‘How to Invest’ is a series of articles guiding readers through the basics of investing in different assets. See also: The risks of leaving money on deposit.
It might seem a precipitous moment to consider putting a toe into the investing waters. War in Iran, soaring oil prices and an uncertain outlook for the US dollar are just three factors triggering volatility in the markets. And yet this also means, perhaps, that it is more important than ever to get a better return on your money to ensure you keep pace with rising prices.
“Investing through the stock market; you’d expect returns to be better than bank deposits,” says Rory Gillen, founder of Gillen Markets, now a part of Quilter.
This week, as part of our new series on investing, we look at how to start investing in stock market shares – the risks, possible upside, costs and potential taxes.
READ MORE
How can I buy stocks?
Stocks are bought through brokers, most of whom these days have online operations. Some operate purely online. You can open an account with a broker, like IG, Interactive Brokers, Davy Select, Goodbody or Revolut, and place a buy order.
Each has their own rules and minimum investment amounts.
“The platform you use is important – for the costs and the security of client assets,” says Gillen. You will want to put your money into a regulated provider, where your money is typically protected by up to €20,000 (or 90 per cent of the loss) in the event of insolvency under the Irish Investor Compensation Scheme.
If you’re investing yourself, you’ll be looking for what is called an execution only offering – where you simply engage the broker to buy and sell on the back of your own research and decision – to keep costs down. The alternative is to seek out an advisory service, which will have significantly higher costs, but it means that you’ll have an adviser in the brokerage guiding your decisions.
You won’t need a large cash injection to get started: shares in Ryanair cost about €26 for example, Shell is about €35, Unilever €60, and Bank of Ireland €16.
It’s more expensive to get invested in US tech stocks however: shares in Nvidia are about $177; $260 in Apple; and almost $400 in Microsoft. Some brokers do allow you to buy a fraction of a share.
How much will it cost me?
Given the level of uncertainty when it comes to investing, one way to introduce some element of certainty is to understand your fee structure – and shop around to get the best one for you.
“Watch your fees,” says Michael Healy, managing director UK and Ireland, at IG Group, which is ramping up its presence in Ireland. He says it is very hard for an average person to make investing work if they are facing high fees on transactions.
In general, the cost of investing in shares has fallen significantly since the 1990s.
“If you save €1,000 a go, you can get it invested very efficiently, probably for under 1 per cent, if you include all costs – that’s only €10,” says Gillen.
If trading frequently in the US, you could keep FX (foreign exchange) costs down by opening a US denominated account (although there will be FX charges on the initial conversion). De Giro for example, gives a cost of just €2 when buying 100 Nvidia stocks with a US dollar account, compared with more than €40 from an euro account.
Another option is to buy the euro listed version of a US stock – for example, Nvidia has a euro listing in Germany. Buying this with Nvidia would only cost €3.90 with De Giro. However, this will trade differently to the Nasdaq stock, so prepare for that.
[ How to invest: What are the risks of leaving your money on deposit?Opens in new window ]
What are the pros?
The statistics are there; over the long-term, buying shares outperforms bank deposits (if you can tolerate periods of volatility). If you invested $1,000 (€872) in Apple for example, back in 2000 when it was priced at $1.19, you’d be sitting on a lump-sum of about $220,000 these days.
And buying into individual stocks allows you to fine-tune your investment strategy. There are also tax advantages associated with stocks over other investment assets (see below).
And the cons?
The downside of buying stocks is that to do it well, you do need to inform yourself – and to identify the future Apples when they’re still cheap. For every Apple, there are many failures that will cost you money.
“I think young people are probably picking it up better as there is so much stuff available online, and they are more comfortable with it,” says Gillen, “But I haven’t really seen a pick-up myself in the older generation.”
Gillen has been running training courses for 20 years now (next one is on May 9th) and he’s seen a pickup in demand.
“Education is key. If you want better returns, the onus is on you to become better informed,” says Gillen, and this means learning to deal with volatility.
“Volatility plays on people’s emotions. They buy high and sell low: the number one objective is to learn not to do that”.
How risky is investing in shares?
Opting to buy shares in individual companies, rather than spreading your money across a number of different companies in a fund, is a riskier proposition, as your money will likely be spread across fewer companies than would be the case in a fund. A key issue in the run-up to the financial crisis in Ireland was an over-concentration by Irish investors on Irish stocks, which account for just a small fraction of the investing universe.
Of course, by concentrating your investments, the upside could also be greater if you choose the right company.
In any case, there are some ways to mitigate risk. “Before you start investing, have your rainy day fund,” says Healy, “some people say six months of expenses, but it depends on your circumstances”.
Typically, you’ll want to keep this in an easily accessible savings account.
Next, you’ll need to spread your risk.
“Diversify – it takes away a lot of risk,” says Healy. “If you buy a broad-based basket of stocks and funds, a lot of the risk looks after itself. Don’t concentrate on a small number of holdings.”
Some stocks offer a natural diversification – class B shares in Berkshire Hathaway for example, the conglomerate led until recently by famed investor Warren Buffett, cost about $500 (class A shares, whose closing price last week was almost $750,000, are for the very wealthy).
