If you have never done so before, buying finacial products may sound like a magical thing rich people do.
The reality is far more boring. For most people buying financial products means logging in to some online interface or app, selecting a product and clicking the 'buy' button.
The three types of investment institutions you will likely work with are:
- "Service providers" like managers & mutual funds
Exchanges keep track of who owns what
These are the big institutions like the New York Stock Exchange who keep track of who owns what, there are only so many of them.
They usually don't allow retail investors like us to buy products directly with them. We have to do it through a broker. The exchanges are the ones who manage the behind-the-scenes of who owns what.
They a big database holding:
- Who owns what stocks
- Who wants to buy what
- Who wants to sell what
When someone wants to sell something (a stock) for a price someone else wants to buy it for, the exchange moves the asset from person A to person B in their books.
It used to be a lot of shouting people and papers being filled out, now these buildings are mostly filled with computers.
Service providers invest for you
I lumped managers and mutual funds together as they both invest on behalf of you.
Often they allow you to choose a strategy and just forget about it. I only really recommend low-cost funds with automated strategies.
Personally, I love the Dutch 'Brand New Day' or US 'Wealthfront' concepts. They charge you very little and follow Buffett-like strategies usign index funds.
I am vehemently against service providers that charge more than 1% in fees as they tend to massively underperform low cost index funds for any length of time.
Brokers are middle men to buy stocks
A broker is an entity that takes orders from customers and executes them. In the past that means you would call your broker (a person) and tell them "I want to buy 1 Apple stock". They would then go buy the asset and hold it for you.
But this is 2019. We don't like middle men anymore. So now brokers are mostly pieces of software and instead of calling brokers we click some buttons.
Brokers all do the same
Buying any given stock through one broker is the same as buying it through another. Apple stock is Apple stock, Google stock is Google stock. It all ends up in the books of the exchanges.
By extension you want to use a broker that charges as little as possible. Usually there are 2 types of fees:
- Transaction costs
- Management fees
You want 1 to be as low as possible, and I haven't paid 2 in years since discount brokers like the one I use don't charge management fees.
Different exchanges have different stocks
Companies can choose which exchange they want to be listed on. You might find American companies on the New York Stock Exchange (NYSE) and a Dutch company on the the Dutch Euronext exchange.
Usually a broker will be hooked up to most big exchanges.
How to choose a provider
I recommend that you choose whatever suits your chosen strategy:
- If you are investing monthly into a Buffett-like portfolio of index funds, choose a low-cost service provider
- If you are using a more custom strategy like Dalio's all-weather portfolio, choose a discount broker
As a general rule I recommend choosing whatever option will get in your way the least.
For 90% of people that is a service that automatically deducts money from your bank account and invests it for you.
The choice of provider for you will depend on what is available in your country. As a general rule I have heard good things about:
|Region||Automatic investment (service)||Manual investments (broker)|
|Netherlands||Brand new day 👍||de Giro 👍|
👍 means I used it personally and like it.
Do not invest with your bank. Banks charge high fees and their service sucks. Go to a dedicated investing institution.
How to open an account
This is usually as simple as signing up for any online account:
- Go to the website
- Click the 'open account' or 'sign up' button
- Fill in relevant details (and probably give a pic of your passport)
- 🎉 Yay you have an account
Important note: most investing institutions have wonderful service! Banks tend to suck, but service providers and brokers often put great emphasis on taking all the time you need to help you.
I have spend hours calling companies like de Giro, Vanguard and Brand new day. Each and every one took time to answer my questions. Both the simple ones in the beginning and more technical ones later on.
Have questions? Call them.
Confused? Call them.
They are handling your money and often think about their customers in the long term. You might only have €20 to invest today, but over the coming 20 years you will build hundreds of thousands, if not millions worth of wealth. And they know that.
In my experience the right companies treat you like the future high-roller you are.
Once you have an account
If using a service provider you will likely have some simple options like a risk-slider. Generally that sets the proportion stocks to bonds (see the previous article on choosing a strategy).
If you are using a broker things are likely to look far more complex, a bit like a casino in fact. There will be charts and updating numbers everywhere, but don't be intimidated. The process of buying a product is usually as simple as:
- Putting the name of the product in a search bar
- Pressing the buy button
The blinking lights are for day traders who have ADHD, you can ignore most of it. If you are implementing a strategy like Buffett's 90/10 or Dalio's all-weather you are likely to only ever buy 2-5 products.
We'll cover choosing the right financial product in a next post.