How to invest in the stock market
The stock market is an organized physical or virtual market that puts sellers and buyers of shares and other financial assets in contact, who carry out their transactions through authorized intermediaries.stock investing how to
The stock market allows funds from savers (whether individuals or organizations) that seek to make their capital profitable to be channeled towards companies that need financing.stock investing how to
If you are thinking of taking advantage of your savings by investing part of them in shares, in this guide we will tell you the basic concepts of the stock market and what you should take into account before taking the plunge.
What does it mean to invest in the stock market?
Investing in the stock market means allocating capital to the purchase of shares of a company with the intention of obtaining a return on them. This profitability can be achieved through the distribution of dividends (when the company has profits and distributes them among its shareholders) or by waiting for the price of the shares to rise so they can be sold at a higher price than the purchase price.
What companies are publicly traded?
When companies need funds to grow and expand, one option they have, in the case of corporations, is to issue shares, that is, titles that represent a part of their capital stock. This issuance is made in the primary market, where the company sells its shares to the public for the first time and receives the money from investors. These shares are then traded on the secondary market, where they are bought and sold by investors. This secondary market is what is known as the stock market.stock investing how to
What is a listed company?
A listed company is a listed company; that is, its shares are admitted to trading on a regulated secondary market. In order to carry out a public offering of shares (OPV), a company must meet certain requirements:
- have a minimum share capital of €1,202,025 (not counting shares that exceed 25%).
- have a minimum market value of €6,000,000.
- that the corporation has fully paid-up capital and no transfer restrictions.
- Have a sufficient distribution (so that at least 25% of the shares for which admission is requested are distributed among the public).
- Submit a formal application for admission to the governing company of the stock exchange (in Spain, BMEX).
- Pass a verification process by the National Securities Market Commission (CNMV), which will analyze the documentation provided by the company, such as its bylaws, the corporate issuance agreement, the annual accounts, or the information brochure of the operation.
- Obligation to comply with information and transparency requirements (regularly submit their financial statements, conduct mandatory audits, etc.).
How your share price is calculated
When a company that wants to go public makes a public offering of shares (IPO), the entity that is in charge of placing its shares on the market sets an initial price for those shares. It calculates it by making an economic valuation of the company, considering its profits and forecasts of growth and profits in the future, and dividing this valuation by the number of shares that are going to be sold.
During the subscription period, interested investors can sign up for the IPO, and the share price can go up or down within an indicative price band that is included in the offer brochure. When the period of binding purchase requests ends, the share price is fixed and trading on the stock market is allowed.
Once the shares start trading on the stock market, their price will fluctuate depending on supply and demand, the economic situation of the company, the evolution of its sector, the general economic situation, or the sentiment of the market.
What do I have to take into account: yields vs. risk?
The return provided by some actions comes in two ways:
- The distribution of dividends
- The gains (or losses) generated by the evolution of the share price in the market, which only become effective at the time they are sold,
These returns are neither known nor certain nor predictable. This is the main risk of investing in stocks. The behavior of a stock in the past does not guarantee how it will be in the future. Its value can go up or down from the price it was purchased for for many reasons. It does not only depend on the reality of the company but also on other factors unrelated to it, such as the evolution of its sector, the situation of the markets and the economy in general, interest rates, inflation, or investor confidence.
One way to measure the risk of a stock is to know its volatility, that is, the variability of the stock’s profitability (how much its price rises and falls) in relation to the average in a given period. This parameter is also measured in comparison with the market and the sector to which the action belongs.
Before you start investing in the stock market,
Knowing the functioning of the stock market and the shares of listed companies, there are other issues to take into consideration before starting to invest in the stock market. First of all, this investment should be part of a broader financial planning strategy that takes into account other aspects of your domestic economy, such as controlling income and expenses, reducing debt, or creating an emergency fund for contingencies. And then yes, you can invest in shares with that money that you are not going to need immediately.
What is your profile as an investor?
