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Investing in the stock market can be fun or it can be a source of livelihood for the person investing. Much depends on the approach, but also luck. In order to invest in the stock market successfully, it is necessary to constantly deepen your knowledge on the subject and follow a few rules. And how much can you earn on the stock market?
What is investing in the stock market?
The stock market, in simple terms, is a place for the movement of capital. It is a market where you can sell and buy financial instruments. Their sale allows business owners, to raise capital for their own development. People who buy shares earn money from the increase in the potential of the company whose assets they bought.
The idea of investing the stock market is for companies to sell their shares in order to get money for further development. Investors, on the other hand, buy shares in order to increase their profits. In this way, the value of their chosen shares will also increase.
Financial instruments, called securities, are traded on the stock market. These include not only stocks, but also bonds, bills, notes or financial certificates.
Types of investment on the stock market
Stock market investments can be made in two ways. The first is self-investment, when the owner of a brokerage account independently selects the shares of companies he wants to purchase. However, if you want to make such decisions on your own, you need to be properly oriented to the realities of the companies and the economy. In addition to this duty, one must use common sense, and keep emotions in check.
This is important especially when the investor observes an unexpected sell-off of shares of a certain company. Hasty decisions in such a situation can cost a lot. This also works the other way – buying shares when there is euphoria on the stock market, and a particular company has been experiencing increases for a long time, suddenly a big drop can occur.
Stock market investing for novice investors can be associated with mutual funds. In such a situation, decisions related to the placement of their funds, are entrusted to the fund owner.
Such a way of investing in the stock market, on the one hand, carries a cost, since the commissions for TFIs are higher than if you invested on your own. But on the other hand, a person who manages such a fund has more knowledge of the stock market game than a person who is just starting out.
What are stocks?
They are securities that give both rights of a pecuniary and non-pecuniary nature. They belong to companies that are listed on the stock market. They can be acquired through secondary transactions on the official stock market or originally, by taking part in an issue. Share issues, on the other hand, take place at the time of a company’s listing on the stock market, but later the company can also make additional issues.
Associated with shares are such property rights as:
- The right to dividends, i.e. a share of the company’s profit, which is distributed to shareholders,
- The right to subscribe to new issue shares,
- The right to participate in the distribution of the company’s assets in the event of its liquidation.
On the other hand, the non-property right in the case of shares is the corporate right in the form of voting rights at the shareholders’ meeting.
How to invest in shares?
Investing in shares is not such a simple task, because the price of shares depends on supply and demand in a direct way, but indirectly it is influenced by many factors, namely:
- The financial situation of a particular company – whether it is profitable and promises to pay dividends,
- The general situation in the country – economic, political, economic, as this is always reflected in the price of listed shares,
- Industry situation,
- The slump or boom in other stock exchanges, as the global financial market is interconnected.
As a rule, there are two ways of analysis to forecast either a decline or an increase in the price of company shares:
- Technical analysis – it takes into account only share prices. By analyzing charts with historical prices, the investor tries to find certain regularities to predict how the price will behave in the future,
- Fundamental analysis in investing in the stock market is that it takes into account everything around it, i.e. competition, situations in the company, industry, etc. In this case, you don’t just look at the price, but the whole picture. To predict stock prices, financial reports, investment information are helpful. It is good practice for listed companies to share all information, both positive and negative, that can affect stock prices.
What are bonds?
Bonds are securities that can be purchased. It can be compared to taking out a loan. The buyer, who is referred to as the issuer, incurs the debt, in turn the bondholder is called the owner of the bonds being purchased.
When a bond is purchased, various aspects are determined, such as the maturity date, which is when the debt is repaid, the interest rate, which is the amount of interest, and the face value, which is the value returned.
Bonds are divided into groups, depending on a certain criterion. The most important divisions are by:
- currency, such as in zlotys or euros,
- issuer – treasury bonds, which are issued by the State Treasury; corporate bonds, which are offered by companies or other legal entities, and municipal bonds, which are issued by local governments,
- interest rate – variable, fixed, zero-coupon.
Investing in bonds
Successful investment in the stock market, involves knowing several important parameters, which include:
- nominal value – this is the amount of the obligation incurred by the issuer,
- the market price of a bond – the value in percent, which expresses a portion of the nominal value; this is the price of selling and buying bonds on the secondary market,
- issue price – this is the price at which a bond is sold in the primary market,
- bond redemption price – this is the price at which the issuer buys back the bonds at maturity for redemption; it is usually equal to the face value,
- interest – amounts that are due to bondholders and paid at varying times, such as annually.
The nominal price in investing in the stock market is set by the issuer, and the market price is the result of the game of supply and demand in the market. Bond quotations are presented as a percentage of their nominal value.
