Playing the stock market – how to invest to earn and not lose?

Playing the stock market can be a great adventure or an investor’s livelihood. Everyone would like to make a profit investing in the stock market, which, however, is not so easy. It is necessary to know the rules of the market and learn some ways to make money in the stock market and not lose.

Playing the stock market – investing step by step

How to start playing the stock market successfully? First of all, at the beginning, it is recommended that the investor allocate to playing in the stock market only such a sum of money that will not adversely affect his household budget.
Playing in the stock market – choosing a brokerage firm and setting up an account (read also: How to start investing in the stock market).

Every investor begins his adventure with the stock market by opening an investment account with an office that will perform buying and selling transactions. This can be done at a branch of the selected bureau, as well as online. The second option, although more convenient, takes a little more time. This is because you have to wait for the set of documents to be sent back and for the contract to be authenticated. To open an investment account, the client needs his ID card and Tax Identification Number.

Before deciding on a brokerage firm, it is worth carefully reviewing the offer of brokerage firms that operate in the market. It is worth considering the issue of the amount of fees for maintaining an investment account, as well as the commission for an ordered transaction. Playing the stock market and maintaining an account also involves the fact that the bureau may provide tools, recommendations and analysis. The commission rates of brokerage bureaus oscillate within similar limits of 0.25 – 0.4% of the transaction value.

However, the minimum amount of the commission, which is expressed in zlotys, can vary significantly and close in the range from $2 to $10.

A considerable number of investors make their own decisions to buy or sell shares and use online platforms provided by brokers, and this significantly reduces commission costs. Therefore, it is worth checking whether a particular brokerage offers player-friendly online tools. It is also quite an advantage for the player to link the brokerage account to the bank account, which is held at the same bank.

Playing the stock market – finding a good company

With an investment account open, an investor can start playing the stock market. When deciding which stocks of companies he wants to invest in, he should take a closer look at the principles of technical and fundamental analysis. Both analyses have one purpose – to forecast what future stock prices will be and to determine the right moment to buy or sell securities. However, they have different applications depending on the investment strategy used. Investing in the stock market is connected with learning both analyses.

Technical analysis based on historical data, which relates to changes in a company’s stock price, is recommended for investors who rely on short-term investments. Fundamental analysis, on the other hand, forecasts stock prices based on macroeconomic indicators, as well as the performance and position in the industry of a specific company. It makes it possible to forecast the behavior of a stock over the long term. So, it will be suitable for investors who do not want to immediately dispose of purchased securities.

Before playing the stock market, you should also assimilate the basic stock market indicators that are used to assess the behavior of stock prices. For example, the ratio of the attractiveness of listed companies – price to earnings, or the ratio of price to book value, which informs about the current valuation by the market of the amount of assets of a certain company.

Playing the stock market – buying and selling shares.

Once an investor spots an attractive company for himself, his task is to order a purchase at a brokerage. He can do this online, over the phone, send the order by fax or in person at a branch office.

When placing an order to buy a specific stock, he must specify the name of the company, the number of shares he intends to purchase, the date of execution of the order, and the price he decides to trade. An investor can either place a limit order or an unlimited order. In the case of an unlimited order, the investor has 3 options to choose from:

• at any price,
• at the market price,
• at the opening market price.

Next, the computer system at the bureau’s headquarters checks that there is enough money in the player’s account and that the seller holds the specified shares. Subsequently, the broker places an order on the stock exchange, and the investor receives his confirmation that the order has been placed.

Playing the stock market involves following the behavior of the stocks of the companies in the portfolio and selling them at the right moment. Hitting the right moment is precisely the most difficult task. By analyzing stocks with the help of the above-described fundamental and technical analysis techniques, by reading reports and recommendations of brokerage firms, and by following the economic situation, you can make your task significantly easier. It is also worth remembering a key principle, namely, proper portfolio diversification.

Playing the stock market – what is portfolio diversification?

Portfolio diversification is deciding to invest in the stock market in different types of assets. When investing in stocks, portfolio diversification involves investing funds in the assets of companies that come from different industries. When investing in different assets, diversification is necessary, which involves buying assets that have different levels of risk. This limits the risk that comes from investing in only high-risk assets, but also limits the low returns when investing only in safe assets, such as government bonds. Portfolio diversification is a basic measure when an investor is concerned with minimizing the risk of losing invested funds.

Why is portfolio diversification important?

Reducing investment risk allows you to avoid losing a sizable portion of your portfolio when markets change drastically. Different types of assets behave differently in a downturn.

If an investor has different types of assets in his investment portfolio, it enables him to minimize losses during downturns in the economy. The less dependent an investment portfolio is on one company, one type of financial asset, the less exposed it is to high losses when a particular type of asset will lose value.

Playing the stock market – how to invest so as not to lose?

