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How to invest in the stock market? This question is certainly asked by all novice investors. In order for investments in stocks to be profitable, a little luck is necessary, but also a solid portion of knowledge. Therefore, it is worth knowing where to practice and brush up on your skills, as well as where to start investing in the stock market.
How to invest in the stock market?
A stock exchange is a place where individuals and institutions come together to either sell or buy stocks, bonds, certificates and other securities. The source of profit for the investing person can be dividends, interest or funds that are generated by the increase in the price of the purchased asset. It can also be said that the stock market is one of the most important providers of capital for companies.
In simple terms, instead of applying for a loan from a bank for business development, the owners put them on the stock market and sell some or all of their shares. These are precisely the shares. Thus, by buying them, a person becomes a co-owner of a certain company.
Who can make money on the stock market?
In fact, anyone can make money on the stock market. However, he should have a solid theoretical background. Without this, it is not worth starting to invest in the stock market.
How to make money on the stock market? First of all, you should gain a thorough knowledge of investing. Many of the novice investors forget the importance of theoretical preparation. It is worth analyzing industry materials, reading books and blogs paying attention to such issues as bull markets, bull markets, business cycles or the rules of buying and selling stocks. It is also worthwhile to regularly follow news about the stock market and devote sufficient time to familiarize yourself with listed companies.
With the term portfolio diversification, a novice investor is bound to have met when starting to invest. This is the first and very often the most difficult lesson for investors – it is about risk management.
Investors find it difficult to make the right decisions in crisis situations. A properly diversified portfolio contains stocks from many different sectors. According to the claims of American researchers, a portfolio should contain a minimum of 12 different stocks. This reduces business risk.
Investment risk is associated with a collapse in the value of a stock, when a company is in financial trouble, for example, or no longer meets investors’ expectations. Market risk, however, is not covered only with diversification. One is vulnerable to economic recession all the time. This means that in times of economic growth, the investor gains.
Payment of dividends on important importance for investors. The first way how to invest in stocks is to speculate on price increases. The second is the profits that come from dividends. And a dividend is a distributed portion of a company’s profit that belongs to shareholders. It can occur either in monetary form or by receiving shares in a specific company.
The term risk-reward is very common in the sphere of trading and investment in the stock market. In this case, it is about the ratio of the risk of loss and the possibility of profit that an investor can count on.
If an investor wants to succeed in the stock market, he should keep this principle in mind. For example, if he invests in a $100 stock, he expects the price to rise to $130 – assuming he wants to sell at that point. His potential profit is $30. He opens this position and sets a stop loss at $90. In this situation, his maximum loss is $10 and his risk-reward ratio is 1:3. His potential profit is 3 times the loss.
How to invest in the stock market – investing in the virtual stock market
After learning stock market theory, it’s time to practice. A good training before investing in the real stock market, is a stock market game simulator. Trying one’s hand at the virtual version will train the potential investor and allow him to get acquainted with the rules of the game in practice. This will allow the investor to gain valuable experience without risking the loss of funds.
Read also: How to start investing in the stock market
It will allow him to test his reactions on his own in stressful and crisis moments, such as when a certain amount of money is lost from his wallet. He will also be able to keep track of the change in the value of his investment portfolio and compare the results with the participants of the game.
How to invest in the stock market – setting up an investment account
After gaining experience investing in the virtual world, using a simulator to invest in the stock market, it’s time to set up a real investment account. This account is necessary for selling and buying shares in companies. An investment account, also known as a brokerage or brokerage account, can easily be submitted over the Internet, without leaving home. Sometimes banks offer investment accounts in addition to a bank account. Wanting to keep paperwork to a minimum, it is worth inquiring about such an option at your bank.
How to choose the best brokerage account?
When deciding to open an investment account, it is worth paying attention to:
- The amount of commission on transactions for buying and selling shares online. Ideally, it should be no more than 0.5 % of the transaction amount,
- The amount of commission for transferring from the investment account to a personal account or another bank account,
- The amount of the annual account maintenance fee. Such a fee should not be more than a few USD per year,
- Access to a platform that allows you to track and perform operations in real time,
- Access to an informative platform that contains up-to-date analysis and expert opinions.
When an investor signs a contract with a financial institution and establishes a brokerage account, he will need to fund it with additional funds. After making the transfer, he will be able to create either a first buy or sell order. Under the former, the investor will receive shares in exchange for cash, and under the latter, he will receive money for selling shares.
In order to facilitate the execution of transactions and automate the entire process, it is worthwhile:
- decide in which shares to invest the money,
- determine how many shares the investor needs and what price he is willing to pay for them,
- set the validity period of the order,
- set your own preferences, which are to execute the transaction in whole or in parts.
How to make money in the stock market?
