How to invest in stocks in Russia 2021?

How to invest in stocks in Russia 2021? That will be the topic of today’s article.

If you are looking to invest, don’t hesitate to contact me, email (advice@adamfayed.com) or use the WhatsApp function below

Introduction

The stock market revived in Russia after the liberalization of the economy in 1991. The history of the stock market of the Russian Empire before 1917 was not directly related to the history of the modern Russian securities market. 

In the conditions of the command and distribution economy of the USSR, the movement of financial flows was determined by the decision of the party and financial and economic bodies, therefore the conditions for the revival of the stock market, which existed before the 1917 revolution, remained unfavorable until the early 1990s. 

In place of the official stock market, there was only the so-called “black market”. The securities market (SM) in Russia began to revive in the first half of 1991 after the Resolution of the Council of Ministers of the RSFSR No. 601 of December 25, 1990 “On Approval of the Regulations on Joint Stock Companies” was adopted. 

However, for a long time, the low level of financial and economic intelligence of the country’s population as a whole did not allow the market to develop. 

The situation was also complicated by the fraudulent privatization in 1993-1994. The dynamic development of the legitimate stock market began only after the resumption of growth in the Russian economy in the early 2000s. 

Anyways, there are still a number of investors that are interested in Russian stock markets and would like to know more about it, here we are with a lot of useful information for those investors.

In this blog post we will talk about Russian stocks, which stock is a good place to invest your funds, what to do and some tips for beginning investors.

Overview of where to buy shares of Russian companies?

The stock market for Russian companies largely depends on the price of oil. Now, while oil and the rating of Russian stocks are on the decline, it’s time to buy securities. As soon as oil goes up, stock prices go up, and you win.

The question is where and how to buy Russian shares, and which securities should be guided by.

How do I buy and sell stocks?

You cannot go directly to the stock exchange. This can only be done by brokers – intermediaries who make transactions on behalf of their clients. By choosing a broker, you can buy any shares that have passed the issue on the exchange.

It is easy to do, but we’ll talk about the steps in details:

  • choose a broker whose terms suit you;
  • contact him and conclude an agreement (or register in the online store of shares);
  • top up your internal account;
  • select and buy stock.

After the purchase, you will become the official owner of the shares and will be able to count on dividends.

Where to buy Russian stocks?

It would seem that the answer is clear – from the broker. But the broker himself trades on specific stock exchanges. These can be Russian (Moscow or St. Petersburg stock exchanges), and American (NYCE and NASDAQ), and Asian (Tokyo and Shanghai). 

There are a lot of exchanges, and the quotes of the same shares in them may differ. But these differences are usually minor, and if you are not a trader, the stock exchange does not matter much.

The larger and more stable the company, the more exchanges it managed to cover. Thus, Gazprom shares are simultaneously traded on the NASDAQ and the Moscow Exchange. An IT giant like Facebook has issued securities on virtually every marketplace in the world.

If you buy shares in a Russian company, you may well have to deal with the Moscow Stock Exchange. This is the largest site in Russia.

With the questions “how” and “where” we have decided, now the main thing: what exactly to buy? Despite the fact that both the actual state of the companies and the rating of Russian shares largely depend on the price of oil, the securities market does not develop synchronously. Much depends on the state of a particular industry or company.

So, Sberbank got good chances for expansion: the Central Bank revoked the licenses of many banks, and clients are moving to a more reliable organization. This is a typical example of the impact of industry news on an individual company’s stock.

Aeroflot shares have shown positive dynamics since the beginning of 2016. For 9 months they have more than doubled – from 56 to 121 rubles and still have at least 15% growth potential. Aeroflot is increasing its assets by investing in shares of large companies.

Investing in shares of Russian companies is worth it: large players offer good dividends, and the securities themselves are inexpensive relative to 2011-2013. Their growth potential, with the exception of some enterprises, is great.

How to invest in the Russian market with a small start-up capital?

The coronavirus pandemic and subsequent lockdowns caused a collapse in global stock markets. And the fallen shares of large companies are a great opportunity to make money.

From the lows of the year reached on March 19, the RTS index has grown by 70% to date.

How to participate in the movement of securities, especially for beginners? Which stocks are worth buying, in what quantity and proportions? If capital is small, it will be difficult to form a diversified portfolio. For example, one share of Norilsk Nickel is now worth more than 23 thousand rubles.

A good option would be to buy an ETF on the Moscow Exchange.

ETF (Exchange Traded Fund) is an open-ended investment fund whose shares are traded on an exchange. These funds are somewhat similar to ordinary mutual funds, the main difference is that ETF shares can be traded on the exchange like ordinary shares or futures. Today more than 5 thousand ETFs are traded in the world. About 15 securities are presented on the Moscow Exchange.

What opportunities open up investments through ETF?

– The entry threshold for investing in ETFs is relatively low. This allows you to start investing with a small start-up capital.

