Stock trading – how does it work?

Stock trading is a popular way to invest your savings. Thanks to operating brokers, investing in stocks has become extremely easy, convenient, and inexpensive. Many people who are considering investing in the stock market certainly wonder if there are stocks and how to invest in them.

Stock trading – what does it involve?

Before explaining how to invest in stocks, it is worth providing a definition of stocks. This is an essential question for making any stock market investment.
Shares are securities that represent a certain fraction of the value of a given company. There are also so-called shares, which are theoretically something different from stocks. Shares refer to other types of investments, such as in ETFs, mutual funds, or private companies. Shares, on the other hand, refer only to securities that are traded on an exchange. On a day-to-day basis, however, the terms shares and stocks are often used interchangeably.

Companies that issue shares do so in order to raise funds to continue doing business. People who acquire shares are called shareholders and become entitled to receive dividends, as well as voting rights at the General Meeting of Shareholders, as in practice they become owners of a certain part of a particular company – this part depends on the number of shares held.

An important point that is needed to understand the stock market is to know and understand the whole idea of stock trading. Investing in stocks is possible for investors from all over the world – both retail and institutional, as public companies are listed on a stock exchange.

What is a stock exchange?

As already mentioned, companies can be listed on a stock exchange. The procedure for turning a private company into a public one is called an initial public offering. Once a company becomes public, its shares can be bought and sold on the secondary market, the stock market.

Thus, the stock exchange acts as an intermediary. It is a centralized trading place where buyers and sellers transact. The stock market used to be physical, but technological advances have brought about major changes and currently, the stock market can also be electronic.

When starting to trade stocks, it is also useful to know that the price of a particular stock can move up or down. Such fluctuations are due to changes in the level of supply and demand. As a rule of thumb, if a company has a successful business and its future looks promising, the stock price should rise. The critical element is the company’s fundamental situation, so investors focus on financial performance and react to the release of earnings reports.

However, it is worth knowing that there are also other factors that affect share prices, such as macroeconomic data or interest rates. Investors with experience, as well as analysts, are constantly trying to identify the stocks of the best companies in which to invest their capital.

What are the types of stocks?

Before an investor starts trading stocks, he should find out what types of shares there are.

Registered shares

This type of share includes the identification of the person of the shareholder. In addition to specifying the person, the amount of payment made for the shares by the specified shareholder should also be indicated. Registered shares are intended to bind a particular shareholder more firmly to the company, but this does not mean that registered shares cannot be sold or converted into bearer shares as well.

The company’s Articles of Association do not have the right to deprive a shareholder of the right to dispose of shares. However, in order to dispose of them, it is necessary to conclude an appropriate agreement, such as a sale, exchange, or donation in the form of a separate written document or a mark on the share.

Ordinary, preferred, and non-preferred shares

It is also possible to invest in ordinary shares, which give the holder one vote per share at a general meeting of shareholders, as well as an equal share with other shareholders in dividends, and in the company’s assets in the event of liquidation. Ordinary shares are the opposite of preferred shares. Preference may relate to the size of the dividend to be paid, the number of votes at the general meeting, or special rights in the event of the commencement of liquidation proceedings of the company.

Complimentary shares

These are shares that the company issues when it passes a resolution to increase its share capital, which is covered by a reserve or share fund. Shareholders obtain these shares with the right to dividends from the new shares, without covering the contributions with their funds.

Complimentary shares may be the subject of joint ownership. In such a case, the joint holders of such a share exercise their rights through a representative, and they are jointly and severally liable for the benefits that arise from such a share.

Vested shares

These are shares with exclusive marketability. However, this restriction is not permanent, as it can last for a maximum of 5 years after the signing of the agreement between the shareholder and the company. In addition, this type of agreement causes effects only between the parties to it, that is, the sale of this type of shares to a third party will be valid and effective, in turn, the shareholder can only be held liable for damages to the company.

Where is the best place to buy stocks?

To buy listed shares, you need an investment account, which gives the investor access to listed shares. A list of licensed entities can be found on the official website of the Financial Supervisory Commission. Before that, of course, you need to make the right choice of investment account, taking into account various factors and issues. However, you should not be guided only by the number of commissions charged by the broker. There are many elements that should be taken into account to be a good brokerage account. Once an investor has created an account, he will be able to make his first transaction to buy stock market shares.

How to buy stocks?

