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People who have not yet had contact with the stock market should be interested in such topics as an investment in the stock market for beginners. Nowadays, the stock market can be accessed by any person – it is enough to open an investment account and make the required deposit into it. Before that, however, it is worthwhile to learn the rules that govern the stock market and gain knowledge about investing before the first investment.
Investment in the stock market for beginners – what is the stock market all about? How to invest in stocks for beginners with little money
A stock market is a place where the exchange of goods and services takes place. It can be compared to a transaction made in a store. However, only financial instruments, such as stocks, bonds, and derivatives, such as futures contracts, are traded on the stock market. It is not worth starting an investment without knowledge of the various financial tools.
In the capital market, brokerage houses perform brokerage activities, which require a permit from the Financial Supervision Commission. They are the ones that receive and transmit orders to buy and purchase financial instruments and manage investment portfolios, as well as have financial advisory activities.
Understanding the capital market and making informed investment decisions, makes it possible to reduce investment risk. Therefore, before opening a brokerage account, it is advisable to find out how to invest in the stock market, learn about the rules of the stock market, read about the financial instruments that are allowed to be traded, and consider your investment strategy.
How does the stock market work?
Many people wonder how to start investing in the stock market. It would be best if you started by learning how the stock market works. It used to be that only commodities were traded on stock exchanges, but today, financial instruments and securities are usually sold on stock exchanges.
As a result, betting on the stock market and trading on it can be done remotely, for example, with the help of a phone. This means investing in the stock market without leaving home is possible.
Types of exchanges
In general, each exchange operates on similar principles. However, individual exchanges may have different territorial coverage or specialize in trading specific goods. Types of exchanges by the subject of trading:
- Commodity – primarily electricity and natural gas are traded, as well as property rights,
- Services – an example is a transportation exchange,
- Stock exchanges,
- Money exchanges – conducting there, for example, currency trading.
Types of exchanges by territorial coverage:
Types by the method of trading:
- Floor trading – in this case, transactions are made directly by investor representatives using voice,
- Electronic – transactions on them are concluded remotely in a computer system.
It is also helpful to know what are the largest stock exchanges in the world where securities are traded:
- New York Stock Exchange – The New York Stock Exchange,
- London stock exchange – The International Stock Exchange London,
- Tokyo stock exchange – Tokyo Stock Exchange.
How to gain basic knowledge of the stock market?
A mistake that novice investors often make is a lack of knowledge regarding the basic principles of its operation. In this case, it is not a matter of advanced analysis techniques or knowledge of derivatives construction but of learning simple information about how the stock market works.
For this reason, before a novice goes into practice, he should take the time to gain at least a general knowledge of stock trading. It’s worth reading up on business cycles, bull markets, bull markets, the rules for buying and selling stocks, and the differences between a limit order and a PKC order.
There are quite a few sources of knowledge to choose from, and it is best to draw from various materials, such as online articles, ebooks, audiobooks, training courses, and webinars. If an investor wants to get serious about investing, they should opt for a course in stock market investing.
Major players in the financial world
It is useful to know the major players who trade in financial instruments to further understand the principles of investing in the stock market. In the world of investing, the following players can be distinguished:
- Issuers – issue securities for sale. They can be entities or institutions that issue money. However, not everyone can become an issuer of securities. This is a privilege reserved for a few entities. This rule stems from the regulation of the operation of the financial market. Who can be an issuer? Individuals or legal entities, the Treasury, a state bank, an enterprise, a local government or a financial institution,
- Investors – investment in the stock market for beginners should start by learning about the types of investors in the stock market. In this case, there are 2 types – individual investors and institutional investors. The first type is individuals who invest their capital in order to make a profit. The goal of such an investor is not to take control of a particular company, but only to make a profit. Therefore, individual investors tend to trade with lower capital than institutional investors and buy back smaller blocks of shares. Institutional investors, on the other hand, are entities that are professionally involved in investing, such as insurance companies and banks. In this case, the capital traded does not come from their own funds, but was raised from other entities in the form of premiums or deposits,
- Broker – can be an individual, a legal entity, or an unincorporated entity. Persons using the services of a broker, authorize him to act as an intermediary on their behalf in the purchase and sale of securities, services, products, etc. The broker’s remuneration depends on commissions on transactions carried out on behalf of the principal,
- Public companies – called joint stock companies, whose shares or part of them are listed on the stock exchange,
Technical and fundamental analysis
If an investor acquires at least a basic knowledge of investing, he will know that decisions about when and which stocks to buy can result from 2 different approaches:
- Technical analysis – involves analyzing charts, and forecasting the price of a stock, taking into account historical data, that is, based on the formations that are drawn on the chart. A distinction is made between trend continuation and trend reversal formations,
- Fundamental analysis – this analysis involves forecasting the future price, based, for example, on an assessment of the economic situation in certain industries, plans, as well as the financial condition of the company. An analysis of the competition should also be taken into account, as well as other factors that affect the overall economic climate.