“If you buy into that you’re getting the diversity,” says Gillen.
You also need to be realistic about what you can and cannot do.
“It’s very hard to time markets, so don’t try. Turn investing into a habit, instead of trying to predict whether the market will be up or down next week,” says Healy, adding: “Don’t try and be the smartest guy or girl in the room, let your gains compound over time.”
If you’re trying to manage currency risk, you could opt for euro denominated stocks.
So-called dollar cost averaging, whereby you allocate a fixed sum of money into the stock market at regular intervals is another way that can help smooth the peaks and troughs of price movements.
“Regular investing is very low risk,” says Gillen.
What about taxes?
Taxes in Ireland can confuse, perplex, and annoy – and in many cases, determine investment asset choice.
“I think it’s very difficult not to take the tax treatment into account,” says Catriona Coady, head of tax with Goodbody Stockbrokers, of investment decisions.
First up, you’ll pay capital gains tax (CGT) at a rate of 33 per cent on any gains you make, over and above an annual CGT allowance of €1,270.
This allowance is allocated on an individual basis. “Any part of an annual allowance cannot be transferred,” says Coady, and you also can’t carry it forward if unused.
[ Are you a beginner investor or looking to start? We want to hear from youOpens in new window ]
If you make a loss, you can offset those losses against gains arising in the same year. If the losses are not fully offset that year, they can be carried forward until they are matched by gains on other investments. In short, this means that a crystallised loss of €1,000 will save you €330 in tax on a future gain – and there is no time limit in which this must be used.
“But you’ll generally not try to cash out of shares at a time when it might trigger large losses,” says Coady.
If your shares pay you dividends, these are seen as income and you will pay tax on this at your marginal income tax rate, plus USC and PRSI. As Coady points out, this could be a top rate of between 52 and 55 per cent, depending on your tax rate.
Dividend withholding tax also applies. This obliges the company paying dividends to withhold 25 per cent of the payment and send it to Revenue. You will get a credit for this against any income tax liability.
It’s worth noting that dividend withholding tax rates vary from country to country – Swiss stocks, for example, have a withholding rate of 35 per cent, but this can be reduced to a double taxation treaty rate of 15 per cent.
“It can get a little bit complex, you have to make sure you’re getting the benefit of the lower treaty rate,” says Coady.
And if you buy Irish shares, factor in stamp duty. This is levied at a rate of 1 per cent but, from January this year, companies with a market cap less than €1 billion are excluded from this.
And how do you settle your tax bill?
“The onus is on you,” says Coady. This means keeping track of dividends you’ve received, and working out the tax owed. To learn more, Goodbody Stockbrokers has an investment tax guide that covers the treatment of most asset types.
How can I exit my stock investment?
If you buy a stock on a main listing, there shouldn’t be any issues in selling out of it, once the market is open. As with buying, you will do it through your broker, so expect charges again.
Trading
How much will it cost me?
It’s worth doing some research on which brokerage offering is the best match for you. That will likely depend on where you’re going to trade, how frequently, and with how much money.
Davy Stockbrokers for example, levies an account holding fee of €50 per quarter for its Davy Select customers. You can reduce this however if you trade every month – the commission rate is 0.5 per cent, so if you trade more than €10,000 in the quarter, no holding fee applies.
When it comes to trading, a spokesman says it would charge commission of 0.5 per cent on a €15,432 trade to acquire 100 shares in Nvidia (based on share price of $177), and a third-party overseas custody charge of €34.26.
It offers multicurrency accounts, so no foreign exchange (FX) charges apply providing you have and use the relevant currency account. So, in total, this trade would incur charges of some €111.42 – and no account holding fee would apply.
Davy’s traditional main street rival, Goodbody, charges a €100 annual account maintenance fee plus commission of 1 per cent on a stock purchase of this size. It also has an overseas custody charge – of €25 – so you would pay for the same trade.
To buy the same 100 shares in Nvidia, IG would charge an FX fee of 0.7 per cent, but no commission or transaction charges, resulting in a cost of about $107 (€92.50).
Dutch-based broker De Giro has a handling/commission charge of €2 on a similar trade, plus an FX fee of 0.25 per cent (€38.30). And if it’s your first time trading on Nasdaq that year, you’ll also pay a €2.50 exchange connection fee. So about €42.80 in total.
Interactive Brokers says it has no account holding fees, account minimums or inactivity fees. To buy 100 shares in Nvidia, it would charge $1.02 in stock commissions and fees and a $2 minimum, so a $3.02 total trade cost, according to a spokeswoman.
Finally, Revolut allows most plan members one free trade a month. On that basis, a similar trade would cost €150 in FX fees for standard plan holders, falling to €0 for premium, metal and ultra.
Once you go over one trade a month, your fees will depend on your plan – 0.25 per cent (min €1) for standard, plus, premium and metal plans, and 0.12 per cent (min €1) for ultra or trading pro plans. So, if this was a second trade, standard plan holders would pay about €188 in costs.
Remember, you will also face charges when selling out of a stock.