Other securities on the stock market
Here are some other financial instruments that an investor may encounter:
- Options – investment instruments are referred to as options. They come in the form of a contract, and the buyer receives the right to either buy or sell a specific underlying instrument, such as a stock, at a fixed price and on a specified date,
- Investment certificates – these are securities that certify the redemption of a share in an investment fund,
- Futures contracts – these are for more experienced investors who are willing to take higher investment risks. It can be said that these are financial bets that buyers take and bet on how much the price of certain companies will be.
Making money on the stock market
The stock market offers a really wide range of opportunities to invest and earn a high rate of return also in the short term, such as futures. However, an investor should bear in mind that investing in the stock market is not only a chance for high returns, but also an investment risk. The investor should properly maneuver between buying and selling certain securities, and pick the right time to make a certain decision.
Very often it happens that decisions on the stock market are made under time pressure. In such a situation, it is necessary to keep a cool head and create a profit and loss account – whether the risk that will be taken on a certain transaction is not disproportionately high to the profits that can be earned.
Some investors treat investing the stock market as a permanent source of income, while for others it is just an additional investment. Opportunities to make money on the stock market obviously exist, but the investor must be aware of the risks that exist. Ignoring it will perhaps lead the investor to lose some or even all of his funds.
Investing in the stock market – how to limit takeoffs?
Investing in the stock market, is inextricably linked with investment risk. However, there are certain measures to reduce possible losses. Methods to minimize risk are:
- Continuous tracking of what is happening in the market, including the economic calendar, as well as reports of stock market analysts,
- Constantly learning and expanding your knowledge of the stock market,
- Diversifying the investment portfolio, i.e. investing vs. different financial instruments,
Acting in accordance with the previously adopted plan.
Successful investment in the stock market is related to knowledge, experience, as well as the ability to correctly interpret market data. An important influence on making the right decisions, is keeping emotions in check. If the investor keeps a cool head, he will effectively limit possible losses. In some cases, it is necessary to wait out the dips in order to have a chance to earn more on the whole investment.
What is diversification of an investment portfolio?
Investing in the stock market should involve diversification of the portfolio. This is a method by which an investor can greatly reduce the level of investment risk. An investor who relies on the portfolio diversification method should invest in more instruments that are independent of each other.
The mechanism of portfolio diversification is very simple. When an investor puts all his capital in only one instrument, in a situation of loss of value, he records large losses. However, if he spreads his capital among several securities, the loss of value of one of them will, of course, generate some losses, but not as large as in the first case. How high the losses will be depends on how much money is invested in a particular instrument and how the quotations of the others are.
To significantly reduce investment risk, it is best to choose securities that come from different classes. When building an investment portfolio, it is best to think not only about buying stocks, which have a high risk and return rate, but also bonds, which have a lower rate of return, but also lower investment risk.
Portfolio diversification – what are the benefits?
The main benefit is primarily a reduction in investment risk. The financial market is characterized by enormous volatility. Therefore, even with careful analysis, the investor is not able to predict how the prices of certain instruments will develop, which is associated with the risk of losing funds.
Investing in the stock market should involve investing funds in a larger number of securities, so that the probability of achieving a high loss, is significantly minimized.
Stock market investing – investment strategies
Portfolio diversification can be considered as one of the investment strategies. There are other, also effective methods on how to make money in the stock market.
Buying and holding
In the stock market literature you can find a description of the passive method, or “buy and hold”. And the idea is precisely to buy shares and hold them. For long-term investing, this is much more effective than trying to actively manage a portfolio, that is, constantly buying and selling shares. In favor of this method of investing in the stock market is:
- Costs – a commission must be paid on each transaction,
- The timing of choosing a transaction – a considerable hassle is the proper buying and selling of transactions. In fact, there are no perfect techniques for buying stocks at the bottom and selling them at the top.
- Selection of companies – choosing the right stocks is a big problem. When investing in a broad market, an investor spreads the investment risk among different companies. Even during a bull market, the stocks of some companies rise faster and others rise slower.
Following the trend
This is always the best practice for investors. It is based on the assumption that any person who trades according to the trend is always favored by probability. However, one should not open a position at the lowest price and close it at the highest price, because with this strategy one should be guided by the thesis that one enters a well-defined trend, which must be formed to begin with.
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Investing in the stock market, following the trend, bears certain characteristics:
- the shorter the time horizon, the higher the risk,
- the basis is technical analysis,
- using this strategy, is to follow the majority of investors in the market.
This is an investment strategy that involves acquiring stocks from the bottom and then holding them until the stock price rises. In this case, it is not about small bounces and corrections, but strong support levels, formed in the trend of certain stocks after large drops. The basis of this stock market trading strategy is technical analysis.
Trading on the stock market – what does the transaction look like?
At the very beginning of the journey, an interested person must set up a brokerage account (read also: Online investment platform for beginners – how to start the adventure of investing?). He can set it up at most banks. Once he has it, he should set aside a sum of money for himself for the company whose shareholder he wants to become. In the transaction, he must enter how many shares he wants to buy and at what price limit.
