Why invest in shares?

The answer is simple. From a historical perspective, stocks on average generate a higher return than bonds or a savings account. But they come with risks. Further explanations are provided below.

What is an action?

A share is a part of a business. In other words, you buy part of the business. Companies issue shares that represent a part of the business. It may be a few shares or several millions, for example in the case of listed companies. The shareholder therefore owns part of the company, in proportion to the number of shares he owns.

Risks of investing in shares

One of the main risks is that you have no guarantee of getting back the money invested: you do not know in advance whether the company will make a profit or a loss. In a recession or bankruptcy, for example, stocks can lose some or all of their value, so you can lose some or all of your stake.

There are also many factors that determine the price of a stock:

Factors linked to the company: the results and financial situation of the company, the economic sector in which it operates, the quality of the management of the company ...

External factors: political events, economic development, natural disasters ...

The unpredictability of the conjunction of these factors can lead to significant fluctuations in stock market prices. For good and for bad.

The challenge of investing in equities is therefore to reap the benefits while limiting the risks as much as possible.

How to reduce the risks?

1. Diversification

By ensuring a sufficient distribution of investments, you are not dependent on the result of a company or a sector. When you invest in several different companies, your profit or loss is not determined by the performance of any company or industry.

2. Long-term horizon

From a historical perspective, stocks generate positive long-term returns. However, a recession or a stock market crash are among the possibilities. But so far, the global economy has always recovered and the markets have reached new records.

It is therefore better to consider a sufficiently long investment horizon. This gives you a potentially high return when the stock markets are doing well, and you can wait for the storm to subside when the going gets tough.

As stock market guru Warren Buffett puts it so well:

"Someone is sitting in the shade today because someone else planted a tree a long time ago"

Warren Buffett

If you reinvest your possible earnings, you can benefit from exponential growth. This is called the capitalization effect or the snowball effect. Your earnings can in turn generate profits.

3. Distribution of investments over time

When is the right time to buy?

Newbie investors often ask this question.

The perfect time is right after a correction because you are buying your stocks for less. But if you wait for a correction to buy, you risk missing out on good returns for years to come.

The problem is, no one can predict when the next fix will occur. The right strategy is therefore to spread your investments over time.

Concretely, you invest a determined amount every month. This way you don't miss out on a return by constantly postponing the time to buy. At the same time, you avoid investing a large sum of money in stocks that depreciate sharply following a crash.

If you diversify your investments, spread them out over time, and hold them for a long time, any price fluctuations will have less impact on your final profit.