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What Is Stock Investing?
By buying a company’s shares, you become one of its owners. Large corporations have an enormous number of shares outstanding, so an individual retail investor owns only a tiny slice of the company. Even a small stake comes with rights, such as the right to vote at the general meeting and the right to receive dividends.
If a company performs well, its share price can rise. The investor can then sell the shares at a profit. Conversely, if the company performs poorly, its share price can fall. Investing in stocks involves uncertainty, but on average, stock investors earn returns on their holdings over the long term.
For many, stock investing is a long-term way to build wealth. Passive investors buy and hold shares for decades, collecting dividends and benefiting from potential price appreciation. That appreciation only materialises when the shares are sold. It’s important to understand that stock investing does not guarantee wealth, and poor decisions can lead to losses. Alongside stock investing, it’s wise to consider other options, such as opening term deposit accounts or investing in peer-to-peer loans. Using several saving and investing methods alongside stocks helps reduce risk.
Public Limited Companies
The shares of public limited companies trade on public marketplaces, i.e., stock exchanges. Traditionally, stock investing refers specifically to investing in listed companies.
A retail investor must use a broker to access the exchange. The broker submits buy and sell orders, handles custody, and pays any dividends to a regular bank account. Many brokers also offer useful add-on services.
Unlisted Companies
Unlisted companies are not on an exchange, so their shares don’t trade in an organised market. That makes buying and selling their shares difficult. While some deals occur through investor networks, demand is often limited, and trading and transferring shares to a new owner usually require many steps.
Crowdfunding is perhaps the most common way individuals end up owning unlisted shares. Unlisted companies can be attractive investments, but they carry more risk than listed stocks.
Read about investing in peer-to-peer loans.
Marketplace for Unlisted Shares
There isn’t a single place to trade unlisted shares. Buyers and sellers have to find each other, though forums and networks can help.
From time to time, websites pop up where you can indicate interest in buying or selling shares of unlisted companies. It’s up to the buyer and seller to agree on the price, and they usually also have to handle practicalities such as transferring money and shares. The buyer must pay transfer tax on the shares purchased, unless the shares are issued in a share issue.
Another marketplace for unlisted shares, osakemarkkinat.fi, was likely closed, as the site no longer works.
Trading on the Stock Exchange
The shares of public limited companies trade on stock exchanges. There are thousands of exchanges worldwide. Finnish shares primarily trade on the Helsinki Stock Exchange (NASDAQ OMX Helsinki), but Finnish investors can also buy shares on foreign exchanges. To trade, you need an agreement with a broker who handles the practicalities. You also need a book-entry account, which the broker opens for the client. Shareholdings are recorded on the book-entry account.
There’s no transfer tax when trading listed shares, but capital gains are taxable.
Almost every Finnish bank acts as a broker on the Helsinki exchange so that you can place stock orders through your own bank. This usually happens as self-service in online banking, but you can also place orders via a bank representative. Regular self-service trading requires an agreement with a bank or other broker, and the service may have a fee.
In Finland, there are brokers other than traditional banks. Nordnet is one of the best-known stock brokers in Finland. It has 2 million customers, which speaks to the service’s popularity.
Costs of Stock Investing
Trading listed shares costs money. A broker may charge a monthly fee for the service, but many charge only per order. Active investors buy market data from brokers to access the latest quotes and professional analyses. Occasional investors may not need this, as basic information on stocks and the companies behind them is available online for free.
The most common cost is the commission on buy or sell orders. The commission is almost always a percentage with a minimum fee. Typically, it’s around 0.20% with a €9 minimum, but exact fees vary by broker. Many brokers lower pricing tiers for active investors when the order volume over a period is high enough. The commission is paid on every executed trade.
Because commissions have a minimum, they’re proportionally higher on small orders. On a €1,200 order, the commission is 0.75%.
A broker may also charge for custody on the book-entry account, but many Finnish brokers don’t. Thus, a stock investor’s costs mainly consist of trading fees and market data.
Where to Find the Best Rates for Term Deposits?
Returns from Stock Investing
Stock investing pays off in two ways: price appreciation and dividends. Remember, stock investing doesn’t guarantee wealth, and poor decisions can lead to losses.
Trading stocks means buying and selling over a relatively short period to profit from quick price moves. This isn’t suitable for beginners because trading requires significant skill. Skilled traders can earn high returns, but losses can be just as large.
It makes sense to invest in stocks with a long-term horizon of more than five years. A typical long-term annual return from stock investing is about 8%, but an individual’s expected return depends on many factors, such as the economic cycle, the level of diversification, and choosing the right investments.
Price Appreciation
Listed shares trade every trading day, which means the market sets prices based on buy and sell orders. Prices can move several per cent within a day, and over the long term, changes can be hundreds, if not thousands, of per cent.
Selling a share above its purchase price yields a profit; the opposite results in a loss. You benefit from price appreciation only if you time your buys and sells well. That requires understanding companies’ businesses—or investing for the long term.
By investing steadily in profitable companies over a long horizon, your chances of earning returns improve even if your trade timing isn’t perfect.
Dividends
When a company’s business is profitable, it may pay dividends to its investors. Dividend yields vary, but typically range from about 2% to 10% of the share price. Dividends are paid to investors’ bank accounts via the broker. Some companies pay little or no dividend. The reason may be weak business performance, or the company may be retaining cash for investments or other expenses.
