One day we were all beginners in something. Nobody is born knowing, and in this article, I would like to show you the questions you asked me when I began to learn how to invest in the stock market and everything I have learned on the way from saver to the investor.Hinvesting in stocks for beginners
Stock market investment has greater security, profitability, liquidity, and flexibility than any other type of investment. It allows you to protect your savings from inflation by creating an estate for your retirement or your heirs.
Let’s see how it works.
What is the stock exchange for beginners?
You have to think of the stock market as if it were a supermarket where producers (companies) make a part of the property available to buyers (shareholders) to raise money through their growth.
The stock exchange ensures that the purchase and sale of shares take place in a safe way and attracts more companies that want to share their property with savers who want to invest money.
How do newcomers invest in the stock market?
It is important to know that there is no single bag. In the world, more than 70 bags are distributed on 5 continents. Almost all developed economies have one or more stock exchanges in their country, on which national companies are generally listed or have interests.
How to invest, step by step
To invest in the stock market, you need to take the following steps:
- Have enough savings for your day-to-day needs (an emergency fund). The savings you need are not invested in the stock market in a short period of time. The rise and fall of stock prices (volatility) can cause your investment to fall when you need the money.
- Be of legal age. Although for a while, some brokers were allowed to invest as minors, almost none of them left. One option is for your parents to create an account for a minor and invest an amount in his name. In Spain, Indexa Capital and My Investor offer that option.
- Open an investment contract with a broker. In the stock market, you can’t buy directly; you need an intermediary company called a broker. This company has changed the commission allowing you to buy and sell shares.
- Transfer money from your bank to the broker through bank transfer, Paypal, Sofort, or Neteller.
- Select the stock and the exchange where you want to buy the stock or ETF. The same stock may be available on several exchanges, but not all will have the same liquidity, nor will you pay the same commissions.
- Launch a purchase order when the bag is open. It is important to know the types of orders and what each one implies (what types of orders are there to trade on the stock market?)
Once those steps are followed, you will have a part in the company selected. The stock market is the mechanism that allows you to be part of businesses as disparate as Amazon, Google, Inditex, or Apple. It is important to understand all these concepts. I leave you a series of videos where you can consolidate this knowledge learned so far:
Where should I invest as a beginner?
Let’s look at all the options available to invest in and see which ones suit beginners. With your money, you can invest in the following types of assets:
- Properties: apartments for rent, garages, commercial premises, warehouses
- Land: crops, plots
- Physical precious metals: gold, silver, platinum, and diamonds
- Art: paintings, sculptures, musical pieces, cinema
- Collectables: stamps, coins, wines, whiskey
- Bank assets: deposits and promissory notes
- Private companies: startups, sports teams
- Fixed Income: Bonds, Treasury Bills, Bonds
- Alternative financing: crowdfunding and crowdlending
- Stock market: stocks, investment funds, ETFs
- Derivatives: options, futures, CFDs, warrants
- Cryptocurrencies: bitcoin, Ethereum, etc.
The stock market is undoubtedly the best place for beginners to invest in a diversified and long-term manner.
How do you earn money on the stock market?
By buying shares, you can earn money in three ways:
- that the shares get up in price
- that the company distributes dividends (annual profits distributed among the shareholders).
- If you invest in stocks outside your country, the exchange rate favours you.
How much money do you need to invest in the stock market?
Let’s look at the three alternatives we discussed to investing in the stock market and the money needed to start investing.
- Stocks and ETFs: the cost of a share
- Some brokers allow you to buy fractional shares.
- For example, the minimum price of a share in the case of Inditex is $20, but an Amazon share is worth more than $2000.
- Investment funds: the minimum required by the manager will depend
- It can range from a simple donation to tens of thousands of euros.
- Robo-advisors: companies that create a portfolio of funds or ETFs for you; the minimum can range from €150 to $3000.
How to start investing with little money
The commissions are the main problem if you have little money to invest. Investing is not free, and you should know that from the beginning. Imagine that you start investing with 100 euros and the broker’s commission is 10 euros for buying a Repsol share. You will have lost 10% of your investment as soon as you start.
For that, I give you two recommendations:
- Invest only in low-commission brokers.
- Reduce the number of purchases and sales: the less you operate, the less damage.
That is why it will be best if you have little wealth to start with a portfolio of investment funds or robo-advisors.
