Table of Contents
How to invest in stocks? Every novice investor certainly asks himself this question. Stocks can bring a lot of profit, but there is no denying that they are risky financial instruments. Starting the adventure of investing in the stock market, it is worth learning what stocks are and what risks are associated with them.
How to invest in stocks?
In order to find out how to invest in stocks with it is necessary to first learn what exactly these instruments are. Stocks, also known as shares in companies, allow you to buy a part of a company along with all the benefits and risks that come with it.
Shares of listed companies are bought on the stock market, as well as in either public or private issues. However, small investors will usually do it the former way, i.e. by buying back already listed shares from other listed investors.
Why should you choose to invest in shares of a particular company? First of all, because in order to take part in the company’s success over time, and to enjoy the increase in the share price of a particular company, as well as the dividends that the company will pay. Of course, there are many companies on the market, and there is no telling which one will succeed. Choosing the right one depends on knowledge, experience, skills and a bit of luck.
What are the types of shares?
With regard to the manner of transfer of ownership, a distinction is made:
- Registered shares – only the individual or legal entity named in the documentation has the right to it. Usually the holders of such shares are the founders of the company. When it comes to investing in registered shares, the company’s board of directors is required to maintain a share book, in which the details of the person who is entitled to the shares are entered. They cannot be sold or bought on the stock market, as they have individual, distinctive characteristics, such as not being standardized,
- Bearer shares – are the opposite of registered shares. The right to them is vested in each person who owns shares, since the shareholder’s data is not in the share document, so they are not tied to a specific share. Bearer shares must be paid in full before they can be taken up,
By the form of coverage, a distinction is made:
- Cash shares – are covered by cash contributions. They are issued in exchange for cash contributions, which are paid by shareholders. They are characterized by the fact that they can be issued after partial payment. Until full payment, they are registered shares,
- In-kind shares – they are covered by a non-monetary contribution. When it comes to investing in the stock market in these shares, they are issued for in-kind contributions, which can be either real estate or legal and intangible assets. Until the approval of the financial statements and accounts for the second fiscal year by the general assembly, they are registered shares,
As for the cultivation of shareholders, we can distinguish:
- Ordinary shares – each holder of a share has identical rights that derive from it. They give their owners such rights as the right to attend a general meeting of shareholders together with the right to vote, subscription rights, the right to dividends or the right to sign assets. As for investing in ordinary shares, they represent fractional ownership of the share capital and can be traded on the stock market,
- Preferred shares – by virtue of its holder, the holder may receive certain privileges, such as priority in the payment of dividends or greater voting weight at general meetings. As for voting privileges, a shareholder may be entitled to two votes per share.
How to buy stocks?
As far as the technical point is concerned, it is very easy to buy stocks, although there may be some problem in choosing the right investment strategy.
To buy shares on the stock market, you first need to file an investment account with a brokerage house, which is licensed by the financial supervision. Such an account allows you to make transactions to buy and sell securities and other financial instruments. Then to the brokerage account, the owner must deposit money. The investor himself should specify the capital he will allocate to invest in the stock market. After this, the first order can be placed. The entire transaction can be carried out entirely online.
What is the real value of shares?
How to invest in shares? It is worth knowing that each share has its nominal value, which is calculated by dividing the company’s share capital by the number of shares issued. In subsequent issues, shares must have the same denomination, while the minimum nominal value of the price, cannot be less than one penny.
The selling price of shares on the primary market is the issue price, which cannot be lower than the nominal value of the shares, while the market price, or actual price, is the price at which an investor can buy shares on the secondary market. The actual price is the stock market price, that is, the price to be paid for a particular security on the secondary market or in over-the-counter trading.
Read also: Investing in gold
Current stock prices, or stock prices on the stock exchange, are determined on the basis of brokerage orders, which are transmitted to the stock exchange and result from the development of demand and supply for shares.
How are stocks different from bonds?
Investing in stocks and bonds is very popular. And how do the two financial instruments differ? The key difference between stocks and bonds is that a bondholder has no rights over the issuer. This includes such rights as joint ownership, dividends or the right to attend general meetings.
As for the practical side, a person holds shares, he has the right to decide the fate of the company. But on the other hand, his earnings or losses depend on the company’s listing on the WSE. This means that the shareholder does not earn interest on the stock, unlike the owner of bonds – the latter earns from the interest rate that is imposed on the loan taken out. Its amount depends on the financial condition of the specific organization.
Besides, bonds are issued by the Treasury, while shares are issued by either private or state-owned companies. A bond issued on the stock exchange, automatically becomes a share.
