Low-risk investments – shares for the security-conscious

Are you just starting out in the world of finance and investments and want to achieve returns, but are perhaps cautious because of the potential risks? That’s understandable! Especially for beginners, the topics of investing and risks can seem complex. In this article, we look at whether there are safe shares, how you can increase the security of your portfolio and whether there is a possible alternative.

Investing in shares

Before we look at the risks involved in investing in shares and how you can increase the security of your portfolio, let’s take a look at how shares work in principle.

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What are shares?

This is a security. If you buy one, you can become a co-owner of a company, specifically a public limited company. The aim of buying this investment is to benefit from a positive performance. If the company can record profits and demand is high, the value of the group increases.

Investors can not only profit if they sell a company share at a higher price at a later date.

Dividends also help to realise higher profits:

• If a company records profits, it can pay these out directly to its own shareholders
• This takes the form of dividends
• Companies are not obliged to pay dividends
• Profits can be used to make investments, invest in projects or research or to increase financial reserves

Types of shares

If you would like to invest in this asset class, you should know that there are different types of shares, which we will briefly discuss below: A distinction can be made between bearer shares, registered shares, preference shares and ordinary shares.

Bearer shares do not have a share register. The person who currently owns a company share is granted the right to participate in the Annual General Meeting. This can be disadvantageous for the group, as it has no overview of the investor structure due to the lack of a share register.

In contrast to bearer shares, registered shares are entered in a share register. This contains information about who owns how many shares in the company. Only registered shareholders may attend the Annual General Meeting and use their vote. Your bank automatically handles the transfer to the share register.

If you purchase a preference share, you receive various benefits. These often take the form of a higher dividend that is paid out. In contrast to ordinary shares, however, the right of co-determination at the Annual General Meeting is forfeited.

Why invest in shares?

One particularly important reason to invest in shares is inflation. High inflation rates ensure that your money is devalued. You can no longer afford the same products and services for the same amount of money today as you could a few years ago.

Inflation cannot be compensated for with conventional investments, as interest rates are low. These include an overnight money account or a building society savings contract. Shares offer significantly higher potential returns and thus a way to build up assets in the long term.

• Another reason is the uncertainty of the state pension
• Shares are suitable for working towards long-term financial goals
• You can therefore use it to top up your own future pension, save for your family or for other wishes

The dividend strategy is also popular for building up passive income. This involves specifically selecting top dividend shares that pay a comparatively high dividend to their shareholders. Investors can build up a portfolio from such company shares and generate a passive income.

Security and risk in relation to shares

Share investments as safe investments? In the following, we will look at the risks you should be aware of if you are interested in investing in company shares. We will then look at some measures you can take to make your personal portfolio more secure.

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The risks of shares

Are shares a crisis-proof investment? What risks am I taking if I want to invest in company shares? In this section, we take a closer look at the potential disadvantages of investing in these asset classes.

Asset classes that are traded on the stock exchange are generally subject to price fluctuations. This also includes shares and their share price. Economic, social and political movements can influence share prices. These can sometimes fluctuate considerably, which is quite normal on the stock exchange.

• One specific risk is the business development of a particular group
• Shareholders invest in a company and are therefore dependent on the individual development of the company
• If the economy changes unexpectedly or demand falls, this can lead to the share performing worse than assumed

The worst case scenario would be if the company you have invested in goes bankrupt. This can result in a total loss of the invested capital. This risk is particularly high if you invest in a small number of companies.

This brings us to the next risk: a lack of diversification. When investing in individual shares, investors try to identify the most promising shares and profit from their performance.

However, if you have only invested in a few companies and these do not develop as desired, you can clearly feel this in your portfolio. A lower level of diversification, i.e. splitting up the portfolio, goes hand in hand with high risks.

How can I increase the security of my portfolio?

As already mentioned, as an investor you can ensure that your portfolio is more secure. There are certain measures that can mitigate the potential risks. In this way, you can earn money with shares, benefit from attractive potential returns and still take security into account.

Only invest in investments that you understand

This is one of the most important tips. For a secure portfolio, you should only invest in financial assets if you have a firm understanding of how they work. This includes understanding the possible risks so that you can counteract them.