How not to lose on the stock market? In particular, you should know that investing and playing the stock market always involves risk (read also: How to invest in the stock market). Most of the issues that concern playing on the stock market are precisely about risk management. The level of this risk depends, in a way, on the economic situation that prevails in the world, but contrary to appearances, a good world situation is not necessarily a good time to buy stocks. Before an investor starts his game, he should in particular understand what risk management entails and determine the level of risk he is able to accept when creating his stock portfolio.

Investing in the stock market is usually most popular during bull markets, that is, prolonged increases in indices. As mentioned, this is not always the ideal time for long-term investing. During a prolonged bull market, stock prices are often elevated by speculators who specialize in quick transactions. They buy stocks in order to sell them at a higher price. Of course, speculation is part of the idea of investing in the stock market. However, in order to do so, it is necessary to stay up-to-date from morning to evening, following the information that comes out of companies, charts of the stocks purchased and various economic announcements.

An investor should therefore determine whether he treats investing in the stock market as a game and wants to focus on quick speculation, or whether he intends to invest for the long term, as the strategy he chooses will depend on this.

Speculation

For a speculative approach, constant observation and analysis of current quotations is key. Nowadays, this will be greatly facilitated by the Internet, which allows the investor to watch the price changes of his shares in real time all day long. If necessary, the investor can make a quick decision to sell them.

Long-term investing

When investing for the long term, the key issue is to choose the right moment and build a relatively balanced stock portfolio with a good deal of diversification, so that, as far as possible, a drop in the price of one type of stock can be offset by an increase in the price shares of another type of company, which is not a simple task. Of course, in the event that everything flies downward, even diversification will not help much.

When it comes to investing in the stock market, the right choice of timing to buy stocks is, counterintuitively, not a bull market period. It’s best to buy stocks at a time when they are cheap, such as due to a discount in the markets. It all depends on what stage of the stock market the market is at. However, sensing the right moment is not so easy. What is the reason for this? All crises, corrections and large drops, are always accompanied by strong emotions, which in turn is associated with much greater fluctuations in stock prices.

During such times, stock prices always fall much faster than they rise during stabilization. If an investor buys shares too early, and the market goes down even further, he is already starting with losses. However, he must remember and that he has a lot less to make up for than investors who decided to buy stocks at the top during the upward period.

Diversifying your portfolio over the long term

Investing funds in the stock market over a long period of time is different from short-term investing. With long-term investing, diversification must be more extensive, especially when investing larger funds. A long period is roughly from several to several years.

With this type of investment period, diversification in the initial period should be based on buying more assets with increased risk, but much higher profit possible.

In long-term investing, you can count on profits even during periodic downturns. The longer the period of accumulation of profits from investments, the much larger the amount of assets should be bought within the framework of safer assets. This type of asset can include, for example, bonds of major corporations. With these types of assets, the risk of downturns is minimized.

Diversify your portfolio in the short term

Short-term investments are much more likely to involve a single market, such as currencies. With this type of investing, portfolio diversification is about not focusing exclusively on one type of asset, such as shares of one company. The number of assets in an investment portfolio should always depend on the size of the sums of money to be invested.

Playing the stock market – when to buy stocks?

As already mentioned, the right time to buy stocks is at the moment of the lowest low. Of course, individual companies may have varying quotations, and the investor in particular must observe the chart that depicts the fluctuation of the stock price of a particular company whose shares he wants to buy. In practice, however, perfect timing of the bottom is very difficult, because no one knows the future, and predictions can turn out to be wrong. Besides, the appearance of large declines usually ends with an upward correction in either a shorter or longer period.

In conclusion, long-term investment in the stock market should be related to the purchase of stocks or mutual fund shares periods of downturns, corrections and downturns. During these periods, there is a good chance that a long-term investor will make a lot of money on them.

Where to start investing in the stock market?

Here are some tips on where to start playing the stock market if you are a novice investor.

Investment funds

People who have no experience in investing may consider investing in open-ended mutual funds (these are not suitable for speculation and frequent buying and selling of stocks, as transactions usually last several days). However, in such a case, someone will build the investment portfolio for the investor, investing the money and, of course, charging an appropriate commission on it. Playing the stock market with mutual funds has another downside. It is much more difficult to withdraw from the market when playing in mutual funds, as there is a fear of getting out at the wrong time. At sensitive moments, the stock market can fall from day to day really fast.

In order to invest in the stock market in mutual funds, you need to purchase units. In the case of closed-end funds, these certificates are for a certain period of time, and then they are cashed in after the investment is completed. You can also sell them on the secondary market, but this is not easy.