Before making a decision on what to invest your savings in, you must be clear about your profile as an investor. That is, what risk are you willing to take your savings in, you must be clear about your profile as an investor. That is, what risk are you willing to take? Would you accept losing an investment? Do you even lose a lot of money? Or do you prefer to earn less but have your capital invested in a safer product? Risk is a concept linked to performance: the higher the risk, the higher the return, and, conversely, products with less risk will offer lower returns.
To find out if you are a risk-averse or risk-prone investor, answering the following questions will help you:
- What is your current financial situation? What are your sources of income? And your expenses and debts?
- What are your financial goals? That is, what objective do you want to achieve with your investment in the stock market? For example, saving 20,000 euros in three years to put down a flat or generating a complementary income to the pension of 500 euros per month when I retire
- What is the deadline to reach my goal? Depending on whether it is short, medium, or long term, the chosen investment product will be one or the other.
- What level of risk are you willing to take? In this question, you have to take into account both objective aspects (what is your financial situation and how would registering losses affect you) and a more subjective part (your way of being, your tolerance for or aversion to risks, and your financial knowledge).
If you use a financial institution to manage your share portfolio, it will have to carry out an adequacy test in order to advise you and recommend the financial products that best suit your profile. This evaluation delves into the previous questions (financial situation, level of training, knowledge of markets, investment experience, and investment objectives).
This way, the corporation can examine your financial situation and investing goals, identify you as a conservative or aggressive investor, and determine if you comprehend financial asset features and risks.
This test will help your company make risk-appropriate investment suggestions.
How stocks are bought and sold
To invest in the stock market, you must open a securities account with an intermediary to execute share purchase and sale orders.
Choose an intermediary.
Only authorized persons and entities can operate on the stock market. Investors have to resort to investment service companies, such as securities companies and agencies, or credit institutions to act as intermediaries in the stock market. The offer is very wide. The main thing is to confirm that the financial intermediary is authorized to provide investment services and registered with the National Securities Market Commission (CNMV). This verification can be carried out from the CNMV web browser.
services they provide
Investment services companies provide different services, such as:
- Investment advice
- Brokerage service: reception and transmission of customer orders
- Discretionary portfolio management
With regard specifically to investment in the stock market, what matters is the brokerage service. The intermediary (broker) receives the purchase and sale orders from its client and transmits them. The client has to give him precise instructions: what shares he wants to buy or sell, at what price, in what amount, and for what term. There are two types of basic orders:
- Market orders: The investor gives the order to buy or sell shares immediately at the best available price.
- Limit Orders: The order to buy or sell shares is only executed at the indicated price or better (if it is to buy, at the same or lower price, and if it is to sell, at the same or higher price).
Costs involved: fees and commissions
Financial intermediaries charge their clients various commissions for the services they provide. These commissions are a percentage of the operation amount, starting at a minimum. For example, when you buy shares of X company worth 1,000 euros, you will pay a brokerage commission as well as another for custody of the titles.
These rates include both the intermediaries’ own expenses (brokerage, custody, and administration commissions) and third-party expenses involved in the operation (contracting and settlement commissions). These commissions reduce the profitability of your investments, so you have to take that into account.
The setting of these rates is free, so one of the aspects to assess when choosing an intermediary is to know their rates and commissions in order to compare them with those of other investment service companies.
How to inform yourself to make the best decisions
Researched stock market investments are the best.
After researching your options and knowing the dangers, you should invest your savings in a financial product or action.
So, analyzing your investing goals and investor profile and seeking professional assistance are crucial.
Before and after investing, you must monitor your shares and follow market gurus in volatile times.
One of the main recommendations that any financial advisor will make to you is that you diversify your investments. As the saying goes, “don’t put all your eggs in one basket.”
This is one of the key strategies to mitigate risk: the benefits of some acts will offset the risks of others.
Another way to minimize the risks associated with equities is to invest for the medium or long term. If you consider your investment in the stock market with a multi-year objective, it is easier for momentary rises or falls in the stock market to affect you less, and, in addition, you will be able to take advantage of compound interest.