Successful investment in the stock market is considered relatively difficult. In order to make a profit, of course, at the right time you need to sell shares of some companies, buying others instead. This raises the question – when is it best to sell and when to buy? It is difficult to give a clear answer to the question – how to make money in the stock market?
Using various techniques and investment strategies, you can achieve very good results from investing in the stock market. It is very important to develop your own investment strategy. However, it can be developed only after some time, until the investor gains experience and sees which techniques and strategies bring the best results.
There is no one-size-fits-all investment technique. Everyone is different and reacts differently in different situations. Therefore, each technique should be tailored to each individual.
Setting up an investment account
In order to invest in the stock market, it will be necessary to open a brokerage account at one of the offices. It is very easy to set it up and can easily be done online. Setting up an investment account is similar to setting up a bank account.
Once the brokerage account is set up, all you have to do is deposit funds, and you can buy shares by filling out a stock market order.
How much money to allocate for investment?
How to invest in the stock market? After setting up a brokerage account, you should consider how much money you want to allocate for investing. Initially, it is best to allocate as little money as possible. These will allow you to get used to the conditions of the stock market. Later, you can gradually increase your involvement in the stock market. There is no minimum amount you need to spend on investing in the stock market.
The only barrier is the minimum commissions. Typically, the minimum commission is between $3 and $5. At most brokerages, the average commission is 0.29%. Of course, if the investor enters the company with less capital, nothing like this will happen. He will only lose about $2-3 on the minimum commission, which is not a large sum.
Learning about and choosing a method to analyze companies
At the latest, you need to familiarize yourself with the basics of technical and fundamental analysis. Over time, the investor will get to know which type of analysis will appeal to him the most. The stock market for beginners should not be treated as a form of gambling. To avoid this, one should educate oneself all the time and gain experience in the real market as well.
Technical analysis is a scientifically researched method of analyzing a company’s chart. Through past events, you can learn how investors reacted to certain events or price levels. In a nutshell, you can put it this way: the more investors sold/buy a certain stock at a particular price, the more likely it is that such an event will be repeated when the stock price falls or rises to previous price levels.
Fundamental analysis, on the other hand, as the name suggests, is based on fundamentals, i.e. the health of the economy and the condition of the issuer of the security. It is assumed that the better the financial condition of the issuer, the higher the value of its shares and the more attractive it is to the investor. Fundamental analysis uses information about the economy and financialized information about companies.
This analysis is not used to evaluate the profitability of investments in the short term. In the long term, which has been found empirically, there is a strong correlation between a company’s earnings growth and its market valuation. For this reason, fundamental analysis is used for investments with a long time horizon. It is used to search for companies whose shares will reach higher prices than they currently do.
Several strategies that allow you to make money in the stock market even in the event of declines
However, these methods are not easy. Using them will require acquiring new knowledge, analyzing the market situation or individual companies.
Investing in multiple markets.
This is perhaps the most obvious way to avoid losses in a particular financial market. If an investor focuses only on the Polish stock market, local downturns will hit his investment portfolio hard. He should be so open to other markets that will behave differently than the domestic one.
The number of financial markets is very large and one can always find one that will give a solid rate of return. The practical problem is that this type of analysis is easiest to make after the fact. Predicting which market will give better results than others is basically impossible. However, partial exposure to other markets is a good way to reduce the risk of loss from a portfolio.
What are the types of financial markets?
Financial markets can be divided by the type of asset (bonds, stocks, currencies, etc.) and by geography (developing and developed markets). There are still alternative markets – works of art, real estate, or recently very popular cryptocurrencies.
Instruments that allow you to make money on a falling market
Even when an investor’s main market is falling, he can still make money all the time. Financial markets offer various instruments that allow you to make money when stock prices and indexes are falling. This type of opportunity is provided, for example, by futures, forward contracts, some options or investment certificates. Such financial instruments are collectively known as derivatives. Their first purpose was to reduce price risks for producers and raw materials, but over time they have become very popular among speculators, who today generate most of the turnover in the derivatives markets.
However, it should be remembered that investing in the stock market with these types of instruments is a big risk. Making money on declines is an optimistic scenario, but their inappropriate use can also result in the opposite situation, i.e. one where the investor will suffer losses in situations where the market will rise.
Waiting out unfavorable economic conditions outside the market
This is the simplest method that limits losses when stock markets fall. At such a time, an investor can withdraw all or part of his funds from his main market. When they fall to a level that the investor finds attractive, he can return to the market and take advantage of reduced stock prices. This type of flexibility is the most important feature of funds that follow an absolute return strategy.
And what to do with the funds after withdrawing them? The investor can choose from a wide range of instruments to preserve the real value of the capital, such as government bonds. One can also invest in government bonds on their own.
Searching for market opportunities
For investing in the broad stock market, an alternative is also to train yourself to find market opportunities, which is sometimes called an opportunistic approach. This involves acting on the assumption that even during a downturn there are companies that will gain a lot in value.
