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Financial guide for newbies.

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Financial guide for newbies.

What if you invest in stocks?

Having savings for emergencies is a measure all households should take, (it is advised by every financial education expert). When this piggy bank exceeds a threshold, that is considered acceptable. However, when there is an excess, you can use that money to make an investment and get a return.

Buying shares of publicly traded companies; that is one of the first ideas novice investors may have. As long as they can maintain their lifestyles, even if that means losing a little in the stock market. 

But, how do you do it? Understanding and comparing thoroughly all the options. Keep in mind that equities change in price continuously; this means the money placed can be lost or won.

Contacting an investment service company is usually a straightforward process. 

“Normally, they have a web page through which we can sign the necessary contracts to operate”

Says Enrique Juan de Sentmenat, a delegate from the association of independent financial advisers EFPA Spain. He adds that 

“The entity we select will send us the necessary documents via post or email”

Operate online

Beyond this preliminary procedure, invertors carry out all sales and purchases over the Internet. According to Souto, this modality has an advantage, and all the experts consulted agree: it reduces costs. In all cases, the user must pay commissions both for the intermediation and for the shares’ custody. This is a percentage of the nominal amount. 

But Sentmenat makes us understand that: 

“brokerage commissions are always more expensive if the purchase or sale has to be managed by a third party”

Since the costs will negatively affect the profitability of the securities, “the most important thing is to analyze and compare all the commissions” suggests Souto. If sales representatives advise the client in a bank or securities agency office, 

“The process is done over the Internet, and it is the client who must select what type of operation to carry out (purchase or sale), how much to buy or sell, and at what price ” explains Virós.

In the words of Sentmenat, the main obstacle when selecting a broker that operates exclusively online is “knowing who is behind”. You must be sure that you have authorization from the National Securities Market Commission (CNMV). You should also know what legislation applies if things go wrong, since “many of these companies are governed by foreign regulations,” says Sentmenat. He adds: novice investors should focus on those stocks “that you know or have heard of”.

Financial independence, higher costs

Both Sentmenat and Virós recognize it: Going to a bank branch and consulting their advisors is a great decision. Especially if it is the first time you enter the investment world. 

The performance of the entities is monitored by the Bank of Spain. However, both experts believe the vision of the entities is biased. “Normally they prefer to sell their own product,” says Setmenat.

Conversely, an investment services firm is likely to offer specialized, transparent, and independent services. The reverse of the medal? “The costs of hiring the advisor’s service are the highest of all the possible options”.

For the financial advisor Pablo Souto, the most common way to buy and sell shares is through a bank, either by going to their offices or using their web pages. Clients give the order to acquire the securities he wishes. They give a price they consider most appropriate. Then, the entity acts as an intermediary between the client and the company and executes the operation. 

“For this, we only have to open a securities account, (a specific account that is used to store the securities)” explains Souto. 

In turn, this account will be linked to the user’s current account, where the money for successful investments will arrive.

Investment services companies

But banks are not the only ways to have securities. Another possibility is the so-called investment service companies. Among them, the securities agencies (brokers)

“have the form of public limited companies (with a minimum capital of 300,000 or 500,000 euros) and process purchase or sale orders for securities on behalf of their clients, but they cannot operate on their own ”

Says Arantza Virós, managing partner of the Neo advisory firm Financial investments. 

There are also financial advisory companies (EAFI), which are persons who must demonstrate experience and knowledge in the investment field. For this reason, 

“the National Securities Market Commission (CNMV) makes them go through a strict qualification process” 

Your company, like any other EAFIs, cannot operate with the client’s money, but only advise them. 

“The one who gives the final order is the user, the EAFI supervises.”

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