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Investing in stocks is done through transactions on the stock market. By disposing of shares, companies gain capital for further development, and the individuals and companies that acquire them become shareholders. The investor’s goal is to benefit financially from the profits made by a certain company.
Investing in stocks – what exactly is it?
To know how to invest in stocks, you must first understand what stocks are. These are securities that are issued by a joint-stock company. The primary purpose of the company is to obtain funds for further development. People who hold shares become shareholders and co-owners of the assets of a certain company.
By purchasing securities, shareholders acquire the right to share in the profit that a particular company earns. It is worth knowing that investing in stocks is associated with risk, so those who intend to engage in it should acquire at least basic knowledge of the subject.
How to start investing in the stock market?
Investing in stocks should be preceded by acquiring knowledge of the market, as well as the rules of its operation. First of all, it is necessary to set up a brokerage account, through which the investor will be able to make transactions. It is worth spending some time beforehand to choose the right one, analyze all the costs, and make sure that the broker is licensed.
What is a stock exchange?
A stock exchange is a market where, in an organized manner, investors can enter into transactions for the purchase and sale of securities, as well as other financial instruments. The stock exchange aims to bring together in one place all those who are interested in trading securities. This makes it possible, on the one hand, to ensure adequate liquidity in the market, as well as to clarify a reasonably effective price.
Members of the stock exchange are brokerage houses, and it is with their help, it is possible to invest in the stock market, that is, to make stock transactions. It is a joint-stock company, and in the area of conducting a regulated market, it is subject to strict control by the Financial Supervisory Commission.
How to buy stocks?
To access the stock market, an investor must open an investment account. In the past, in order to buy or sell securities, traders needed the help of a stockbroker, contacting him, for example, by telephone. Currently, brokerage companies offer easy-to-use investment platforms. This has made investing in stocks easily accessible, and traders can now buy stocks with just a few clicks.
What has not changed, however, is choosing the right broker. A good service provider should not only enable stock trading in a cheap and convenient way, but also support its clients in the area of education and give them access to the latest market news. Choosing the right broker is an important decision for any investor.
After opening and funding the investment account, the investor can make the first transactions and monitor his own positions. It is also advisable to familiarize oneself with the investment platform in advance. Service providers usually offer good tutorials, but they also customize their trading platforms in such a way that they are increasingly intuitive.
When do stock prices rise and when do they fall?
Stock prices are subject to the same laws of supply and demand as other services or goods. If a company’s services or products are successful, stock prices tend to rise. Investing in stocks is related to choosing stocks with the right growth potential. By investing in stocks, the investor buys a part of the company and becomes a part-owner, so he must believe in the future development of the company. In order to understand the mechanism of either rising or falling stock prices, it is important to remember that the price of a stock depends on expectations that relate to the future development of the company.
The current price already includes public information about recent events that are related to the company, but also about its current situation and current expectations. There are also other factors that do not always depend on the company, but can affect the share price. These include external factors such as inflation, the political situation, interest rates, economic cycles, tax burdens or probably unpredictable events such as war.
Risks associated with investing in stocks
Stock prices change every day, and the investor’s return or loss on investment also changes every day. At the same time, there are a lot of factors that cause the stock market price to constantly change. On the one hand are factors that are closely related to the company, such as business changes, new contracts, etc. But on the other hand are factors that are related to how investors view the prospects of the economy and the industry in which the company operates.
In investing in stocks, elements such as inflows and outflows from mutual funds that require either sales or purchases are also important. The risk factors are really quite numerous and unpredictable. All of them make the ultimate risk of investing in stocks relatively high, but are compensated by large expected returns.
Strategies for investing in stocks
Investing in stocks is very flexible, so it allows the investor to adopt different strategies. As a result, each can appropriately adjust the stock portfolio to his own expectations, needs and preferences.
Value investing
This strategy involves searching for undervalued stocks, buying them and holding them for a long time in the investment portfolio. Skillful use of fundamental analysis is important in this strategy. It assumes buying rather well-established companies with strong financial results, whose price has fallen below its real value for temporary reasons.
A portfolio created in this way, should be properly structured internally. It should contain companies from different industries, and provide exposure to a variety of risk factors.