Which type of analysis an investor will use depends on his individual choice, but it turns out to be best to use both. The fundamental analysis makes it possible to make an overall assessment, as well as to select companies with solid fundamentals. Technical analysis, on the other hand, helps the investor learn more about short- and long-term trends, as well as choose the right time to make an investment. Simplifying, fundamental analysis allows you to get the answer to the question – of whether a particular company is worth investing in, while technical analysis tells you when it is worth investing money in it.
What can you invest in on the stock market?
The stock market allows you to invest in a variety of financial instruments. The most important of these are listed and described below.
Stocks are the most popular securities traded on the stock market. By buying shares in a selected company, the investor becomes a shareholder or co-shareholder. This gives him many rights, such as the right to dividends or to attend general meetings.
Each share has its own nominal value, which is calculated by dividing the value of the company’s assets by the number of shares issued. Shares can be bought at the nominal price at the time they are issued, or at the market price on the stock market, which depends on the current price.
These are financial instruments, the value of which depends on a specific underlying instrument, such as a currency, commodity, stock, etc. they include, in particular, futures contracts and options, which are traded primarily for speculative purposes, but also treated as a method of hedging against the risk of changes in the price of a beige instrument.
A futures contract is a commitment by two parties to execute a transaction to buy and sell a certain amount of the underlying instrument at a specific price on a given date. An option, on the other hand, provides the investor with the unilateral right to either buy or sell a specific quantity of the underlying instrument at a specific price on a given date.
These are securities issued by investment funds. They are indivisible and represent the same property rights. They are also listed on the stock market, meaning they are subject to daily market valuation in stock exchange sessions.
These are exchange-traded mutual funds. They are characterized by high liquidity and usually reflect the behavior of a stock market index. For example, ETFs on DAX indices, among others, are listed on the WSE. ETFs are relatively safe financial instruments in which novice investors often invest (also read: Where to buy ETFs).
How to start investing in the stock market? Step-by-step instructions
Investing in the stock market is an activity for anyone to set up an investment account and deposit the required capital. Below is a list of steps to follow to start investing. Take a look at investing for beginners with little money
Selecting a brokerage house/broker
Choosing a brokerage house or broker can be made easier by using available rankings and comparison sites. Of course, you can always close an open brokerage account when you find a better deal in terms of transaction costs, as well as the additional tools offered by the broker to help you make investment decisions.
A brokerage account at a bank
The simplest solution is to choose a brokerage account at a bank where the prospective investor maintains a bank account. This reduces the formalities and the entire procedure to a minimum. It can also be a solution that will make it easier to enter the market and start investing.
Opening a brokerage account
Creating a brokerage account requires signing a contract with a brokerage house. In order for an individual to open an investment account, he needs:
- a document that proves identity, i.e. an ID card or passport,
- the name of the current address of the tax office that has jurisdiction over the investor’s place of residence,
- the number of the bank account to be used for making withdrawals from the brokerage account.
An investment account can be opened:
- In person at a branch of a bank that conducts investment activities,
- Over the Internet – through the appropriate form on the website of the selected brokerage house,
- With the help of electronic banking, the bank where the investor has an open bank account conducts investment activities.
First transfer to an investment account. How much should you invest in stocks first time?
Once an investor has signed a contract and opened a brokerage account, the investor can start investing in the stock market. The first step is to make a bank transfer to the brokerage account. The investor himself determines the amount of the transfer. Initially, the amount should not be too high. Ideally, it should be funds, the loss of which will not adversely affect the investor’s household budget. Of course, stock market investments are carried out for profit, but one must reckon with the existing investment risks, especially when it comes to stock market investments for beginners. Funds for making investments should come from one’s own savings. One should not decide to take any loan or credit to be able to invest.