In addition, he has two more options available:
- at any price,
- at the market price.
It is also possible to set the rate yourself, so that the transaction from start to finish is made as consciously as possible. Investing on the stock market involves approving a buy order, and at this point the money is secured, meaning the investor will not be able to use it.
Any order can be sent at any time of the day or night. However, the transaction can only be executed during the session, and this in turn lasts from Monday to Friday from 9 a.m. to 5 p.m. When the order can be executed, the investor will become the owner of the shares, and the money will go to the seller.
This is an obligatory concept that every person who starts investing in the stock market should know. The word is found in almost every place where there is any mention of making money in the stock market. A trend is the general direction in which the price of a particular company follows. Due to the direction, the trend is divided into:
- Rising trend – when the straight line, determined by at least 3 local minima, is rising,
- Declining trend – when the straight line, which runs through at least 3 local maxima, is declining,
- Sideways trend, or the absence of a trend – when it is difficult to clearly determine the trend.
The trend in the case of investing in the stock market can also be divided by time period:
- Short-term – when it is considered in the perspective of a few weeks,
- Medium-term – when a perspective of several months is referred to,
- Long-term – occurs when one analyzes more than a year of stock price, or even several years.
How to set up an investment account?
To start investing in the stock market, you must first set up a brokerage account. It is used to store and trade financial instruments. The account agreement can be concluded either at a customer service desk or online. In the second case, the contract will be delivered by courier. The only document required is a valid ID card or passport.
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A contract with a brokerage house is somewhat similar to a bank account agreement. To start investing on the stock market, you must be at least 18 years old. Importantly, the contract can be terminated at any time with due notice.
After setting up an investment account, you can deposit your first money. It is recommended that beginners trade such funds, the loss of which, will not cause financial trouble. The deposit can be made by bank transfer to the account number specified by the brokerage house.
The next step is to place orders, which is mostly done over the Internet. The order first goes to the brokerage house’s system, from which it then travels to the exchange. This is a cheaper, faster and more convenient solution.
Investing in the stock market – some tips
Experienced people condition their movements on the stock market, precise technical analysis. Debutants should keep in mind several important points that will help to successfully invest in the stock market:
- Careful analysis of the market – an investor should not buy shares of declining companies if they do not have an upward trend,
- Use of “stop loss” orders – when selling shares, the investor should determine the exact price so as not to lose too much,
- Investing only a portion of savings in the stock market – you should not risk losing your entire life’s work in the stock market. At the very beginning of investing, it is best to invest with such a sum, the loss of which will not affect the investor’s household budget,
- Learning on the virtual stock market – it is worth trying a stock market simulator, which allows you to learn without risking the loss of funds (read also: trading platforms),
- Depositing shares in large and stable companies – beginners should opt for the so-called certainties, which will reduce the risk of losing funds.
Is it worth investing the stock market?
The stock market is one of the markets where you can invest your capital. To start investing in the stock market, you do not need to have a large sum of money. Is it worth investing in the stock market? Certainly, investing in the stock market arouses a lot of excitement, which is justified. On the one hand, it can bring a really big profit in a short period of time, but it can also lose a lot. It depends on when an investor invests in certain securities, as well as which shares of companies he selects for his investment portfolio.
An investor should know when to buy and when it is better to sell the securities he owns in order to increase profits and minimize the risk of losses. In the world of finance it is difficult to predict anything, also predicting trends is not a simple task. True, you can support yourself with micro and macroeconomic data, information from companies, etc., but you never know 100% what will happen in a given week or month.
Whether it is worth investing in the stock market depends on whether the investor is able to accept a relatively high investment risk.
Why is it worth to invest in the stock market?
Of course, the main motivation for investors is the prospect of earning high profits, which are impossible to achieve with conservative investments. There are many reasons why investing in the stock market can be a good decision:
- The investor is free to choose shares of companies that are listed on the stock market,
- Buying shares makes the investor a co-owner of a certain company and thus earns the right to dividends,
- Investing in the stock market can include not only stocks, but also bonds, futures contracts, instruments based on currencies, etc,
- The investor makes his own decisions on which securities to buy at a certain time and which are better to sell,
- The investor has a chance to earn large profits, although with a higher level of investment risk,
- However, he has an impact on the overall investment, if only by diversifying his portfolio.
How to invest in the stock market? There is no universal method to invest in the stock market successfully. However, it is worth taking into account some of the above principles, and certainly the risk of loss, will be minimized. It is also important to develop your own stock market strategy. Thus, it is difficult to record very high profits at the very beginning of the road.
Read also: Playing the stock market – how to invest to earn and not lose?
A lot of advantages also depend on luck. Nevertheless, one should always keep in mind the investment risks that are associated with investing the stock market. For this reason, especially at the very beginning, it is best to invest only funds that the investor can afford to lose.
Otherwise, he or she may not only become discouraged from investing in the stock market, but may also get into financial trouble, which is not the point after all.