To make a stock purchase, you need to follow such steps:

  • Establish a brokerage account,
  • Deposit funds into the investment account,
  • Inserting a stock market order to buy specific shares,
  • Waiting for the stock market order to be executed in the stock market session.

The longest step is to set up an investment account, and deposit funds. It will go much easier with the issuance of a stock market order. However, you need to remember to be the right company, which should be analyzed by the investor beforehand.

The most popular methods of analysis are fundamental analysis and technical analysis. The latter is based on the analysis of the past behavior of the price, while the latter allows you to assess the financial condition of the company.

Stock trading – how to get started?

Before starting to trade in the stock market, it is worth remembering a few safety rules:

  • Exercise moderation – that is, allocate, for example, 5% or 25% of your savings to the purchase of shares, rather than, for example, most or half. It is best to be prepared right away that in the worst-case scenario, the invested capital will be lost,
  • Diversification – it is best to buy shares in several different companies than to allocate all your capital to shares in one company. Sector diversification is also important. If all money is invested in one sector, there is a possibility that all the companies owned by the investor, will lose value when there is macroeconomic turmoil. A safer option is to select several sectors and distribute cash relatively evenly according to the following key, which is an example: 1/4 to banking or financial companies, 1/4 to energy companies, 1/4 to commodity companies, and the remaining quarter to technology companies. It should also be taken into account that larger companies are more secure and smaller companies are more speculative,
  • When deciding to trade stocks, no broker should be considered infallible. The youngest brokers manage mutual funds, but these also lose value if the entire stock market index decreases in value. Any advice from a stockbroker should be evaluated critically or consulted, by someone else.

How to set up an investment account?

Opening an investment account is an activity that is similar to opening a bank account. Some banks offer the possibility to open an account that allows you to make stock market investments. You can also create a brokerage account with a broker of your choice, and there are many of them operating in the financial market. An investment account can also be opened online – online stock trading is possible. Then you must also confirm your identity electronically.

Deposit into an investment account

To start investing in stocks, you need to deposit money to cover the required minimum deposit, set by the selected broker. Issues of deposits and cash withdrawals are determined on an individual basis by each financial entity that offers the establishment of an investment account. It is quite a convenience to set up an investment account at the bank where the bank account is held.

How to buy and sell stocks?

Currently, more and more types of various activities are moving to the Internet. The same is the case with stocks. It should be taken into account that making all transactions requires an stock trading platform. It is worth considering a popular tool that offers useful features, while being simple and intuitive to use, such as Meta Trader 4.

Commission on buying and selling shares

The commission on either buying or selling stocks is usually an amount in the order of 0.4%. In addition, the operation of an investment account may also involve additional fees, so it is worthwhile to find out in advance what the costs are with the selected broker.

Investing in the stock market – profits and losses

Profit occurs when the selling price of a stock, after commissions, exceeds the buying price. Another issue is loss management. If stock prices fall, a dilemma arises for investors – to exchange shares for cash to limit losses or to wait and hope for a rebound soon.

Risk management is not easy, but there are simple solutions to follow. When buying shares at a price of USD 100, you can set a limit on the allowable loss of, say, 10% at the outset, and get rid of the securities when the value falls below USD 90.

Playing on the stock market also allows you to use an order with an amount limit, for example, the shares of the company XYZ currently cost USD 100, but the investor wants to buy them cheaper. You can set an order – the moment the stock reaches 97.50, it will automatically buy a specific number of shares.

A similar operation can be applied to profit realization. For example, when the investor will have 20 companies at a price of 100 USD. Then he can set an order – the moment the price of the shares rises to 104 USD, for example, half of them will be automatically sold.

In contrast, quite another stock trading strategies is to buy shares under dividends, that is, not to buy and sell at a higher price. Companies that perform well and pay generous dividends, in the best case can achieve a dividend yield of, for example, 15% – a share price of USD 100, with a dividend of USD 15.

You may also encounter the statement that a good investment strategy is to slowly and systematically buy a small number of shares. If you combine this strategy with the strategy of buying under the so-called dividend, you can get something similar to a mutual fund.

Realizing profit from stocks

Cash withdrawal is often associated with profit realization. The procedure of physical cash withdrawal itself is a varied matter depending on the entity that offers the investment account.

Investing in foreign markets

Investing in stocks in foreign markets is an option for investors who have already gained some knowledge and experience. The most popular is the US stock market. If you choose this type of option, you need to pay attention to the availability of services in different languages. On the American stock exchange, the range of possibilities is much wider than in the case of investments on the Warsaw Stock Exchange. Access to foreign exchanges is offered by some brokers.