– High liquidity. With the help of ETFs, you can quickly manage your capital and invest in various assets, depending on the current market conditions.

– Possibility of significant diversification of funds. Unlike stocks, ETFs are more diversified, which reduces exposure to corporate risks and the characteristics of an individual company.

– Standard taxation. To work with ETFs on the Russian market, standard taxation is applied, as when working with shares of domestic issuers – income of individuals is taxed with personal income tax at a rate of 13%.

– The indisputable advantage of buying ETFs on the Moscow Exchange is that they can be purchased on the IIS. Also, in relation to investments in such funds, the privilege for long-term ownership of securities is applied.

Let’s look at an example.

FinEx is one of the key ETF operators in Russia. The operator manages 14 funds. Specifically, when you invest in an FXUS fund, you “buy” 506 shares or 85% of the US market. You can also invest in the Chinese market by buying FXCN or Germany using FXDE.

ETF FXRL allows investing in Russian stocks. The fund’s portfolio consists exclusively of Russian stocks included in the RTS index. Among the most famous are: Gazprom, Lukoil, Sberbank, NOVATEK, Magnit, Rosneft, etc. At the same time, securities of less liquid companies are also represented.

Top 10 largest components of Russian fund index


Company

Currency

Weight
Sberbank ORDUSD% 15,342
Gazprom ORDUSD% 12,325
Lukoil ORDUSD% 10,781
Yandex CL A ORDUSD% 8,632
GMK Noril Nickel ORDUSD% 7,669
Novate ORDUSD% 5,069
Rosneft ORDUSD% 3,384
Polyus ORDUSD% 2,643
Magnit ORDUSD% 2,348
Tatneft 3 ORDUSD% 2,320

Most of the assets are concentrated in the energy sector, accounting for 45%. For the raw materials sector – 20%. The securities of the financial sector account for 18%.

Instructions: how to buy shares on the Russian fund exchange

The average rate on bank deposits in April 2020 slightly exceeded 6%. You can count on such a guaranteed income by putting funds on a deposit. The shares of the Far Eastern Energy Company rose by 130% over the six months to June 22 – from 0.6 to 1.38 rubles. Although few people manage to make such money on the stock exchange

We will try to give you the instructions on how to buy Russian stocks.

1. Choose a broker

There are two exchanges in Russia: Moscow and St. Petersburg. A person cannot directly purchase securities – he needs to become a client of a broker. Accordingly, at the first stage, you need to choose it. There are more than 200 of them on the Moscow Exchange. Banks can act as brokers.

What to consider when choosing a broker:

  • commissions (cost of services for the purchase / sale of securities);
  • the minimum investment amount (can be, for example, from 100,000 rubles);
  • markets where the broker allows you to work (Russian, American, British);
  • the convenience of the program for working on the stock exchange (some of them are quite complex, but there are also simple ones).

Often a broker is chosen by the size of the commission that must be paid for transactions. It can differ several times – for one it is 0.03%, while for the other it is 0.3%.

2. Conclude a contract

To become a client of a broker, you need to conclude an agreement. For this you only need a passport. This is where the difficulty arises: many brokers work from 9:00 to 18:00 and only on weekdays. Only a few brokers can come to you at a convenient time to conclude a contract, so with some probability you will have to sacrifice working time to go to the company’s office.

After concluding the contract, it may take up to three days to open a brokerage account.

3. Transfer money to a brokerage account

To buy securities, you need to transfer money to a brokerage account. This can be done using the details specified in the contract. Your bank will charge a standard money transfer fee, the same as if you were transferring funds from card to card.

You can save on commissions if your bank does not take money for interbank transfers or if he is the broker (that is, the transfer takes place within the bank).

4. Install the application for trading stocks

To buy shares on the exchange, you must instruct the broker. You can do this over the phone, but this method is used only as a last resort when you do not have access to the software.

There are many programs for buying stocks, you just have to find the one that matches your needs and expectations. In this case your broker can help you.

5. Decide what you want to buy

You can buy different instruments on the exchange.

Shares are the right to a part of the company. That is, buying shares (even one), you become one of the owners of the company – you can go to shareholders’ meetings and vote for or against the proposed decisions. You can make money on the growth in the value of shares (bought cheaper, sold more expensive) or on dividends (the company distributes its profit, if any). Stocks are a risky type of investment, their price can fluctuate significantly.

Bonds are securities that confirm the company’s commitment to repay the debt with interest. For example, a bond costs 1000 rubles, its yield is 7% per annum. This means that you will be paid 70 ₽ every year until the bond expires. In the end, you will receive your 1000 ₽. The market value of a bond can be higher or lower than par, depending on the risk of the security and the demand for it. Eurobonds are bonds denominated in foreign currency.

ETFs are funds that repeat the structure of some financial indices, that is, sets of stocks or bonds (gold mining companies, IT companies, shares of Chinese companies, US bonds, and so on) are protected inside.