Investing in value stocks is a long-term strategy, although it is also possible to use it for a few months. However, it is worth knowing that the use of this strategy requires dedication of time, especially at the beginning. However, it does not require close, continuous tracking of markets, as well as a constant time commitment. Its big advantage is that it generates low transaction costs.
Investing in growth
This is a strategy that involves investing in growth stocks and involves finding companies that have their best period yet to come. In this case, what is important is not the price of the stock today, and whether it is higher or lower than its true value. What is important is the business outlook that allows the company to improve its performance rapidly. This strategy can be long-term, although it is usually short to medium-term. However, it requires a good sense of the market.
Investing in dividend companies
As a rule, when investing in stocks, most of the return comes from the change in price. However, realizing such returns, requires selling shares, i.e. exiting the investment. There are investors who would like to keep their portfolio as unchanged as possible, and they also care about realizing profits on a regular basis.
Why invest in stocks?
Investing in equities is considered to be relatively safe, although also subject to some risk, just like any other asset. The advantage of equity investments is often the high liquidity of the markets, which allows you to either buy or sell shares at almost any time. Other advantages that come with investing in equities include low fees and the ability to personally manage a portfolio.
As for the disadvantages, they primarily include the inability to influence the company’s operations, little investor awareness, and the possibility of the company going bankrupt, in extreme cases, of course.
Long-term stock valuation
The main factor that makes investing in stocks so popular is long-term profitability. The key to successful investment is that the profitability of the investment must leapfrog inflation.
The possibility of systematic income in the form of dividends
One of the options you can earn by investing in stocks is the annual percentage appreciation of shares. The other option is regular dividend payments. Not every company pays a dividend and, of course, not every dividend is equal. Its amount is expressed in terms of a fixed amount per share and is one of the factors that affect the stock price. Its size usually depends on the company’s profits. However, there are companies that have no profits and do not pay dividends.
The payment of regular dividends is a highly desirable factor for investors, which in many cases can determine whether an investor will want to buy shares.
Diversification of personal finances
Some people may consider investing in stocks on the stock market as their main source of income, while others may consider it as a form of diversification of their investment portfolio. Investing in stocks, contrary to appearances, is not complicated and really has many advantages. An investor can benefit not only from rising stock prices, but also from regular dividends. So it’s no wonder that investments in stocks are increasingly popular.
What is a dividend?
A dividend is a grant in profit that is paid to shareholders by a company. Any investor who owns shares in a company that pays dividends is entitled to receive this dividend. The date and amount of its payment, is decided by the general meeting of the company.
How does a dividend work?
A dividend represents a share of profit from the operations of a specific company, which the company pays out to its shareholders. The amount of dividends is determined by the company’s dividend policy. One of the main factors that affect the dividend is the company’s profitability. The dividend can be steadily increasing, stable or variable, depending on the company’s profit. On the other hand, an investor should keep in mind that by paying dividends, the company loses its funds that it could have invested in its development and growth.
In the case of investing in stocks, dividends are paid on the so-called payday. For a shareholder to be entitled to a dividend, he or she must own the stock before the dividend payment date. The last day on which the shares must be held by a given investor is the so-called ex-dividend date.
Each company individually decides the ex-dividend date, and a shareholder can easily find information about it. The dividend payment is made by allocating the financial flow to the investment account of a specific investor. The company pays the dividend from its net profit after taxes. In addition to this, the dividend received is taxable to the investor as his own income.
How to buy stocks?
The following are all the steps and steps you need to take to start trading stocks.
Opening an account with a broker
The first step is to open an investment account. Without a service provider, an investor will not have access to the stock market. Setting up a brokerage account is as easy as a regular bank account.
In most cases, all you need to do is fill out a form, send scanned identification information, and the account will be set up within a few days. Once the funds have been transferred to his account, the investor can make his first transactions.
Market selection
After opening a brokerage account with sufficient capital, it’s time to choose the specific stock market in which the investor wants to invest his funds. One can choose stocks such as Apple, Google, Coca-Cola.
Getting acquainted with the platform
An investment platform is software that can either be installed on one’s computer or used as a mobile application on a phone or tablet. With the platform, an investor can buy stocks at a set price. It is advisable to choose the right platform that works quickly and efficiently, and has a number of useful features.