Stock trading – practical tips

Stock trading, unlike other various other types of investment, is available to almost everyone. It does not require a lot of capital, since the first investments can be ordered with a capital of several hundred dollars. In turn, knowledge about investing in stocks can be gained from generally available materials.

However, buying shares on the stock market also has its weaknesses. First of all, it is necessary to remember the risks that are associated with any investment. To reduce them, it is worthwhile to prepare yourself substantively, as well as to constantly improve your skills.

Establish an account and deposit money

Stock trading is not possible without having an investment account. When choosing the right account, it is worth paying attention to several important issues, including commissions or account maintenance costs. Access to markets is also of considerable importance. Using the offer of reputable brokers, you can invest not only in stocks but also currencies, commodities, cryptocurrencies, bonds, and funds, as well as other assets. What’s more, it’s worth finding out the procedure for depositing and withdrawing funds.

Stock trading
Stock trading

Proper selection of companies

The selection of shares to be bought is one of the factors that most determine the success of companies. The most important principles are:

  • Choosing the right industry – the companies whose shares the investor buys should operate in industries he is familiar with. This will make it easier for him to predict future events,
  • Use of support – especially at the beginning of his adventure with the stock market, it is worth following reliable expert advice on the current situation in the markets. These are available, for example, within the investment platforms of top brokers,
  • Use of analysis and trends,
  • Betting on certain companies – there are companies that have been experiencing steady growth for years, especially over the long term. This is especially true for companies that are listed on American stock exchanges, such as Disney, Apple, and Amazon. Investing in these types of stocks is not only safe but also easy for beginners.

Effective risk management

When it comes to investment risk, it cannot eliminate completely, but it can be reduced. First of all, you should stick to your chosen strategy – instead of buying and selling stocks under the influence of emotions, diversify your investment portfolio and use stop-loss orders. In this way, you can minimize the investment risk and increase the effectiveness of your investments.

Stock trading – choosing the best broker

The effectiveness of your investment depends on several factors, including the services of the broker you choose. The list of brokers is long, so the choice is not always easy. It is worth knowing what issues to take into account to choose the best broker.

Security

This is the most important element, because the person starting to invest, entrusts the broker with his money. She should be sure that they are safe, and in case of problems, she will have full support. Security means proper regulation by certain authorities. Reputable foreign brokers, on the other hand, are usually controlled by the FCA of the UK or CySEC of Cyprus. It is worth checking in advance whether the broker you choose has a regulatory body that provides security for investors. Reputable brokers that have good reputations and enjoy an established position in the market are even regulated by several such bodies.

Trading platform

Stock trading is possible through an investment platform. These are offered by brokers as part of their services. It is worth checking in advance what kind of broker the chosen broker makes available. The best brokers put at the disposal of clients such platforms as Meta Trader 4, which is the most popular investment tool worldwide. Many brokers also provide proprietary platforms, which also have many advantages. An example is the broker XTB, which provides not only Meta Trader 4, but also xStation – an investment tool appreciated by many.

Markets offered

Brokers’ offerings also differ in terms of the markets they offer. Some brokers, for example, offer only CFDs, while the offer of others is much more extensive. If an investor is interested in trading stocks, he should check in advance whether the broker he intends to use offers to make investments in real stocks. The rule of thumb, however, is that the more markets, the better. After all, in some time the investor may want to expand his investments, so it would be better if he did not have to open a new investment account.

Customer service

The quality of customer service also matters. It is good if the broker allows different methods of assistance, such as telephone, video chat, and email. This allows the investor to choose a convenient way to contact the broker and receive relatively quick help from his side.

Transaction fees

Brokers’ offers differ in the costs associated with using their services. Some make money on spreads, while others still charge commissions, which is worth knowing in advance. In addition, some brokers charge account fees – they are usually paid once a year. However, the lack of fees for maintaining an investment account is not always a good thing and does not always mean lower trading costs, as the broker may compensate for this with higher commissions.

The best brokers on the market

Below is a list of brokers you should use. These are reputable brokers that offer top-notch services.

XTB

XTB is a Polish broker that has been operating since 2005 and is supervised by, among others, the Financial Supervision Commission. It has been listed on the Warsaw Stock Exchange since 2016. It offers over 5,400 financial instruments, including CFDs on indices, currencies, bonds, commodities, or cryptocurrencies. What’s more, the broker offers access to real stocks and ETFs, which are listed on 16 of the world’s largest and most popular exchanges. The broker has no set minimum deposit. The account is serviced in USD, PLN, and EUR. The spread is market-based and starts at 0.8 pips. XTB is regulated by the FSA, CySEC, and FCA.