6. How to buy and sell

You set the cost of the security you want to purchase. You can buy it at its current value, for example, at the price of the last trade, or set your own price. As soon as other market participants agree to sell at your price, the deal is done.

Securities are sold in lots, a lot can consist of 1, 10, 1000 or 10,000 securities. If a share is worth 10 rubles, and a lot is 1000 shares, it will cost 10,000 rubles.

You must pay a commission to the exchange and the broker for the transaction. For example, when buying shares for 26,500 rubles in Sberbank, both commissions will be 35.6 rubles. When selling, you need to pay the same.

7. Taxes and benefits

On the income received on the exchange, you need to pay income tax at the rate of 13%. It is held and paid by the broker.

You do not need to pay income tax if you own the shares for at least three years. But there is a limitation: for three years, you can not pay taxes on income up to 9 million rubles.

It is also possible to open an individual investment account (IIS). Every year it can be replenished by 400,000 rubles and receive an additional tax deduction of 13% (52,000 rubles).

How to start investing: useful tips for beginners

Start from self-education. Without understanding the basics of how the economy in general and the stock market in particular, investments are unlikely to be successful. 

Of course, you can use a trust management service – when you give money to a professional investor and he invests it without your active intervention – but it is usually quite expensive. So if you are a novice investor without big budgets, you will have to figure it out yourself.

Determine the amount that you are ready to invest in Russian stocks – the initial budget and how much you are ready to spend regularly on this later, if you are ready in principle.

Formulate a goal. It will help determine the strategy of behavior in the stock market: in what proportions to collect a portfolio, how often to sell and buy assets, etc. 

Beginners are advised to designate a specific goal – not just “I want to make money”, but “to accumulate such and such an amount for real estate / child for education / retirement”, etc. 

The longer the investment period, the lower the risks. At the same time, different portfolios can be collected for different purposes.

Assess your own willingness to take risks. To do this, for example, you can take a risk profile test on the Moscow Exchange website. Large brokers also, before opening a brokerage account or immediately after, offer to pass similar tests in order to understand what kind of portfolio drawdown you are willing to tolerate. 

The choice of assets also depends on the readiness for losses. After all, the higher their potential profitability, the higher the risk.

Choose a broker. Private investors cannot trade on the stock exchange on their own – a broker is needed for this. He will open a special brokerage account, and now with his help you can buy and sell the selected assets.

Above were the technical steps. What else do you need to remember?

Don’t invest your last money. So that in the event of force majeure, you do not have to urgently sell assets and withdraw money from the brokerage account. Plus, experts from the Central Bank on financial literacy recommend keeping some of the money in conservative instruments, like the same deposits. If only because the state guarantees the safety of the latter up to 1.4 million rubles.

Don’t invest borrowed funds. On the stock market, it is possible to trade not with your own money, but using the funds of a broker (margin trading).

Diversify your portfolio. Don’t focus on buying only one type of asset – the same stocks. At the school of the Moscow Stock Exchange, beginners are advised to make a portfolio of profitable, but more risky in the short term, stocks and less profitable, but also more stable bonds. 

The diversity of the portfolio will compensate for the fall of one asset if it suddenly occurs. Plus, diversify within a set of assets of the same type. That is, buy stocks of different companies from different industries.

Don’t invest in what you don’t understand. Otherwise, there is a high probability of incorrectly assessing the risks.

Try not to panic or succumb to the mass sentiment of buying or selling assets. The stock market is obviously risky and often unpredictable. It is important to stay in the know, but not to react impulsively to them.

What is an investment portfolio? And how to assemble it?

Essentially, a portfolio is the same long-term strategy that involves investing in different asset classes. At the same time, in a general sense, your financial portfolio can be called all the assets you have – real estate, cars, currency, precious metals, etc.

The composition of the investment portfolio reflects the willingness to take risks: for example, the more shares it contains, the more aggressive it is, and vice versa – the more bonds, the more conservative it is.

The first option may be suitable for long-term investments, because historically, in the long term, the stock market shows more growth. The second option, on the contrary, is preferable for tasks for a relatively short time in which you do not want to take risks.

You can use the “age rule”, which says that bonds in your portfolio should be as old as you are. The shares, respectively, are 100 minus your age. That is, if the investor is 30 years old, then there should be 70% of stocks in the portfolio, and 30% of bonds. There are other calculation formulas, but the meaning of the rule is the same – the younger the investor and the more time he has to achieve the goal, the more he can afford risky, but more profitable in the long term assets – stocks and fewer more reliable, but less profitable – bonds. This ratio should change with age.

This rule is often criticized because it does not take into account the investor’s inclination to take risks and implies that the goal is always long-term (for example, ensuring a comfortable old age). But the general principle can be modified at any event horizon – as you approach your goal, reduce the share of stocks in your portfolio.

Pained by financial indecision? Want to invest with Adam?

Financial Planner - Adam Fayed

Adam is an internationally recognised author on financial matters, with over 252.9 million answers views on Quora.com and a widely sold book on Amazon

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