Investing in the stock market may sound elite, but for some time it has been available to, and simple from the level of an individual user. All you need to do in order to invest in the stock market is create a suitable account with a broker, and, basically… that’s it. The whole process may take even less than a day.
How the stock exchange works
In the past, the money exchange used to be a physical place where it was possible to buy shares, bonds, foreign currencies, issued in the form of paper “receipts” by individual banks or companies in exchange for money (or, even earlier, bullion). Nowadays, most of the operations on the stock exchange are carried out over the Internet, and issuers release virtual assets, which are credited to the investment accounts of individual investors.
The entire stock exchange is based on the pairing of buying and selling offers. Those who sell are mainly issuers and small businesses, while buyers are other businesses. Everything happens in real time, with only a slight delay due to the data transfer (often of less than one second).
The stock market is above all a reliable indicator of the value and stability of companies. The shares and bonds of promising companies reach high prices and tempt investors with the promise of further value growth in the future. And the company itself generates additional income from the issue of securities, which it can trade as company capital.
What are shares on the stock market?
A share is a type of security that not only has a certain specific value (a price) that varies in time, but also gives the purchaser many intangible rights. Shareholders have the right to vote at the meeting of the company’s authorities as well as at the so-called shareholders meeting. In many cases, however, especially when an investor has acquired few shares in a given company, they voluntarily waive that right, knowing that due to a dilutive effect on that right, they will have no significant voting control. Usually, the majority of the companies’ shares are divided between the management/founders, and only a small part of them is traded.
What should be of interest to a trader are the property rights they acquire when purchasing shares. A shareholder is entitled to dividend, i.e. to a share in the profit of a given company. They also have the right to participate in the division of the company’s assets, if the company is liquidated.
The price of shares available on the stock market is usually higher than their nominal value, because those are so-called issued shares. In this way, the company generates additional income and an investor receives shares, whose value may change if the company increases or decreases its capital.
An investment in shares is considered to be a long-term investment with relatively low risk of losing capital. However, how an investor will treat shares as an investment depends only on their strategy.
How to choose shares on the stock market?
First of all, take into account the projections regarding the share prices of the companies concerned. These depend on numerous factors, both internal and external. However, there are certain essential principles that are useful when investing in shares.
It’s not a good idea to buy shares just because they are cheap. Just because something costs little at a given point in time doesn’t mean that its price will suddenly go up. There are shares which keep low, competitive prices, and whose value never increases.
One should also not invest in a negative trend, hoping that it will suddenly be reversed, and then the investor will make large profits of several times the value of their capital. That’s most often not the case, and the negative trend as well as a decline in value are progressing instead of being reversed.
Highly indebted companies are risky, as are those that try to save capital by paying dividends that exceed their own profits to shareholders. A company can gain some time by doing so, but the shareholder will still lose on that, because the dividend will either not be paid at all due to the company’s bankruptcy and claims that exceed its value, or the shares themselves will prove to be worth little.
Also, companies which keep issuing new shares over and over again are suspicious. Not only does the price of such shares fall, but it is also a sign that the company has problems with generating profit and saves itself from bankruptcy in this way.
What should you take into account when investing on the stock exchange?
Above all, focus on your own knowledge and experience. Do not succumb to the pressure of subsequent, changing trends, daily falls and profits.
Do not invest all you have in a single company right away. That’s very risky and may turn out to be the end of your career as an investor. It’s advisable to divide your capital among several promising companies, thus hedging yourself against the risk of losing a large part of the funds in the case where the shares of one of them dip.
It’s best to simply invest in shares of companies that generate profit. A company which has no problem with generating a sound turnover, is not indebted and doesn’t postpone the implementation of its projects – is stable, trustworthy and promising for the future.
Effective investing, or how to invest on the stock market
Above all, any profit can be lost due to a poor broker who charges too high commission. Therefore, even before setting up an investment account, consider what strategy to go for, especially in terms of the number of transactions. Brokers often charge a commission on each transaction, and its amount can drain the future profit of investors who make many minor buy or sell transactions.
After opening an investment account, it is a good idea to review the current quotations. They usually appear with a delay of about 15 minutes, which in the case of most stocks doesn’t significantly affect their value. It’s the time when you can compare companies, read about their history, capital, ongoing projects and the future development plan. Then, you can choose the companies that promise the highest profits in the nearest future as well as in the few upcoming years.
To minimise losses, it’s good to set a limit – once it’s reached, the shares will be sold. This limit could be, for instance, a loss of 15% in value. Usually, it doesn’t pay to hold shares in a company with an extremely negative trend, bearing in mind that, unlike e.g. currencies, companies are more likely to collapse, and then their shares may be of completely no value at all. In the case of spectacular collapses, companies even record a million percent decline in the value of their shares, as was the case for instance with Kodak, a very well-known company which had been a market leader for many years, or with a computer giant Atari.
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