In order to buy shares, you need to place an order to purchase selected shares of a company using an investment account. It is enough for the investor to specify the number of shares he wants to buy at a specific price and to have the funds in the account to complete the transaction. Each order to either buy or sell shares is associated with a commission charge by the broker.
Apps for playing the stock market and more
Before investing real money, great training is to play the virtual stock market. This allows the investor to realize how to invest in the stock market. On the Internet, you can find many services that allow you to invest virtual money in the stock market. The user can track the change in the value of his investment portfolio, as well as compare it with other participants in the game. This is a great way to test your skills, as well as gain valuable experience, without the possibility of losing real money. For a novice, this is a very valuable step, being an introduction to real investing.
Alternatively, you can open a demo account on the investment platform of your choice. In this case, too, you can try your hand at no investment risk, and at no cost. For example, at one of the most popular brokers – XTB, which is listed on the Warsaw Stock Exchange, in the demo account the user receives 10 thousand zlotys and can trade them for a month. During this time, the investor can learn how the platform works, as well as the rules of futures trading (also read: Trading app).
If the investor finds it suitable for him, before setting up a real account, he should be aware that CFDs are complex financial instruments and are associated with a high risk of losing capital quickly, due to the use of leverage.
Training on investing in the stock market
A good way to learn how to invest and gain knowledge is to take advantage of stock market investment training. Such courses are organized both stationary, as well as via the Internet. This allows everyone to choose the preferred form. If a prospective investor does not have much time to commute and show up at a particular place at a particular time, he can opt for the more accessible online form.
In the second case, depending on the specific training offer, the user can receive materials in different forms, such as video, written, or mixed. Online investing courses impart sound knowledge, as long as one chooses a training course that is taught by a professional (also read: Online stock market). Beforehand, it is advisable to go through the current offerings and choose one that best suits individual expectations.
Opening an investment account
How to play the stock market? You will need an investment account, which is also called a brokerage account. This is an account that records information about the financial instruments held by the investor and the transactions made. An investment account allows you to buy and sell stocks, as well as other securities.
After transferring a certain amount to the brokerage account, the investor can open an order by specifying the company whose shares the investor wants to buy, specifying the number of shares, and the price the investor is willing to pay for it. In addition, the investor can modify the settings of the order’s validity period, for example, it can expire together with the close of the session on the WSE or on a day set by the investor, as well as whether it is to be executed in full or can be divided into parts.
Where to open an investment account?
Investment in the stock market for beginners should start with opening an investment account. A brokerage account can be opened either with a broker or with a bank of your choice. If a prospective investor maintains a bank account with a particular bank, he can check whether it also has an investment business. Then setting up an investment account will be much easier.
However, setting up an investment account with a broker is also quick and easy. It usually takes several minutes. When choosing a broker, it is worth betting on a reputable broker with good reviews. Below is a list of the most popular brokers you should use.
XTB is a Polish broker that allows investors to access a wide range of financial markets, such as CFD indices, CFD cryptocurrencies, Forex, many real stocks without commissions, CFD indices, CFDs on commodities, and precious metals.
XTB broker is regulated by the National Financial Supervisory Authority from Poland, as well as the FCA from the UK. XTB is listed on the Warsaw Stock Exchange.
This broker offers competitive spreads. Investing in the stock market with the help of this broker is very simple. It puts at users’ disposal the proprietary xStation platform, which has been awarded many times, as well as Meta Trader 4 – the most popular investment tool among traders. The platforms can be used both on a computer and on a mobile device in the form of an app.
The advantages of the XTB broker include, above all:
- Control of the Polish financial authority,
- The minimum deposit is PLN 1,
- The account can be held in PLN, USD, and EUR,
- Forex spreads start from 0.7 pips.
The downside, on the other hand, may be the fee charged for inactivity in the account after 12 months.
This is an Australian broker that provides quality services and ensures traders with fast order execution using various trading platforms, including Meta Trader 4 and Meta Trader 5.
Pepperstone has great customer service and allows its users to choose from a wide range of account types. It is a broker regulated by the FCA, ASIC, and DFSA. How to start investing in the stock market with this broker? All you need to do is make a minimum deposit of $1.