Commissions for investing in the stock market
Knowing where to put your money in the stock market is as important as choosing which platform you will invest with. Making the wrong decision and starting from scratch can waste money.
Let’s see a list of the commissions that we can face if we start investing in the stock market:
- Custody or maintenance fee: the monthly fee for keeping your assets on the platform, which usually ranges from 5 to 20 euros per year. Ideally, it should be 0.
- Purchase and sale commission: A commission is charged for each transaction, which can be a percentage or a fixed amount. It usually ranges from $5 to $20. The ideal is to reduce it below $5 and not operate with the banks.
- Dividend payment fee: the cost of receiving a dividend usually ranges from 0.50 to 1 euro. In many brokers, you can find it for free.
- A currency exchange fee is applied for buying shares in a different currency from your securities account. It oscillates between 0.1 and 1%. Stay with brokers that charge less than 0.5%.
Advantages and risks of investing
Advantages of investing in the stock market
- Periodic income: It is a very important advantage since the portfolio of shares that we believe will generate income for dividends from the shares. It must be taken into account that the money obtained by collecting dividends can be reinvested in buying more shares or used for our own consumption, depending on the needs of each investor. Dividends are the profits companies have each year and decide to distribute among their shareholders.
- Low commissions: They are low if we compare them with those of other assets or the expenses of investing in a property, but of course, you have to consider that they are charged per transaction. Therefore, we must inform ourselves very well about the broker’s commissions before starting to operate.
- Total freedom to invest: We have no obligation to buy or sell if we do not see that it is the time for it; we always own our movements.
- Diligent in deciding to enter or exit: We can enter or exit the market anytime; our positions have little influence compared to the market size.
- Invest in securities outside the stock market indices: We can invest in very good companies that do not meet the requirements for size or liquidity to belong to any index and to which surely no investment fund pays attention.
- Ways to fight inflation: the stock market allows us to invest in assets that protect us from inflation, such as real estate companies, commodities, etc.
Risks of investing in the stock market
Just as I highlighted its advantages, we must also consider the risks we face when investing. To our ignorance, when we begin to be interested in the stock market, we must add the breadth of terms, analysis, “experts,” markets, and existing products.
Before investing, we must take into account the risks that exist:
- Market risk is the possibility that when you decide to sell your investment, it will be worth much less than you invested.
- Liquidity risk: if you can’t find someone to buy the shares you have bought, you will have to offer them at a discount.
- Exchange rate risk: if you invest in shares in dollars or another currency other than the euro, it may happen that even if your investment goes well, the exchange rate is unfavourable, and you lose money.
It is important to know that in the stock market, you can lose all the money you invest if companies go bankrupt. Still, you will never lose more than you invest, and the risk of it happening in a diversified portfolio is almost impossible.
To avoid these risks of investing in the stock market, the most important thing is that you read, train, analyze, and know the sector and the companies for yourself.
How do I start investing from scratch?
I’ll tell you 10 steps you should follow to start investing from scratch.
- Analyze your financial profile: income vs expenses, life stage, savings capacity, future plans, professional career, liquidity buffer.
- Analyze your psychology: How do you deal with losses? Are you consistent?
- Establish an investment term: 1, 5, 10, 20 years?
- Establish what your loss limit is. The stock market fluctuates, and you should know that it may not be the most favourable when you need the money, and you will have some losses.
- Set your target return: always remember that more return means more risk and that the best investors of all time have not generated more than 20% per year in the very long term. Be realistic; if they promise you very high returns, be suspicious.
- Decide your investment style: many investors just want to save and have someone create a diversified portfolio (for example, a robo-advisor), while others like to select stocks, and even the riskiest investors want to buy and sell frequently by trading.
- Select your broker: the differences between the most expensive and cheapest brokers on the market are impressive. So compare brokers and find the one that best suits your profile.
- Save: It is essential that, in the long term, you save and that your savings are invested. The sooner you start, the sooner compound interest will do its magic.
- Diversify: It is important not to have all the eggs in the same basket. You must diversify by countries, sectors, and assets.
Once you decide this, you are ready to start, but first, you must choose your investment strategy, and here the eternal debate of the stock market opens. How do I select which action to buy? I will introduce you to the two most commonly used types of analysis when investing in the stock market, which is totally opposite. They are not the only strategies, but they are the most used.