Once you have built up sufficient knowledge, you can start to develop a strategy and invest. In this way, you can often avoid unnecessary mistakes that can happen, especially as a beginner on the stock market.

Investment horizon

Shares that never fall? There is no such thing! But how can you protect yourself against price fluctuations on the stock market? You can do this quite simply by setting yourself a long-term investment horizon for your company shares.

There will always be price fluctuations, but these become negligible over long periods of time. In this way, poor entry points can also be equalised.

Another advantage is the compound interest effect. Your assets can grow faster if you invest them over many years or decades. You can invest your money and it will use the time to work for you.

Diversification

When investing in individual shares, some investors do not take diversification or risk spreading into account. This can be risky. It is therefore advisable to pay attention to diversification.

You can diversify at different levels. In terms of your portfolio, you can invest money in different financial investments. In addition, you should invest in different groups and diversify your risk across different sectors.

Risk diversification also plays a role if you only invest in a single country. If there are unforeseen developments such as a national economic crisis or an environmental disaster, this will have a negative impact on your portfolio.

Stay calm & don’t let yourself be unsettled

For some newcomers to the stock market, investing can be emotional. Some panic when they see red figures for the first time and try to save what they can. This is not advisable, as fluctuations are normal and you only realise losses when you sell shares.

Statistically speaking, an economic crisis will occur again and again. One example of this was the coronavirus pandemic. In times like these, you should try to remain calm and not sell hastily.

What can help you with this is a fixed investment strategy that you build up beforehand. You determine how much you want to invest, what your exact goals are and by when you want to achieve them. In uncertain times, you know that you are well prepared and have nothing to worry about.

Insider tips?

If you take a longer look at investing and consider sources on the internet, you will often be shown supposed experts who will tell you how to get rich quickly and that they have a special insider tip for you.

Building a fortune takes time and rarely works overnight. Such experts usually have an interest in getting you to buy a certain course from them at a high price. Therefore, don’t let yourself be put off and trust the knowledge you have built up over time on the subject of investing.

Safe share alternative? Investing in ETFs

Whether shares or ETFs, both asset classes allow you to benefit from attractive potential returns and realise long-term financial goals. ETFs come with a few special features, which we would like to look at in more detail.

An ETF or Exchange Traded Fund is a fund that is traded on the stock exchange. It can invest in various assets such as bonds or shares. Investors therefore pay into a common pot that invests in the underlying investment.

• The advantage is obvious: unlike individual shares, ETFs can be highly diversified
• They sometimes contain a large number of companies, which can spread the risk
• If, for example, a group becomes insolvent, the loss is absorbed by the other assets it contains

Global portfolios have been particularly popular in recent years. Investors invest specifically in numerous companies with indices such as the MSCI World, which contains over 1,600 companies. The high level of diversification or spread reduces the risk and makes the portfolio more secure.

ETFs are a passive investment. Unlike active funds, they do not have a fund manager who takes care of composition and management. ETFs are therefore characterised by low costs.

They are also easy to understand and require little effort. Once you have understood them, you can set up a savings plan and let it run automatically. Incidentally, you can start investing from just one euro with most banks and brokers, which is why this investment is also suitable for beginners.

• If you are a beginner, you should initially steer clear of so-called themed ETFs
• These focus on certain trends and therefore often only on a specific sector
• This means that the advantage of high diversification is lost
• However, they can be worthwhile for advanced investors who want to achieve higher returns and already have a broadly diversified portfolio

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Conclusion: Invest in safe shares – pay attention to diversification!

With shares, you can become a co-owner of a company and benefit from the performance of a group. You can also acquire rights and have the right to vote at the Annual General Meeting. These meetings decide, for example, whether dividends are paid out to shareholders.

Investments in company shares are associated with various risks, such as price fluctuations, corporate development, the possibility of a total loss and often low diversification. The risks differ in terms of how you deal with them as an investor.

With various measures such as a long-term investment horizon, sufficient risk diversification and rational trading, you can invest safely in shares and increase the security of your portfolio. Diversification in particular should not be underestimated and can have a decisive influence.

ETFs offer an alternative to company shares, with which you also have the chance of attractive returns with comparatively high security. These are funds that attempt to track certain indices as closely as possible.

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