Timing of market entry
Entering the market is the first and most important step in trading. The right time to enter the market is very important in this case, even more so if the trader chooses a short time horizon. If a trader wants to invest for the long term, the timing of market entry is a secondary consideration. Although technical analysis can help, in the end it does not matter whether the investor buys at a price of 100 or 101. The general rule of thumb is that stocks should be bought when the price is low, but this may not always be successful, as sometimes an investor can lose investment opportunities if he waits too long.
In the case of short-term trading or even daily trading, the timing of entry is even more important. In such situations, different approaches to technical analysis are used. During day trading, the timing of entry is crucial and is usually decisive for profit or loss.
Diversification opportunities through so-called ETFs
An extremely popular type of equity investment, is investing in ETFs. These are similar to standard mutual funds, but are listed on an exchange. ETFs work by buying shares of companies, operating in a specific sector, and then these funds issue their shares, which are traded on the stock exchange. Investing in ETFs is a good way to buy stocks in a specific sector. With the help of ETFs, an investor can buy shares in oil companies, for example.
If for some reason an investor wants to speculate on the rise in oil prices, but does not want to buy shares of one particular oil company, he has the option of buying oil ETFs. The advantage of investing in ETFs, is that by diversifying, they cover the entire oil sector. The disadvantage, however, is the possibility of losing the assumed profits if the potential for shares in a specific sector, is not strong enough.
What are bonds?
Bonds are debt financial instruments in which the issuer, or one party, states that it is a debtor to another party, called the bondholder. The issuer, such as the Treasury or a company, undertakes to the owner of the bond, to redeem it under specific conditions. For the money borrowed, the consideration is usually interest, the amount of which is specified by the issuing document.
A special type of bonds, are zero-coupon bonds. In this type of bond, the remuneration is not interest, but the purchase of bonds at a lower price than the nominal price. Another type of bond, are variable bonds, which are issued by selected companies.
Investing in bonds – what is important to know?
The parameters you need to know when investing in bonds are:
- Issue price – is the price at which the bond is sold to the first owner at the time of sale,
- Interest rate – determines the amount of interest on the loan taken out. Typically, interest is paid regularly, such as annually or quarterly,
- Redemption date – the date on which the issuer is obliged to redeem.
Bonds are divided by issuer:
- Corporate bonds,
- Municipal bonds,
- Treasury bonds, which are issued by the State Treasury.
Is it profitable to buy bonds?
Bond yields depend on various factors. Among them, the interest period in particular is dominant. The profitability of investing in bonds, should be evaluated on an individual basis. Since the interest rate is lower than 3%, the return on investment will not be spectacular. In addition, for the duration of the investment, the funds will be frozen, so the investor will lose the ability to dispose of them for a while. In the case of 3-month bonds, this may not be so noticeable, but if the investor opts for 2-year bonds, the associated discomfort may be felt. However, it is worth appreciating that investing in bonds guarantees a certain profit.
How to choose the best bond?
This depends on what the investor expects. If he cares about a steady flow of cash, the best choice will be three-year floating rate bonds, since interest is capitalized and paid out every six months. While in the case of investing in bonds, the investor can afford to invest the funds for longer, it is better to bet on four-year index-linked bonds. With indexing, the investor gains confidence that inflation will not threaten his investment. However, if he can’t afford to freeze funds for such a long time, he can choose, for example, 3-month bonds. Much depends on the investor’s financial situation and the profit he expects to make.
How to invest in bonds?
First of all, the investor should consider how long he wants to invest for. Usually, the longer the interest period, the higher the profit. The second consideration is the type of interest rate – variable or fixed? In this case, one should be careful, as not all bonds protect against inflation. Investing in bonds can be a good idea, provided that the investor remembers to diversify the investment portfolio, that is, to buy bonds of different types and from different issuers. This applies to bonds that are issued by companies. In addition, when investing in government bonds, remember to hold them until maturity. Otherwise, you could lose some of the profit.
Bonds and investment risk
Treasury bonds are a safe investment. The only reason an investor could lose funds is if the country goes bankrupt. So the risk is minimal. If a trader decides to buy bonds from the secondary market, their prices may fluctuate, but they will not be significant. An alternative is to invest in bonds that are issued by local governments. Then there is a slightly higher investment risk. In addition to this, the investor should bear in mind that the purchase of bonds with variable interest rates, is associated with a profit that depends on an external factor, i.e. inflation. This risk will be eliminated if the investor opts for a fixed interest rate.
