A GUIDE TO TRADING
AND INVESTING IN STOCKS

Investing in stocks is a way to potentially make money when a company does well, as the value of stocks can go up over time. However, it’s crucial to do your homework and understand the potential risks before diving in.

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Investing in stocks is one of the best ways to build wealth and achieve financial independence. But it can seem intimidating, especially if you’re a beginner. This guide will provide you with a solid foundation to navigate the stock market with confidence. 

By the end of this lesson, you’ll have a clear understanding of what stocks are, how the stock market works, and the key factors to consider before investing in stocks. 

What are stocks? 

Stocks are shares of ownership in a company. 

When a company wants to raise money to grow its business, it can issue shares of stock. So when you buy a stock, you’re buying a piece of that company. As a shareholder, you have the potential to make money if the company does well and its stock price goes up.

Stock prices are influenced by a variety of factors, including company performance, economic conditions, and investor attitudes. While stocks can be volatile in the short term, they tend to provide higher overall returns than other assets such as bonds and cash.

What is the stock market? 

Stocks are bought and sold on stock market exchanges like the New York Stock Exchange (NYSE), the NASDAQ, the London Stock Exchange (LSE), and the Australian Securities Exchange (ASX). 

These exchanges each have rules to ensure that the market operates efficiently and fairly.

The stock market works on the macroeconomic principle of supply and demand. When there are more buyers than sellers for a particular stock, the demand increases, and the price tends to go up. On the other hand, if there are more sellers than buyers, the supply exceeds the demand, and the price may go down. 

Where to start investing in stocks 

To participate in the stock market, you’ll need a brokerage account. These days, it’s never been easier to invest thanks to online brokers. You can often set up an account and make your first trade in a matter of minutes. 

Once you have an account, you can place orders to buy or sell stocks. 

You’ll need to follow a few key steps to begin investing in stocks. First, educate yourself. Take the time to learn about different investing strategies, understand financial terms, and familiarize yourself with the companies you’re interested in. Knowledge is your best friend when it comes to investing.

You’ll also want to reflect on your reasons for investing. This will dictate how much risk you’re willing to take on and which stocks you should choose. 

How much money do you need to start investing? 

One of the great things about investing in the stock market is that you don’t need a fortune to get started. 

Some online brokers offer the ability to invest in fractional shares, which lets you buy a portion of a share rather than the whole thing. Fractional shares make it easier for investors with limited funds to participate in the stock market.

While you can start with a small amount, it’s important to keep in mind that investing is a long-term commitment. Ideally, you should aim to invest regularly and consistently over time.

This approach, known as dollar-cost averaging, allows you to buy more shares when prices are low and fewer shares when prices are high, potentially reducing the impact of market volatility.

How to pick a stock

Stock investing ultimately comes down to buying the right stock at the right time. It often takes careful consideration and research. 

First, define your investment goals and risk tolerance. Determine whether you’re looking for long-term growth, regular income, or a mix of both. This will guide you in selecting the right type of stock that aligns with your objectives.

Next, conduct thorough research on the companies you’re interested in. Look beyond the stock price and dig into their financials, including revenue, earnings, and debt levels. Pay attention to industry trends and consider how external factors, such as changes in regulations, may impact the company.

When it comes to analyzing stock performance, there are two key methods: fundamental analysis and technical analysis.

Fundamental analysis looks at a company’s financial health, industry position, and growth potential. You can use this method to identify the likelihood that a company will continue to grow and generate profits in the future. Long-term investors, who are usually able to ride out any market volatility, often favor this approach.

Technical analysis, on the other hand, involves analyzing historical price and volume patterns to predict future stock movements. While it can be useful for short-term trading, it often requires more experience and knowledge of market trends.

Types of stocks to invest in 

Here are some of the most common types of stocks to invest in. 

Blue-chip stocks	Shares of well-established, large companies with a history of reliable performance. These stocks are often considered safer investments because they have a proven track record and tend to withstand economic downturns better than others.
Growth stocks	These are stocks belonging to companies that are expected to grow at an above-average rate compared to the broader market. These companies often reinvest their earnings into expansion. Growth stocks can be an exciting opportunity to earn above-average returns. But they can also be riskier.
Value stocks	Shares of companies that are considered undervalued based on fundamental analysis. These stocks often have lower price-to-earnings (P/E) ratios compared to their industry peers. Value investors believe that the market is underestimating the true worth of these stocks, presenting an opportunity for potential appreciation.
Dividend stocks	Shares of companies that distribute a portion of their earnings to shareholders in the form of dividends. These stocks are popular among investors who want regular cash flow. Dividend stocks are typically found in mature industries, such as utilities and consumer goods.