Risks associated with owning new shares
When deciding to invest in stocks, you should be aware that they are relatively risky financial instruments. The risk associated with a particular stock, depends on the company that issued it, as well as the market. There are two types of risk:
- Systematic risk – is related to the general situation that prevails in the market, and affects all market participants at one time. This, unfortunately, cannot be prevented in any way. Systematic risk, for example, can be associated with a downturn in the economy,
- Specific risk – making money on shares is also associated with this type of risk. It is related to the situation of a specific company and depends on the decisions made by the company. The risk increases when a company introduces a new product or enters a new market, or is taken over or in poor financial condition. To minimize this risk, an investor should properly diversify his investment portfolio. He should be interested in companies that are different from each other, i.e. from different industries, different sizes, etc. For the reason that other factors will affect them, then even when he reaches a decline on the shares of one entity, he can still gain on the others.
How to invest in stocks? Investing in foreign stock exchanges.
The place where you can buy and sell shares is the stock market. Currently, making all transactions has been computerized – investing in stocks is done remotely. Below are some examples of stock exchanges and the countries where they are located:
- Warsaw Stock Exchange – has been in existence since 1991,
- Warsaw NewConnect, which has existed since 2007 and is an alternative market to the Warsaw Stock Exchange. It is mainly for small companies and new technology companies,
- New York Stock Exchange – in terms of capitalization, it is the largest stock exchange in the world. It is located in New York on Walk Street. Major giants such as Coca-Cola and General Electric are listed there,
- NASDAQ – this is the second largest stock exchange in the entire world, also located in the United States. It focuses in particular on technology companies such as Apple,
Due to the development of technology, access is now very easy. High competition among brokers has forced the offering of new markets, so many brokers offer access to markets, including XTB, Degiro. When it comes to investing in the stock market, commissions have also dropped significantly, so more and more service providers are offering access to investing in stocks completely commission-free.
When to buy and when to sell stocks – different philosophies related to investing in stocks
It is difficult to find even 2 people who would make investments in the stock market in such a way and follow the same set of rules. However, there are 3 trends to which a huge number of stock market investors belong. These are, in turn:
- Proponents of the efficient markets hypothesis,
- Technical analysts,
- Fundamental analysts.
Efficient markets hypothesis
This is a theory formulated by Eugene Fama, according to which stock prices reflect all available information about them. Fama draws the conclusion that it is impossible to outperform the average of the market, and the opposite of luck.
Therefore, it is not worth trying, as you will only lose a lot of money on commissions. According to the premise of Fama’s followers, making money in the stock market start with a properly diversified protel of shares o hold it regardless of what happens in the market. Looking at the historical perspective, this type of approach yielded about 7% annual return before taking inflation into account.
This is the approach with the most research behind it, and it is also the one most accepted by the academic world. In addition, investing in stocks based on this philosophy has become increasingly popular among investors, who invest according to this concept in stocks through low-cost funds such as ETFs.
A big advantage of this type of approach is its simplicity. It can be used without having any knowledge of how the stock market works. It is also not very time-consuming. All that is needed is to buy shares in ETFs from time to time with new capital. This allows the investor to invest until retirement or any other financial goal he has set for himself.
This group disagrees with the key premise of efficient markets, as they believe that this is how an imperfect market prices stocks. According to them, there are periods when stocks are relatively cheap relative to the business value of the company. In this case, investing in stocks is based on buying precisely cheap stocks, and periods when stocks are relatively expensive are a good time to sell them.
Fundamental analysts have a mindset similar to businessmen. Looking for the best bargain, looking to buy thriving companies for little money. As a rule, fundamental analysis involves estimating the true value of a company. To calculate this, fundamentalists pay attention to such issues as:
- The macroeconomic environment of the company – the dynamics of the markets in which the company operates, including demand for the company’s goods, GDP growth,
- The company’s competitive environment – the company’s competitive advantages, its positions, operating costs, financing method or unique technologies,
- The company’s management – whether the personnel who make key decisions at the company are properly trained and competent in their duties,
- The company’s financial statements – on the basis of these, those basing their stock investment on fundamental analysis, assess the dynamics of revenue and cost growth, as well as issues that relate to debt, and liquidity. They pay attention to cost structure, stock turnover time, profitability ratios, as well as other financial issues.
How do you invest in stocks? Investing in the stock market in the case of technical analysts involves using a price chart and possibly a stock volume chart when selecting stocks. Some of them use indicators that draw additional lines and levels on the charts. The most popular technical analysis indicators are:
- Moving averages,
- Bollinger Band,
- Stochastic Oscillator,
- Ichimoku Kimko Hyo,
In addition to these, price formations, candlestick formations, trend lines, support and resistance levels, etc. are also used. These techniques are intended to be used by technical analysts to predict future price movements.
How to invest in stocks – some practical tips
Investing in the stock market unfortunately involves the risk of losing a lot of money. It is impossible to eliminate this completely, but there are several ways to reduce investment risk. How to invest in stocks?
The method of small steps
In the financial market it is useful to have theoretical knowledge on how to invest in the stock market. It can be acquired by reading books and textbooks, as well as educational materials that can be found on the Internet. It is worth paying attention to get knowledge only from professional sources and experienced experts.