Investing in bonds – advantages and disadvantages
Bonds are widely available, which is a big advantage. They can be purchased online, and there are several types of bonds to choose from, so the investor can easily select those that meet his expectations. Among the benefits of this type of solution, also mention the low investment risk. Bonds are a sure, albeit low profit, which for some investors may be a disadvantage. It’s also worth knowing that if you choose a fixed-rate bond, you may find that your profits will be really low when inflation rises.
Redemption or conversion of bonds
The investor has options for bond conversion. This involves the possibility of extending the savings. In this situation, with the money from the redeemed bonds or part of them, the investor can buy any bonds available in the new offer. The redemption of a bond is the day on which it ends and the investor gains the right to withdraw the money paid, together with the interest due.
Stocks vs. bonds – the differences
Investing in stocks and bonds – investors often use these terms interchangeably, although they are not the same. When an investor acquires shares, he gains a share in the capital of a joint-stock company, that is, he is entitled to share in its profits, but also its losses. In addition, shares are issued by both the state and private companies. Investing in stocks carries a higher risk than in bonds, but the profit can be higher with stocks. It depends on the stock price of a particular company on the stock exchange. If an investor decides to buy bonds, he knows the profit in advance.
When buying shares in a company, whether they are subscriptions on the primary market before the IPO or securities of a company already listed on the Stock Exchange, the investor becomes a co-owner of the company. This entitles him not only to profits from the sale of shares after their price rises, but in particular to:
- Dividends – participation in the company’s profits, distributed to shareholders,
- Participation in general shareholder meetings and votes,
- Priority to buy shares in new issues conducted by the company.
When investing in bonds, the investor does not gain all these rights.
Corporate bonds vs. Treasury bonds
To invest in corporate bonds, individual investors are attracted by the prospect of higher returns compared to bank deposits or Treasury bonds. However, it should be remembered that corporate bonds are different from stocks, but also from Treasury bonds, which are popular among small investors. In the latter case, it can be said that the investor lends funds to the state. Thus, it can be treated as a more secure investment – as it is hard to have a situation where the state becomes insolvent and is unable to repay the bond obligations.
Corporate bonds should therefore be considered a riskier investment than buying government bonds. However, as in the case of stocks, for the greater risk, the investor receives the prospect of higher returns.
How to buy bonds?
Investing in bonds is not possible directly. It can be done through an intermediary, which is most often a brokerage house. Most bonds are issued to bearer, and over-the-counter trading of bonds is also possible – you can freely buy, sell and exchange them among yourself. However, then you need to make changes in the NDS register, i.e. report with the appropriate documents to the broker. So OTC trading comes down to finding the right counterparty.
Buying bonds through a mutual fund
Investors who have less financial resources can use an indirect method, namely the purchase of units in bond funds. This type of investment is a good way to diversify the capital held and thus reduce investment risk. It is worth knowing that funds do not purchase only one series of bonds, but can have hundreds of them. Everything depends on the investment profile of the fund.
How to choose the best investment platform?
Each investment platform is an online service for buying, selling and storing assets. Choosing the right one is very important, because it affects the efficiency of investments.
Efficiency of operation
The best investment platform should be fast and reliable. It must not in any way delay the movements that the investor makes. Otherwise, his investments will not be effective, as every second counts in investing in the stock market. For this reason, the platform should work at lightning speed, without undue delay.
Additional functions
Equipping the platform with additional functions is very important, as they can affect the effectiveness of investments. One important feature is the ability to copy trading. It allows automatic copying of open positions and those managed by others.
The usual system used involves the use of social networks and social trading systems. The trader openinhttps://fxnstock.com/investing-in-the-stock-market/ig a position decides whether to allow others to copy it or not, thus connecting to a system that allows automatic copy trading, or must have the first contribution from a person who wants to use copy trading.
Costs
Fees and commissions are a very important factor that determines the choice of an investment platform. A trading platform has to make money from something. However, the question of pricing comes down to whether the cost is transparent and not too high. An honest broker speaks openly about the prices of its services and additional fees.
As for their number and amount, first of all, the investor should match them to his preferences. If the trader plans to invest regularly, it is best that the fees associated with the frequent taking and leaving of positions be as low as possible. However, if the investor aims to trade assets several times a year, he will be most interested in fees for inactivity.