The pros of using this broker are:
- Forex spreads from 0.0 pips,
- Many different investment platforms to choose from,
- Competent customer service,
- Free demo account,
- Registration with the Financial Supervisory Commission.
The downsides are:
- Only forex and CFDs are available,
- It is not possible to maintain an investment account in some currencies.
This is a global CFD broker that has been operating since 2009. It is regulated by ASIC and CySEC. It offers one of the safest investment platforms with which to trade. XM also has one of the lowest initial deposits at $5.
Creating an investment account is simple and quick. The broker also offers an extensive educational section so that investors can expand their knowledge.
The pros of using this broker are:
- Low spreads – from 0 pips,
- Support in 25 languages,
- Great customer service,
- Fast execution of transactions.
The downsides of this broker are:
- Account maintenance is not possible in gold,
- The broker charges a fee for inactivity on the account after 12 months.
How to choose a good broker? Tips for beginners
Investment in the stock market for beginners often begins with the choice of a broker. After all, it is through him that investors can make transactions on the stock market. Below are the issues you should pay attention to in order to choose the best broker.
It is worth watching out for scammers and it is best to choose reputable brokers who are well-known and have good reviews. An investor who decides to use the services of the broker or brokerage of his choice entrusts him with his money, so he should take care of security. The most trusted among investors are, of course, brokers who are regulated by the National Financial Supervision.
Investments in the stock market for beginners should include activity in a demo account. It is worth checking whether the broker of choice offers the possibility of opening a demo account, where the investor can see how the platform works and learn about its functions. It is best to get an idea of how long a particular broker provides a demo account, as some offer unlimited access to the account, while others specify a time limit.
Minimum deposit amount
The amount of the minimum deposit varies from broker to broker, and these differences can be significant. There are brokers that have no initial deposit requirements, while others set a very high deposit that is often out of reach for the average investor. However, there is so much competition in the market that surely every customer will find an offer that suits him.
Costs – commissions and spreads
Brokers also differ in the transaction costs they charge investors. It’s worth checking whether the broker you choose charges an account maintenance fee, and how much it charges in commissions and spreads. Some brokers offer free account maintenance but charge higher fees in the form of commissions. You should also check whether additional costs are charged.
Many people think that this is not an important issue, but overlooking it is a mistake. The moment an investor encounters a problem, he or she will certainly want the problem to be resolved as soon as possible. In a situation where customer service cannot be quickly and easily contacted, and the investor has to wait, he may lose out on his transactions and generate losses. This is why high-quality service is important, as it allows the problem to be resolved quickly.
Brokers provide stock trading platforms through which it is possible to make transactions on the stock market. It is worth taking some time to look at the chosen platform, as the effectiveness and success of the investments made largely depend on it.
When it comes to investing in the stock market for beginners, novices should choose investment platforms that are intuitive and easy to use. This will make making transactions quick and hassle-free, and when it comes to investing, every second matters. It is also worth checking what additional features the chosen platform has.
Availability of markets
Before making a decision, a prospective investor should check whether the broker he chooses offers the possibility to make investments in those financial instruments that are in his circle of interest. The rule of thumb, however, is that the more extensive the offer, the better. After all, in some time the investor may become interested in other financial instruments, and it would not make sense to open another investment account.
The most important investment terms
Below is a list of the most common investment terms:
- Besa – this is a situation in the market, which is characterized by a prolonged with sharp drop in prices,
- Bid price – is the price at which a person holding units of a mutual fund can sell shares,
- Bull market – is a situation in the market when prices are rising or are expected to rise,
- Derivative – is a general name for securities whose prices depend on the prices of other investments. Among derivatives are options, futures, swaps, and warrants,
- Commission – a fee that is charged by a broker for either buying or selling shares on behalf of an investor. It can depend on the amount of the order and the extent of advice given,
- Liquidity – the ability to easily convert assets into money,
Investment in the stock market for beginners – the most important rules, how to invest in stocks and make money
Before you start investing, it’s a good idea to know the most important rules that will make your investments more effective and reduce your investment risk. What is worth knowing and remembering?