Capital.com

This is one of the most popular brokers that offers convenient access to financial markets. With it, you can trade CFDs on oil, Apple, and Bitcoin, as well as more than 6100 other assets in markets from around the world. Capital.com’s platform allows you to smoothly execute trades with a single click. In this case, the minimum initial deposit is USD 100. In turn, the account can be held in currencies such as USD, EUR, GBP, AUD, and PLN. The spread is diversified, and the broker is regulated by the FCA, CySEC, FSA, and ASIC.

EXANTE

This is an innovative investment company that offers access to various financial services and focuses on international markets. From a single multi-currency account, a trader can play on dozens of exchanges from around the world and more than 100,000 trading instruments. This broker is supervised by the Cyprus Financial Supervisory Commission. The initial deposit in this case is 10 thousand euros, and the account can be held in such currencies as USD, EUR, GBP, CZK, CHF, RUB, and PLN.

Vantage

This is a global CFD broker that offers its clients access to an efficient and effective CFD trading service for stocks, Forex, commodities, and indices. Making money on stocks in this case is possible only through CFDs. It has been operating on the market for more than a dozen years and provides traders with lightning-fast execution of orders, as well as competitive spreads. It offers a range of investment, drawing, and analytical tools, as well as market analysis and training materials to help you take full advantage of CFD trading. With this broker, the minimum deposit is $50. The spread, in turn, is variable, starting at 0.0 pips.

XM

This broker offers more than 1,000 financial instruments, which are available on the Meta Trader 4 and Meta Trader 5 platforms, including CFDs on stocks, currencies, stock indices, commodities, forex, energy commodities, as well as precious metals. In this case, the minimum deposit is $5, and the spread can be as low as 0 pips.

Interactive Brokers

Interactive Brokers is an international brokerage company with 24 offices in 14 countries from around the world. It offers the largest electronic trading platform in the U.S., in terms of the number of trades, and brokers’ options, stocks, futures, forex currencies, futures options, bonds, and funds. In this case, the minimum deposit is 0 USD. The spread is variable, market-based, and follows a multi-level model.

Naga Markets

This is a popular broker, whose services are used by more than a million traders. The trading platform has many advantages and various useful investment tools. Among other things, traders can copy the movements of top traders with a single click. The minimum deposit is only $1, and the broker is supervised by regulatory authorities.

Pepperstone

This is a broker that offers competitive spreads in the industry. With its help, it is possible to invest in the world’s largest markets at relatively low costs. Traders can enjoy lightning-fast order execution with low spreads that start as low as 0.0 pips. The minimum deposit is $200.

Plus500

This is a market-leading CFD broker that offers very good conditions for investing in stocks, forex, options, and indices, using innovative investment technology (read more: Plus500 demo). The initial deposit here is €100, and the account can be held in currencies such as USD, PLN, EUR, and GBP. The spread is variable, and the broker is regulated by the most important regulatory bodies in the world.

Saxo bank broker

Saxo is a global investment bank, which is used by more than 850,000 investors from around the world. Here it is possible to buy stocks on the stock market, and invest in ETF funds, commodities, cryptocurrencies, as well as currency pairs on the forex market. Saxo Bank is a broker with many years of experience in the international market. The minimum initial deposit here is 2,000 euros, and the spread is variable, depending on the market and the type of account.

Tickmill

This is authorized and regulated by CySEC, requiring customers’ funds to be kept in separate accounts and accounted for. It also provides a guarantee fund for investors. The minimum deposit is USD 100, and the spread starts at 0.0 pips.

TMS

This is one of the oldest brokers, which has been operating since 1997 and offers trading in instruments that are based on the valuation of currency pairs, commodities, indices, and cryptocurrencies, currencies, as well as stocks, so the broker allows you to make money on stocks. Moreover, TMS is regulated by the Financial Supervisory Commission. There is no set minimum initial deposit.

Investment platform – how to choose the right one?

Investing in stocks and other financial instruments is not possible without an investment platform. Its choice also matters, because well and quickly operating, with useful features, are able to significantly increase the effectiveness of the investments made. What to pay attention to in order to choose the best investment platform?

