Investing in stocks is one of the most popular ways for people to try and achieve financial independence. Stock trading and investing can be daunting for beginners, but this guide will help new traders understand exactly what stocks are and how to pick the right ones. Also, discover what can impact the price of a stock and learn about some of the risks involved when investing in stocks.
Stocks: how to invest in as a beginner
Investing in stocks involves taking part ownership in a firm. As the performance of the company you’ve invested in rises and falls, so will the share price and value of your investment.
What are stocks?
Stocks are a type of security that gives holders a share of ownership in a company. You own a certain percentage of the firm and are entitled to a pro-rata share of its profits. Companies issue stocks to raise money to help them grow and develop.
Stocks are traded on stock exchanges such as the New York Stock Exchange, the NASDAQ, the London Stock Exchange and the Australian Securities Exchange. These organisations have rules and regulations to ensure that the market operates efficiently and fairly.
The prices of stocks can go down as well as up, so how do you make money from stocks?
How to invest in stocks
Stock trading for beginners involves considering your overall investment aims and your reasons for investing. Your risk-profile will dictate which types of stock you should hold, taking into account the inevitable fluctuation of market prices.
Some investors buy stocks to gain broad exposure to the financial markets. If this is the case, blue-chip stocks or stock ETFs offer lower risk-return . Alternatively, spend time trying to discover growth stocks that might outperform the market.
It’s generally recommended to diversify your portfolio, and so some investors choose to follow both approaches and build a collection of stock positions that complement each other, smooth out returns and mitigate against risk.
Historically, the stock market is well-known for making long-term gains. Since 2000, there have been four bear markets. These have shaken some investors out of the market, but those that held on to positions in the S&P 500 Index, for example, would have made potential gains of 145%.
Tip: Thanks to online brokers revolutionising the investment sector, stock trading is relatively cost-effective. It’s possible to set up an online brokerage account and book your first trade in a matter of minutes.
How to pick a stock
Stock investing ultimately comes down to picking the right stock to buy at the right time. Fundamental analysis can help you to consider the likelihood of a firm’s business model leading to growth and generating greater profits in the future. Long-term investors, who are usually able to ride out any market volatility, often favour this approach.
For those more interested in short-term objectives, studying price charts and using technical analysis tools can help to understand the immediate supply-and-demand for a stock, as well as where the price is potentially heading, rather than the reasoning behind these price moves.
Tip: Long-term stock investing involves riding out the ups and downs of the market, and beginners have the option to build a portfolio of stocks that match their appetite for risk.
How does stock trading work?
Stock trading works by speculating on short-term spikes in stock prices. Whereas some stocks, such as dividends, suit investors looking for a low-maintenance, buy-and-hold approach, those interested in trading stocks more actively will need to commit additional time and resources to the process.
Regardless of the approach, having a clearly thought-out plan will help you to stay on course, and there are a number of different strategies available to help support every type of investor or trader.
Tip: Investing and trading are two very different things. Establish which approach you want to take in order to try and achieve financial independence.
What impacts the price of a stock?
Stock prices can be influenced by firm-specific factors, as well as events in the wider market. For example, a company’s stock price might rise if its directors make a positive announcement. Alternatively, the price might change in line with global investor sentiment, due to rising or falling interest rates, consumer spending levels or geopolitical events.
How to Profit from Stocks
There are three main ways that stock price moves can result in a trading profit.
| Capital Gains | If you buy a stock and its price goes up, when you sell it, the cash proceeds will be greater than the amount you paid to enter into the trade. |
| Dividend Income | Some stocks pay dividends to shareholders. This involves a company distributing a share of its profits to its owners. |
| Short Selling | Contracts for Difference (CFDs) allow traders to short sell a stock that they think is overpriced. If the price subsequently falls, they can buy it back at a lower price and make a profit. |
Tip: Most stock valuation models are based on what a company’s future earnings will be. Follow company announcements to establish whether a stock is over or undervalued.
Risks of investing in stocks
The main risk associated with stock investing is “market risk,” the chance that the price of the asset you hold may go down. This is an unavoidable aspect of investing.
Although you can’t influence price movements, you can follow a strategy that makes it easier to stick with your positions and help to avoid emotional investing. If your risk appetite is low and your investment aims are modest, buying lower risk stocks could be a good option.
Build a collection of stock positions that complement each other, smooth out returns and mitigate against risk.
Final thoughts
As with all assets, there is a risk that the stocks you invest in might experience a fall in value, but they are still an excellent option for many beginner investors.
Visit the eToro Academy to learn more about investing in stocks and other asset classes.
Quiz
FAQ
- How do I analyse stocks?
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There are different strategies available for analysing stocks and getting a better idea of potential future price moves. Fundamental and technical analysis are both popular approaches, but investors can also use personal experiences of a company to know whether they want to invest. First-hand analysis of a business can be just as valuable as attempting to read the charts.
- Which stocks should I buy first?
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If you’re approaching the situation with no, or minimal, existing stock holdings, then, a fund-style product, such as an ETF, can be a good way to start investing in stocks. Instead of buying one single stock, you buy a basket of many that follow a theme. For example, the Energy Select Centre SPDR ETF contains 23 stocks from the global energy sector, whereas the SPDR S&P 500 ETF tracks the value of the 500 US stocks that make up the S&P 500 Index.
- How much of my capital should I invest in stocks?
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Historical performance is not an indicator of future returns. However, stock markets have consistently generated returns over a long period of time for many investors. As a result, many people suggest delegating approximately 70% of your portfolio to stocks, and the remaining 30% to other asset classes. This number will vary according to personal circumstances, as well as your risk-profile.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past 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 guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.