Diversification of the investment portfolio
Diversification of the portfolio is a concept that means that you should invest funds in various instruments, not just in one type of asset. For example, if an investor is interested in stocks, it is worth investing in different industries. This way, when one type of asset or the stock of a certain company goes down, the investor is able to protect at least part of the capital he or she holds. And investments in the stock market for beginners should be precisely based on protecting the capital held.
Acceptance of investment risk
Investment risk is an intrinsic element of the stock market, which is best accepted at the beginning of one’s journey. This will ensure that the investor will not be disappointed and unpleasantly surprised when he loses some or even all of his capital. Of course, this does not have to happen at all, but it is worth mentally preparing for such an option.
Investing according to a plan
A plan is an investment strategy. It is not worth making transactions at random, as this will not bring the expected result. Of course, some moves may be profitable, but in the long run, there is no profit and effective investments. You can choose an investment strategy from existing ones or create your own, building on them and selecting the desired elements. One of the most popular investment strategies is the trend-following strategy. It is also a good idea to test the strategy in advance on a demo account.
Learning the basics
Investment in the stock market for beginners should start with a solid theoretical preparation, or at least with learning the basics of investing in the stock market. It is worth gaining knowledge, first of all, of the financial instruments in which the funds will be invested. It will also be useful to know the concepts and terms related to investing.
Investing free money
The idea here is to invest only those funds that are not needed for monthly essential expenses. Otherwise, you can get into financial problems from which it will be difficult to recover. You can invest your own savings, but you should not take out loans to get money to invest. This leads to financial trouble and gambling.
Also read: How to invest small amounts
Invest in well-known financial instruments
It is also important to invest capital in those assets about which you already have some knowledge. The time will come for more financial instruments, and it is best to invest in small steps. You should first gain knowledge of, for example, stocks and invest in them, and only after you have gained a minimum of experience and skills will you expand your list of financial instruments.
Gaining knowledge about investing
Investing in the stock market is an activity that requires systematic study and deepening of knowledge. It’s also a good idea to stay up to date with all the news and trends. It’s best to gain knowledge from various sources, such as stock market investing courses, articles on the web, eBooks, webinars, etc. (also read Forex training courses).
It is worth remembering to use the demo account provided by the broker. It allows the investor to see how the stock market works, check his investment strategy, and gain experience in the matter.
The demo account is offered by all reputable brokers and can usually be used for free. Some brokers provide a demo account for a limited time, while others give unlimited access to the account. It’s worth practicing on this type of account for at least a few months to gain some skills and experience.
Playing the stock market does not like emotions. What does this mean? The idea is to approach investing without unnecessary emotions, which are not good advisors. Making investment decisions under the influence of stress or excitement, will not bring good results. The best investors know well that investing is best approached coolly, without undue emotion. Although this is not an easy skill, especially for beginners, it is worth trying to learn.
Investments in the stock market for beginners require prior preparation in both theoretical and practical terms. Although it is not a difficult job, and available to almost everyone, it is to acquire knowledge and certain skills.
Frequently asked questions about investments
Here are some frequently asked questions that relate to investments for people who are starting out in the stock market.
Is it possible to set up a joint brokerage account?
Yes, but a joint brokerage account can only be owned by a spouse who is in the statutory community of property.
How much money do I need to start investing?
In fact, you can start investing with a few hundred dollars or a few thousand dollars. Much depends on the savings you have, as well as the initial deposit required by the broker chosen by the investor.
Is it possible to establish a proxy for a brokerage account?
Yes, the power of attorney specifies its type, as well as the scope of the authorization, as well as the requirements of written form.
How can I deposit money into an investment account?
The easiest way to do this is via the Internet, via the Internet Banking System. Depending on the offer of the selected broker, a cash payment is also possible. For example, Alior Bank allows you to make cash deposits to your account at any bank branch, as well as via the hotline.
What is investment risk?
Investments on the stock exchange involve the risk of incurring losses. The degree of risk depends on the type of financial instruments that are the subject of the investment. It can always happen that the investor will gain less than expected or lose all his money.
Is it possible to invest in shares of foreign companies as part of a brokerage account?
The possible possibility of making transactions on shares of foreign companies depends on the broker’s offer. For example, some banks, as part of access to a brokerage account, offer the possibility of investing in shares of companies listed on stock exchanges from several countries around the world.