Types of Analysis on the stock exchange
Once you decide this, you are ready to start, but first, you must choose your investment strategy, and here the eternal debate of the stock market opens. How do I select which action to buy?
I will introduce you to the two most commonly used types of analysis when investing in the stock market, which are totally opposite. They are not the only strategies, but they are the most used.
The fundamental analysis tries to determine the value of companies based on their results and the assets they own. How? With a series of metrics:
- PER: It relates a company’s market capitalisation to its net profit, that is, its profit per share with its price per share. It tells us how many exercises are necessary for the profits generated to equal your market capitalization.
- Price/cash flow is a relationship used to compare the market value of a company with its cash flow. The lower the relationship, the better its value will be.
- Price or accounting value measures the relationship between the price at which the shares are quoted and the value of their own funds, that is, the book value of their assets minus the book value of their debts.
1: The price at which it is quoted is lower than its book value, and therefore we would be facing a purchase opportunity.
= 1: The company is quoted at a price approximately equal to its book value.
> 1: The price at which it is quoted is higher than its book value.
- ROE: measures the return that shareholders obtain from the funds invested in the company, that is, the company’s ability to remunerate its shareholders.
- The net dividend per share is the amount of net profit a company achieves that is divided or distributed among the number of shares.
- DIVIDEND PROFITABILITY: measures the percentage of the share price that goes to shareholders in the form of a dividend each year.
- NET PROFIT (MILLIONS): The profit remains in the company after covering all expenses and taxes.
- EBITDA (in millions of dollars) is the gross operating profit calculated before the deductibility of expenses.
- BPA is part of the profit corresponding to each company share; it tells us its profitability.
You can learn all the details in this stock market blog written from scratch. If you are especially interested in the valuation of companies, you can learn more in Company valuation: PER, EBITDA, cash flow, sales, and capitalization.
In the technical analysis, you have to look at the charts of the quotes and the evolution of your quote without taking into account the results or assets of the company.
Broker’s platform usually provides these indicators.
- Trend indicators
- Volume indicator
- RSI (relative force oscillator)
The debate between these two analyses is a little complex since some analysts believe that only the fundamental needs to be done and others the technical. I think you must both be complex and stay away from the dogmas that tell you that it is easy to perform them and that you have to discard everything from the other.
How do I choose a broker?
In order to invest in the stock market, we need a broker. A broker is an agent or entity that manages the negotiations between a buyer and a seller on the stock exchange, charging a commission on each transaction. That is, the person or entity acts as an intermediary.
The doubt that invades us all is which broker will be better or which one we can trust. If your bank charges a lot of commissions, you should study all the brokers in detail to see which one convinces you the most.
Types of brokers
You will hear about many types of brokers. I try
An assistant to find out which broker suits your investment profile. If you start on the stock market from scratch, this point is one of the most important.
- Brokers without commissions are those who do not charge commissions for buying and selling but for currency exchange or the flow of orders.
- Multi-product brokers: they offer stocks, ETFs, and derivatives
- Forex and CFD brokers replicate all types of assets, offering leverage.
- STP/ECN: Send your orders to liquidity providers.
- Market Maker: They are your operations’ counterparts. Whatever you earn, the broker loses it, and vice versa.
Frequently asked questions about investing
How are stock market profits taxed?
Taxing profits from stock market investments is complicated since it depends on the financial product acquired and the country. This tax rate applies to both dividends and investment funds, such as shares, the year after closing the position.
What days can’t be invested?
It is important to check the calendar of the world stock exchanges to know what days you can’t trade on the stock market because it is closed. They usually close on New Year’s Eve, Easter, and holidays.
What time does the bag open and close?
It depends on the bag. Generally, the schedule of the bags ranges from 8:30–9 in the morning to 4–6 in the afternoon local time.
How profitable is it to invest in stocks?
This one is the most famous graphic you should always remember. Jeremy Siegel’s book Stocks for the Long Run shows that long-term investing in stocks has been the most profitable investment.How to invest in the stock market as a beginner
When is the best time to buy shares?
It is best to invest in a diversified way and with periodic contributions. That said, if you are reading these letters, the stock markets are in a significant fall, and they open the news with the news, you are in luck. It’s a good time to invest .How to invest in the stock market as a beginner