Having a solid theoretical basis, you can try to use this knowledge in practice. However, the adventure with the stock market should be started gradually, with small investments, and over time, having more and more experience and knowledge, you can increase the amounts invested.
Risking sums that can be lost
Investing on the stock market is characterized by relatively high risk, compared, for example, to investing in real estate or bank deposits. Thus, an investor must reckon with the fact that his snap investments may not go as he would like, and he may lose some or even all of the funds. For this reason, it is best to invest surplus funds that are not needed to meet basic needs.
At the same time, it is important to remember that in the stock market the time horizon is usually long-term. Therefore, it is best to allocate for investment only those funds that represent a surplus of the household budget and can be frozen for a long period of time. Unfortunately, counting on the fact that the investment will bring large profits in a short period of time can be illusory.
Of course, when it comes to investing in the stock market, it is worth taking advice from more experienced investors. But ultimately, the investor himself must decide how to invest. And he will be responsible for this investment decision. Drawing knowledge from specialized sources and knowledgeable specialists is very important, but it is not always worth following the crowd – they too are sometimes wrong.
Investing in what you know
Beginning investors wonder what to invest in the stock market. However, there is no one-size-fits-all answer to this question. The stock market involves many variables, so financial instruments that are worth investing in now, the very next day may turn out to be those in which it is not worth investing. In particular, however, one should not invest in those instruments with whose mechanism one is unfamiliar. Otherwise, a person deciding to invest in the stock market may not even realize what the profits depend on and what risks he or she is taking. Among the complex financial instruments are structured products.
Diversification of the investment portfolio
This is a basic principle associated with the stock market. Diversification reduces investment risk and also reduces volatility in the value of the portfolio. It also allows exposure to different areas of the economy that the stock market covers. How to get started? In particular, an investor should analyze which assets to invest in to begin with.
Playing the stock market should not only include stocks, but also bonds and other financial instruments. The structure of the investment portfolio should depend on the investor’s risk appetite. In doing so, it is good to apply geographical diversification. This includes financial instruments that come from different parts of the world, or at least Polish companies that operate abroad.
It is better not to make money than to lose
A person considering how to start investing in the stock market should know one more important rule. Greed can sometimes be a bad advisor. The best way to protect capital is to carefully analyze a particular investment before making a decision, so that the potential profit will compensate for the risks the investor is taking.
Overconfidence, such as that resulting from previous successes, is often lost. In such cases, investors are often inclined to be too risk averse and to report warning signals. They often play against market trends or hold losing positions, leading to the loss of some or even all capital.
Overconfidence is dangerous, especially for people who begin their adventure with the stock market during a bull market, when most stocks are rising strongly. At that time, investors may think that they are infallible and know very well how to invest in stocks, and that it is a very simple activity that depends on their skills, not market conditions. It is important to remember that every bull market ends at some point, and with the onset of a bull market, unruly investors very often lose the most.
Sticking to goals and strategies – no competition with others
Investing in the stock market is not a race. Every investor has different goals and is in a different position. At the very least, he or she has a different financial situation, is of a different age and has a different propensity to take risks. For this reason, comparing yourself with others often makes no sense, and can only negatively affect your chosen investment strategy.
Read also: Online stock market simulator
Learning from mistakes – preferably other people’s.
Investing in the stock market involves constant learning. It is best to learn from previous mistakes, learning from them in such a way as to not make them again. Great of such mistakes are repeated by most investors. Therefore, when starting your adventure with the stock market, it is worth asking yourself what to do to protect yourself from such mistakes.
Stop loss and take profit orders
The human psyche often does not allow you to close a position as planned, and as a result, investment results suffer. When a stock is falling, one may feel uncomfortable with posting a loss and receive a position for too long, hoping that the kids will rebound in a while. On the other hand, when the price rises, investors very often close their positions too early in order to feel the joy of the gained profit. To avoid such mistakes, stop loss and take profit orders are useful, which automatically close the investor’s position at a predetermined moment.
Read also: How much can you make in the stock market
Cheap stocks are not cheap without a reason
The valuations of many listed companies may seem attractive at first glance, if only given the low values of popular market ratios, i.e. such as price-to-earnings or price-to-book value. However, very often they are not so cheap without any reason.
The reasons may be additional risk factors, as well as discounts, e.g. due to low trading liquidity of certain securities, high debt or poor information policy. In addition, the market indicators that are reported on online services tend to focus on the past rather than the future. However, the issuer’s prospects may be weaker, as reflected in the stock price.
How to invest in stocks? First of all, it is necessary to acquire adequate knowledge of the instrument, as well as the investment risks that are associated with it. It is also important to choose the right strategy and stick to several important principles, such as, for example, diversification of the investment portfolio. Once you know how to invest in stocks, you can move on to practice and set up a brokerage account that allows you to make trades.