Risks of Stock Investing
Stock investing carries significant risks. You can lose your entire principal. This happens if the company you invested in goes bankrupt and, after paying its debts, has no cash or assets left. Shareholders outside the business—such as retail investors—are not liable for the company’s debts, so an investor’s risk is limited to the amount invested.
Reducing Risk
You can lose the money you invest in stocks, but with a plan, it’s unlikely. It’s sensible to invest only what you’re prepared to lose.
Beginners often struggle to spot the best entry points and may buy at suboptimal times. You can reduce this risk with time diversification—buying in smaller batches at different times. Unfortunately, commissions are proportionally high on small orders, so it’s not efficient to buy too few shares at once.
If you want to invest only small amounts, stock funds may be a better choice than buying individual shares.
A new investor may also struggle to pick good targets and end up buying into companies with poor prospects. Diversification reduces this risk too. By buying shares across several companies and sectors, any poor choices represent only a portion of your portfolio.
Many Finnish investors buy only Helsinki-listed shares. When Finland’s economy weakens, the values of those companies may fall with it. Geographic diversification helps. It’s wise to include shares from outside Helsinki—and even outside the EU—in your portfolio.
How to Choose the Right Stocks
Picking suitable investments is hard for retail investors. An active, curious investor studies companies’ businesses, future outlooks, financial statements, and stock valuation metrics. These help inform better decisions.
Less experienced investors can leverage stock research from banks and brokers. These analyses provide recommendations on whether to buy or sell a given stock. A safety-minded investor should also focus on large, profitable companies with steady earnings and positive outlooks.
Taxation
Returns from stock investing are taxable.
Capital gains on shares are subject to capital income tax of 30% or 34%, depending on your income level. Capital gain means the difference between the selling price and the purchase price, and you can deduct costs related to investing. If you dispose of assets worth less than €1,000 in a year, you don’t pay any tax.
Dividends are also subject to capital income tax. Because the company has already paid corporate tax on its profits, investors pay tax on only 85% of the dividend, with the remaining 15% tax-free. The tax authority calculates dividend tax based on data provided by the broker. The investor must review the tax return information and supplement it if needed.
Dividends from foreign shares may first be subject to withholding tax in the paying country. In addition, the Finnish Tax Administration treats dividends as capital income, which can result in double taxation. Tax treaties between Finland and many other countries usually allow reclaiming foreign withholding tax.
Finnish brokers automatically report trades and dividends to the tax authority, so you don’t have to calculate taxes yourself. Sometimes you may need to supplement the broker’s data on your tax return.
Read about our experience with reclaiming foreign withholding tax.
Equity Savings Account
Long-term stock savers should consider opening an equity savings account instead of a traditional book-entry account. With an equity savings account, you don’t pay tax on gains at the time of sale; you can reinvest the full proceeds in new shares. Tax is paid only when withdrawing funds from the account. It’s a convenient way to defer tax, allowing you to reinvest the tax portion in the meantime.
Getting Started with Stock Investing
Before you start investing in stocks, it’s important to understand the risks involved. No one guarantees returns.
You can significantly reduce risk by learning the basics and making well-considered decisions. Investors should understand that stock investing has a long horizon and immediate gains are rare. We don’t recommend trading for beginners.
Once you have the basics down, find a reliable broker and open a book-entry or equity savings account through them. Your home bank is often a good starting point, but it’s rarely the cheapest or most versatile. The service level may also be lower than with a specialised broker.
Compare brokers’ services, terms, and pricing. One option is the Nordic firm Nordnet, which has operated in Finland since 1996. Nordnet isn’t just cost-effective; it’s experienced and offers a versatile suite for both beginners and professionals. It also provides services beyond stock investing.
A beginner should pick a few well-known listed companies and study their information to learn. Take time to understand business descriptions, key figures, and outlooks, and what they mean. You can glance at price history, but past performance is not a guarantee of future results.
Once you’ve learned enough to compare stocks and found your first target, placing an order through your broker is quick and usually executes in seconds.
For orders, you can set a limit price yourself or trade at the current market price.
Investing in equity and capital markets always involves risks. The value and return of investments can rise or fall, and an investor can lose all invested capital. Historical returns and performance are not a guarantee of future results.
Nordnet
We highlighted our partner Nordnet a few times in this article. While many banks offer investment services, Nordnet stands out in several ways.
Nordnet is an established player with a comprehensive service offering. Order fees are competitive, and there are no custody fees. Through Nordnet, you can invest in both shares and funds, and high-interest deposit accounts are also available.
Nordnet’s range of services is broad, so it’s worth exploring the options yourself. If they meet your needs, you can open an account easily.
Open an Account With Nordnet now and you’ll get 20€:worth of units in the Nordnet One Balance Fund.
Bottom Line
Stock investing is one way to build wealth. Others include term deposit accounts and peer-to-peer lending. It’s advisable to diversify across asset types. Because stocks are risky, a safety-minded investor may want to keep their weight small in the portfolio. Within the stock portfolio, broad diversification—both geographically and over time—is important.
A beginner shouldn’t expect quick wins. Dividends provide a small, steady annual return. Gains from price appreciation materialise only when you sell, and that may take years. Returns are taxable with a few exceptions. On average, stock investors earn reasonable returns, so their wealth grows over the long term.