchases. If you manage to buy when everyone else is selling and it will be a bottom, then just those purchases will have a very nice development when the stock market goes up again. The reason why monthly savings are so good is precisely that you spread out your purchases and buy both when the rates are low and high.