Playing the stock market – professional terminology

Successful investment in the stock market is tied to mastering professional stock market terminology. The most important terms are:

• Asking price – also known as the offer price is the amount that a seller is able to accept for a specific financial instrument. It is also the price at which a buyer can purchase a particular stock,
• Spread – the difference between the bid and ask price. Many brokers make money through the bid-ask spread. It can also be an indication of the liquidity of certain assets,
• Bid price – the highest price at which a buyer can purchase a security,
• Commission – it is due when buying shares of other underlying assets from a broker. This commission varies from broker to broker and depends on the underlying asset,
• Market order – this is an order to a specific broker to either buy or sell an asset immediately at the current market price. ,
• Limit order – playing on the stock market involves a type of order to buy or sell an asset at a given price or higher. A limit order will be executed only when the market price reaches a certain value,
• Stop Loss – this is an automatic order to buy or sell a security when its value falls to a certain level,
• Dividend – a large number of companies allow their shareholders to share in the profits of the company. Once a year or even more, a dividend is paid, which can be an additional income for shareholders,
• Capitalization of the company – this is the total value of the company whose shares are traded on the stock exchange. Capitalization in stock market investing is calculated as the product of the absolute number of shares and their current price.
• C/Z (price/earnings) ratio – is the price/earnings ratio, which is the quotient of a company’s share price and earnings per share. This value is used to value a company. It can indicate whether a particular company is overvalued or undervalued,
• Mutual fund – this is an investment fund, consisting of a number of stocks, bonds, etc,
• IPO – this is a type of public offering in which a company sells its own shares to private and institutional investors. This transforms it from a private company to a public one,
• ETFs – this is a passive fund that has a specific stock composition and is traded on an exchange, just like other financial instruments. For this reason, German index funds are composed of shares of DAX companies in particular,
• Safe stocks – these are stocks issued by a large and reputable company. These companies have been operating for a long time, and their market capitalization very often reaches billions.

Playing the stock market – choosing the right strategy

Before trading stocks, it is advisable to choose a plan of action. Successful stock market gambling can only be carried out by a disciplined investor, and such an investor should have his stock market plan and risk management. This investment strategy should help him make profits while minimizing the risk of losses (read also: Online trading).

Above all, an investor should determine how much risk he is willing to take. Both day traders and active investors have a much higher tolerance for risk than long-term investors who buy and hold their securities. They very often use highly leveraged short-selling strategies.

Read also: Online stock market simulator

This means that they sell securities that are borrowed on margin from a broker in order to achieve the highest possible returns. A day trader is more exposed to risk than an active investor who holds a position for days or weeks.

Depending on his or her own risk tolerance, an investor should determine whether he or she wants to be a day trader or an active trader. Both types of investors use technical analysis tools to store future price trends and the timing of market entry and exit.

An active trader is one who does not always trade every day. The primary goal of an active investor is to profit from short-term events.

Day trading in stock market investing involves making multiple trades in a single day. The most popular market strategies are described below.

Day trading

A day trader opens many positions simultaneously and then closes them before the session ends. In this way, he earns money from small changes in prices during the day. This type of trader buys a lot of financial instruments and opens a number of trades so that, in the end, the sum of the differences between the bid and ask prices, yields the highest possible profits.

Swing trading

Swing trading can also involve holding stocks for longer than one day. The player tries to make profits over a period of several days to several weeks.

Swing traders use technical analysis tools to identify investment opportunities and the right time to exit. When sufficient price gains guarantee a satisfactory profit, the investor closes the position.

To trade stocks using a swing trading strategy, you need to choose stocks with high capitalization. They tend to fluctuate between high and low levels over a few days or a few weeks.

Scalping

This involves holding open trades for only a few seconds or minutes. In this way, traders make a lot of profit. They use technical indicators to identify short-term opportunities. Investing in the stock market by using this strategy involves traders having to read complex charts, and quickly identify trends.

Trend following

This type of player searches for current trends in the market and, according to them, buys stocks when they go up, and sells when they start to fall. However, they need to closely follow indicators, i.e. moving averages or RSI.
After buying a stock that is on an upward trend, the goal of an investor using such a strategy is to keep it open for as long as possible. In the meantime, of course, the stock’s price falls a bit and rises. The key is to sense the right moment to sell the stock.

Position trading

In this case, players ignore short-term market fluctuations and focus on long-term investing. This is the right strategy for an investor who doesn’t want to buy and sell stocks frequently or simply doesn’t have the time to do so.
These types of investors tend to analyze support and resistance levels in order to decide whether to close or hold a stock. This type of strategy has a high profit potential when, in principle, the risk of loss is minimized in the second and short time horizons.

Playing the stock market can be fun or a source of income. However, it is worth remembering that the risk of losing money is unfortunately inherent in investing in the stock market. However, it can be effectively minimized by diversifying the investment portfolio or choosing the right strategy. Often, however, it takes time to develop it, as the investor will not immediately know which will be best for him. Also key is the amount of investment that the player intends to allocate to investing in the stock market. It should be a sum whose loss will not cause a burden on the household budget.

Applying all these rules will minimize the risk of losing the invested funds as much as possible.