Demo account
People trust more in things and services that have been tested by them. For this reason, a demo account on an investment platform is a huge plus. This allows the investor to check the quality of the broker’s services, find out how the fees for stock trading are in practice, but also whether a particular company suits his preferences.
Choice of markets and investment products
Some investors care only about one type of asset, while others value a wide choice. Therefore, another issue to pay attention to is the number of financial instruments available. Depending on the investor’s preferences, one should pay attention to the availability of, among others, cryptocurrencies, shares, indices, currency pairs, commodities, etc.
Online trading training courses
For a beginner trader, free educational materials are a very important consideration. It is worth considering the amount of help for beginners, as well as additional features that will allow the investor to implement in the platform. It is important to find out whether the investment platform, in addition to basic materials, gives access to the community. Among other investors, you can better learn how to invest in the stock market. There are brokers on the market with a more extensive educational section, so it is worth paying attention to this.
Affordable interface
In the long run, convenience is as important as functionality. Therefore, the intuitiveness and clarity of the interface are an important consideration when choosing a broker. You can choose from world-renowned investment platforms such as MetaTrader 4 or 5, and some brokers offer proprietary platforms.
Mobile version
Nowadays, many people are constantly on the go, so traders are looking for a way to have the stock market at hand all the time – no matter where they are. Such a trader will find it useful to have a broker that provides a mobile version. This is a great convenience and greater comfort, as brokerage companies are realizing.
Customer service
Also important is assistance from the broker when the trader hits a problem. The ideal customer service is round-the-clock, responsive, and available in many ways.
How to choose a good broker?
This is one of the most important choices a novice investor will face. It is worth knowing a few elements and taking them into account when choosing a broker for yourself.
Supervision exercised over the broker
A very important issue is the control exercised over the broker by an external authority. With this type of control, the investor can rest assured of proper settlement, as well as security of finances. The investor should therefore check whether the broker he has chosen is controlled by an authority. The latter can be located, for example, in the UK, Switzerland, USA, Cyprus or Australia.
Rad also: Stock market simulator
A broker whose supervising entity is located abroad usually also features slightly more flexible requirements in terms of registration and account opening. In addition to this, the regulations that apply to the market in the country where the agency that controls the selected broker is located should be well studied. This is very important in terms of the safety of funds.
Type of broker
Investing in the stock market also requires the acquisition of knowledge that relates to the nature and specifics of the operation of the broker. As a rule, they can be divided into those who operate according to dealing desk and no dealing desk. The first group includes MM brokers, and the second group includes STP and ECN.
Market makers are market makers. If an investor decides to go through them, he must know that there is a party that competes with the investor for profit. This allows for high liquidity, as well as arbitrarily high trading spreads. However, the orders of this intermediary are executed flexibly. There is also a high risk of their cancellation due to technical errors.
No dealing desk brokers, on the other hand, do not apply the principle of adversarial play. STP has many units that cooperate with it in the course of currency exchange. In this case, the advantage is the sorting of offers, starting with the best one for the investor, and the automatic execution of orders. The intermediary’s income is the margin, which is imposed on each operation.
Trading costs
Investing in stocks is associated with the choice of a broker, and this in turn with certain costs, both in terms of account management and commissions on transactions, so it is best to compare them at different brokers. The trader should pay attention to all transaction fees, as well as the spread of the spread on the main currency pair, but also the other fees. This way he can form an idea of the various costs that await him.
Actual size limitations
This factor is important especially for investors who are interested in really large orders. For such investors, an important consideration is whether a specific service provider can guarantee liquidity for each order, no matter how high the investor’s purchasing power.
The amount of leverage
Investing in the stock market is also associated with the possibility of using leverage. High leverage can mean a large profit, but it also increases risk. Some providers have a fixed leverage level, while others adjust it according to the specific investor.
The last factor is the margin call policy. Brokers use 3 types of actions in this case. They can follow the rule, saying that they close transactions one by one, if the deposit does not cover the open positions. Other service providers close the necessary transactions, also one at a time. The third type is to close the most losing trades.
Investing in stocks and bonds are the most popular investments among invstors. They have a lot in common, but a lot also divides them, such as the level of investment risk. Before starting to invest, it is necessary to gain at least basic knowledge about them, so that you do not lose your capital at the start and do not get discouraged from playing the stock market.