Speed and reliability

A good investment platform should be characterized by speed and reliability. This will ensure that the investor’s movements will not be delayed by the poor performance of the platform, and, as you know, in the case of stock market investments, every second counts.

Additional functions

Additional functionalities are of importance, in particular, for advanced investors who are proficient with such tools. For novice investors, a few basic features, such as the ability to perform technical and fundamental analysis, will suffice.

Education section

Brokers, as part of the platform they provide, often also give their clients the opportunity to learn, with educational materials offered as part of their services. Some offer very extensive training sections, while others offer more modest ones. The materials can take a variety of forms, such as videos, articles, etc. This allows everyone to choose a form of learning that is convenient for them.

Investing in stocks – advantages, and disadvantages

The biggest advantage of investing in shares is that the buyer becomes a shareholder, i.e. a co-owner of a certain company. This is associated with a number of rights, the main ones being the right to vote at general meetings, as well as the possibility of receiving dividends. The downside is that the stock market is not efficient and valuations of specific companies often take away from their actual values. Below is a list of the most important advantages and disadvantages that are associated with investing in stocks.

Advantages of trading and owning stocks to primarily:

  • The ability to influence the company’s decisions – in the case of buying large stakes,
  • Participation in the profits of the company,
  • The ability to sell the shares held when the investor decides that he does not want them in his portfolio – he does not have to look for another party to the transaction,
  • If the investor chooses a good company whose share price is rising, he will make money on this growth.

Stock trading, on the other hand, has the following disadvantages:

  • Risk of losing all invested capital,
  • Lack of leverage,
  • Lack of knowledge at the appropriate level that pertains to individual companies – stock trading is a time-consuming activity,
  • Ability to invest in stocks only during the trading session,
  • The opportunity to make money on dips is not readily available.

Investing in stocks – useful tips

Stock trading has gained considerable popularity and more and more novice investors are characterizing themselves on this form of the stock market investment. Although before many it is considered relatively safe, one should not forget about the investment risk and the possibility of losing even the entire invested capital. It cannot be completely eliminated, but it can be reduced by applying a few key principles.

Acceptance of risk

It is best to come to terms with risk even before you start investing. This element will always be present in any type of investment. In the worst-case scenario, it may happen that the investor loses all the money involved. It is worth preparing emotionally for such an eventuality.

Diversification of the investment portfolio

Another very important principle is diversification, i.e. investing money in various financial instruments, not just one type. In this way, the investor is able to protect at least some of the money when the shares of any one company or industry start to lose value.

Learning how to invest

A prospective investor should know that investing in stocks and other financial instruments involves a continuous expansion of knowledge in this field. This type of knowledge, however, is generally available, so an investor, depending on the needs, can be various sources, including online articles, eBooks, audiobooks, webinars, or training courses, both online and onsite.

Investing in accordance with your knowledge

One should enter into stock market investments in small steps. First, you should invest in those financial instruments on which you have already gained knowledge. Only as you gain knowledge and experience can you expand your investments. Throwing yourself into the deep end right away is not a good move.

Picking the right plan and strategy

Before making his first investments, an investor should choose an investment strategy and stick to it. He can use investment strategies that are available on the Internet or decide to create his own, based on existing action plans. It all depends on the investor’s individual situation, his capital, and his expectations from the stock market.

Choice of time horizon

In addition to the investment strategy, it is important to choose a time horizon, i.e. decide to invest either short-term or long-term. In the first case, investing involves opening and closing from a few, even up to dozens of trades each day. This is known as day trading, which usually requires the dedication of time and some experience from the investor. Long-term investing, on the other hand, is an option suitable for people who treat this occupation as an additional one.

Then it is enough for them to look at the investment portfolio several times a year.

To invest in stocks, in addition to meeting the formal requirements, you need to have knowledge at an appropriate level, as well as certain skills. Knowledge can be acquired from a variety of sources, such as websites, educational sections at brokers, or at training and courses on investing. It is also important to choose the right broker, as well as an investment platform that can increase the efficiency of the investments made.

The chosen investment strategy and other elements, such as portfolio diversification or the investor’s own approach to investing, are also important. A bit of luck is also significant, which is worth remembering. Sometimes you just have to be in the right place at the right time.

Stock trading is often chosen by novice investors. Stocks are financial instruments that are considered by many to be relatively safe. However, it should not be forgotten that they are also risky assets and an investor can lose even all the invested capital. However, it is worth following the rules that allow you to reduce risk and generate profits on your investments.

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