How stock market investments work

There are a number of indicators and historical statistics that can be relied upon to get an idea of the results that can be achieved in the stock markets.

In the long run, the stock market is a safe bet

The history of the stock market has many ups and downs, reflecting changes in the global economy. However, there is one clear trend: over the long term, stock markets tend to go up. For example, the S&P 500 index has posted an average annual return of about 10% since its inception.

The CAC 40, meanwhile, offers investors an average annual return of about 6.5%. If you are just starting out in the stock market, investing in an index is a smart choice to passively grow your savings while significantly limiting risk.

The impact of diversification on stock market returns

Diversification is one of the key risk mitigation strategies that can have a significant impact on portfolio performance. By spreading investments across different asset classes (equities, bonds, real estate, etc.), investors can minimise the potential losses associated with any one sector or market.

The benefits of diversification include

Risk dilution

Diversification minimises the risks inherent in one sector or company. For example, if a particular sector in your portfolio fails, other sectors in the portfolio can help stabilise its performance.

Access to different sectors

Diversification allows you to gain exposure to different sectors without putting your entire portfolio on the same investment thesis. For example, you can spread your investments across different asset types (stocks, bonds, ETFs, property), different geographical regions (French market, US market, emerging markets) or different business sectors (technology, industrials, services, etc.).

The main disadvantage of diversification is that it dilutes risk and thus returns. Diversification can dilute the high returns of a particular investment. If a large portion of the portfolio is invested in low-risk, low-return assets, it can limit the overall growth potential of the portfolio. In addition, with globalisation, markets are becoming increasingly correlated. Therefore, a diversified portfolio is not immune to negative returns on all of its components.

Warren Buffett, an American billionaire, often advises not to diversify a portfolio too much.

Diversification is for people who don't know what they are doing.

Which online brokers are best for getting started in the stock market

To start investing in the stock market, you need to choose an online broker that suits your needs. Here's a list of the best brokers to start investing in the stock market in 2024.

Trade Republic

Founded in 2015, online broker Trade Republic offers a wide range of products including stocks, ETFs, bonds, and cryptocurrencies. Known for its mobile-friendly interface, this broker offers competitive commissions of €1 per transaction across a range of products.

In addition to innovative banking products (payment card, interest-bearing savings), Trade Republic allows you to buy fractional shares and gives investors the opportunity to create a savings plan for free investment.

DEGIRO

Founded in 2008, DEGIRO offers a wide range of products including stocks, ETFs, bonds, options, futures and CFDs. Transaction fees vary by country and product, with particular advantages for domestic market transactions.

DEGIRO is characterised by low ETF commissions (free brokerage on a number of ETFs) and no inactivity, custody or withdrawal fees.

Scalable Capital

Founded in 2014, Scalable Capital offers a variety of investment products including stocks, ETFs, bonds and options. The broker offers an interest rate of 2.60% p.a. on uninvested cash up to €100,000.

Scalable Capital stands out with its offers based on different packages: Free, Prime and Prime+. In the Free package, the commission is €1 per transaction. In the other packages, there is no commission for orders of €250 and above.

Scalable Capital is a great option for those who want to invest in ETFs. The platform provides access to 2,000ETFs with the option to include them in investment plans to build long-term wealth in a simple and inexpensive way.

eToro

Founded in 2007, eToro offers a wide range of markets and products including equities, forex and CFDs. The broker is known for its social trading features including copy trades and community chat.

eToro offers mobile apps for iOS and Android, as well as a user-friendly web platform. The broker offers free trades in US stocks, but charges a €5 withdrawal fee and an inactivity fee. eToro is regulated by several leading regulators, including the FCA in the UK, SEC in the US and ASIC in Australia, and offers negative balance protection as well as a variety of deposit and withdrawal methods.

In short, each of these brokers offers different benefits. Trade Republic is known for its simple interface and savings plans, DEGIRO for its low commissions and wide range of products, Scalable Capital for its cash interest rates up to €100,000 and desktop accessibility, and eToro for its social trading opportunities and regulatory stability. Your choice will depend on your specific needs and preferences when investing in the stock market.