An investor may specialize in a particular market segment and within that segment look for market opportunities that allow higher returns. The simplest example of such sectors is computer game manufacturers. However, it is important that such a sector, in which the investor will want to become an expert, should offer sufficiently high growth potential. It is better to choose companies in growth industries than those operating in established sectors, e.g. energy, banks. However, if the investor has expertise in other areas, he can also think about more traditional sectors of the economy.
Investing on market events
How do you invest in the stock market? One can use the strategy of earning from market events, i.e. mergers, mergers or public calls for shares. Taking the right position at the right time, can bring a lot of profit, if the investor correctly predicts the scenario in which the events that are associated with the transaction will unfold.
In the current market conditions, for example, an investor may try to look for companies that will be subject to tender offers. This is usually associated with the payment of a relatively high premium above the market price, to the shareholders of the target company. There are also companies that are related by capital, and in this case you can also try to determine the scenario of events and try to earn something from it.
How to invest in the stock market – useful tips
Below are some useful tips to help you take your first steps in the stock market.
Invest only the amount you are able to pay back.
It is best to invest in the stock market with savings that you are able to pay back. This is an old rule of experienced investors. No matter how confident an investor is about a particular company and how much his colleagues have earned from it, the risk of sizable losses is a necessary part of investing in the stock market.
Constantly expanding knowledge
Even if an investor already has a basic knowledge of how the stock market works, he should not stop there. If an investor wants to be more successful, he needs to stay up-to-date all the time. Successful investment in the stock market equals constant expansion of knowledge. To become a master, one should constantly learn, improve his competence, be open to new experiences and knowledge.
Do not be guided by emotions
How to invest in the stock market? First of all, without emotions. Maintaining a rational approach is one of the basic principles of a good investor. When making decisions on the stock market, you should be guided by cool calculation, putting aside emotions.
Not buying at peaks
If stock prices are reaching peak positions, it is best to refrain from buying them. There is a high probability that the result of such a situation will be a drastic drop in prices. On the other hand, if the company’s shares have reached a significant decline, this is a good time to buy them.
Betting on companies with liquidity
If an investor cares about being able to sell shares at any time, he should invest in those from companies with high liquidity.
Safeguarding against large losses
Investing in the stock market especially at the beginning should be protected against the risk of very large drops. To do this, you should set a protective order, or stop loss, in your brokerage account. This allows you to determine the level to which the investor accepts losses.
Learning from mistakes
The ability to learn from mistakes is one of the key principles of investing in the stock market. It is worth remembering not to take failures personally and treat them as failures. Instead, it is worthwhile to learn from them and effectively do your homework, which will make the investor richer, and it is not just about the contents of the wallet.
How to invest in the stock market – investor’s glossary
People who invest in the stock market use a specific language that is not understandable to the layman. Therefore, it is worth learning some basic terms in order to know how to successfully invest in the stock market:
- Common stock – a security that is issued by a company that is a joint stock company. A person who acquires shares, becomes a co-owner of the company,
- Shareholder – is the holder of shares and co-owner of the company,
- No dividend – information that is given in addition to the stock price of shares. It means that buyers of shares are not entitled to subscribe to a new issue,
- Bear, or bear – symbol of a downward trend,
- Bull – symbol of an upward trend,
- Share issue price – the price at which shares are sold on the primary market,
- Custodian – a bank engaged in the safekeeping of mutual fund assets by maintaining their register,
- January effect – a term that describes increased purchases of shares by portfolio capital, which usually occurs at the beginning of the calendar year,
- Issuer – an entity that issues securities in its own name,
- Bull market – a long-term, strong upward trend in the market,
- Derivative – an instrument whose price depends on the price of the underlying,
- Fixed rate bonds – bonds with a fixed interest rate,
- Floating rate bonds – the interest rate changes more often than once a year and depends on the yield of short-term financial instruments,
- Primary market – sale of shares to the first owners by the issuer,
- Secondary market – secondary trading of shares by participants who purchased shares in the primary market from the issuer,
- Rate of return – the increase in the value of an investment, which takes into account dividends or interest and subscription rights and is expressed as a percentage,
- Trading value – the product of the price and the number of securities sold and bought,
- Stop loss order – an order set to minimize losses.
Investing in the stock market can be a great experience , but it can also generate great profits. Starting an adventure with the stock market is not at all as difficult as most people think. Internet access to an investment account allows you to manage your funds without leaving home. On the other hand, the costs of being an investor are usually limited to commissions on the value of transactions and tax on profits. Finally, it is worth remembering that different banks and brokerage houses offer varying terms for brokerage accounts.
How to invest in the stock market? The path described above is primarily aimed at seekers. Together with the increase in investment knowledge and experience, requirements, needs and awareness grow. If these are accompanied by upward returns, the investor can be sure that he is taking the right path.