The type of stock you choose depends on your investing goals and risk tolerance. The key is to diversify your portfolio with a mix of stocks.

Investing vs. trading stocks

Short-term stock investing (also known as trading) involves buying and selling stocks within a relatively short amount of time, often taking advantage of short-term price fluctuations. 

Traders aim to profit from these price movements by actively buying and selling stocks based on technical analysis, market trends, or other short-term indicators. Stock trading typically involves more frequent transactions compared to the long-term, buy-and-hold strategy. 

On the other hand, long-term stock investing focuses on a buy-and-hold approach. Investors select stocks with the intention of holding them for an extended period, for years or even decades. 

Long-term investing requires patience, discipline, and a focus on long-term goals. These investors hope to benefit from the compounding returns and potential growth of the companies over time. 

How to make money investing in stocks 

You can potentially make a profit investing in stocks by selling them at a higher price than what you initially paid.

There are two key ways that stock price moves can result in a profit. 

Capital gains	Capital gains occur when you sell a stock for a higher price than what you initially paid. For example, if you buy a stock for $50 and sell it for $70, you’ve realized a capital gain of $20. These gains result from the overall growth of the stock market or from individual companies’ performance.
Dividend income	Dividends are regular payments made by some companies to their shareholders out of their profits. These payments are typically made on a quarterly basis. By investing in dividend-paying stocks, you can receive a portion of the company’s earnings as a cash payment.

The stock market tends to fluctuate in the short term, but historically, it has shown an upward trajectory over the long run. By adopting a long-term mindset, you can benefit from compounding returns and ride out market volatility. 

Another way to protect your portfolio’s returns is through diversification. 

Spreading your investments across different stocks, sectors, and even asset classes can help mitigate risk. This way, if one sector experiences a downturn, you have the potential for gains in others.

Risks of stock investing 

The main risk associated with stock investing is market risk. Stock prices can fluctuate widely in response to economic conditions, market sentiment, geopolitical events, or company-specific news. These price swings can be unpredictable and may result in short-term losses or gains. 

Market risk is an unavoidable aspect of investing. Though you can’t influence price movements, you can follow a strategy that makes it easier to stick with your choices and avoid emotional investing.

Understanding and managing these risks is crucial to successful stock investing. It’s important to do thorough research, diversify your portfolio, invest within your risk tolerance, and stay informed about the market and the companies you invest in. 

Final thoughts

Investing in stocks can be an exciting and potentially rewarding journey. It offers the opportunity for growth, passive income, and building wealth over the long term. 

By understanding the risks, diversifying your portfolio, and staying informed, you can increase your chances of achieving your financial goals through stock investing.

Visit the eToro Academy to learn more about investing in stocks and other asset classes.

FAQs

Is stock investing safe for beginners?

Stock investing carries risk, but it can be a great option for beginners. Keep in mind that the stock market can be volatile, and individual stocks can experience price fluctuations. As long as you do your research and take a long-term approach, beginners can navigate the stock market and potentially achieve their investment goals.

Can I invest a small amount of money in stocks?

Yes, you can invest small amounts of money in stocks. Many brokerage firms now offer fractional shares, allowing you to buy a portion of a stock even if you don’t have enough money for a full share. 

Are stocks a good investment for beginners?

Stocks can be a good investment for beginners, though it depends on individual circumstances and risk tolerance. Stocks have the potential for long-term growth and can outperform other investment options. It’s still important for beginners to consider their financial goals and risk tolerance before entering the stock market.

What are the best stocks?

There is no one-size-fits-all answer to this question. The best stocks vary depending on your individual goals and preferences. Some investors may prefer investing in well-established companies with a history of stable growth, while others seek smaller, high-growth companies.

How do I choose my stock investments?

Choosing stock investments involves thorough research and analysis. Start by understanding your financial goals, risk tolerance, and time horizon. Research companies, analyze their financial health, and evaluate industry trends. Don’t forget to diversify your portfolio by investing in different sectors and asset classes.

This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments.

This material has been prepared without taking into account any particular recipient’s investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.

eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.