Your first securities account: what it is and what it is for
In order to invest in the stock market, you will have to sign a custody and administration contract with the chosen intermediary and open a securities account with him. This will be your tool for buying and selling shares, and it must be linked to a bank account to receive the money you invest in titles, commissions, and dividends.
The options to invest in the shares of listed companies are vast. There are renowned companies with a long history and others whose names are probably not familiar to you: large banks, energy companies, construction companies, telecommunications companies, or new startups. What titles to buy? Once again, the risk that you are willing to assume will be one of the indicators that guides you when selecting actions.
There are questions that will help you make this selection. For example: Is the company known? Can you find information about its growth and profit forecasts in the specialized press? Is there information about any circumstances that could make your shares go up—a purchase by another, larger company—or lower their price—job cuts, contraction of activity, etc.—? Do you usually distribute dividends? How often? What are the expectations of your industry, country, geographic region, etc.?
Don’t let the historical returns of one or the other titles deceive you when making a purchase.Be clear that past returns are not a guarantee of future returns.
Finally, another consideration that you should make when buying shares is the cost of the operation: what expenses and commissions does it entail?
To invest in shares according to different predefined factors. For investors with a conservative profile, these factors are:
- Minimum volatility.
For those who have a more dynamic profile, they are:
In these selections, there are options with more limited returns and longer investment terms and others with higher returns and shorter terms.
Retail investors should follow their companies’ progress, even if they’re not market experts.
In addition to specialized media, all listed businesses must notify the CNMV of any material that may affect their securities’ value (shareholders’ meetings, management changes, operations, social agreements, etc.). All this information is available for consultation on the CNMV website.
Track your investments
Your investment services provider or financial institution must send you frequent investment information in addition to public information from the companies in which you are a stakeholder.
This information will show you if the investment is working, if titles are rising or declining, or if threats have increased.
What do I do if my investor profile changes?
Your investor profile will alter as you gain market knowledge or expertise (approaching retirement age, changes in your financial situation, etc.).
With time, an aggressive investor may become more conservative, or your income and savings may make you more risk-tolerant.
Therefore, if your circumstances change, you should notify your financial advisor or the entity that provides you with investment services so that they can adapt their investment recommendations to your new reality.
Final tips for investing in the stock market
As we have already mentioned, information and knowledge are essential when making investment decisions on the stock market. Another component is important.
Investing biases—psychological variables that affect decision-making and might cause mistakes—should not be ignored. .
Investment biases are psychological factors that influence decision-making and can cause mistakes.
Be aware of biases when making financial decisions.
Links to authority websites with tips for beginners
The Spanish National Stock Market Commission (CNMV) oversees stock markets and their participants.
Its website includes fraud alerts, beach bars, financial education materials, and basic investing advice.
Stock market beginners might use the Bank of Spain’s Finanzas para Todos portal.
It provides guidelines, videos, seminars, and tools to increase financial literacy and investment decision-making. .stock investing how to
At a more advanced level, the BME Bolsas y Mercados Espaoles website (the holding company that integrates the four stock exchanges in our country) provides updated information on the state of the market and the different indices, variable and fixed income products, or derivatives that are traded on it.
The Spanish Association of Financial Advisers and Planners website offers sections on investment and markets and financial education. stock investing how to
To continue delving into stock market investment, you can turn to specialized bibliographies. These are some of the most recommended books to start buying stocks:
- Benjamin Graham’s 1949 value investing classic, The Intelligent Investor (investing in value).
It’s a long-term strategy to buy shares and boost their worth.
Another renowned stock investing book is One Step Ahead of Wall Street. .
Investor and businessman Peter Lynch describes how he became a top fund manager.
Warren Buffett’s management, investment, company evaluation, and financial articles are in this book.
- The most important thing to invest in is common sense. This book by Howard Marks summarizes the keys to financial success: critical thinking, risk criteria, and a strategy. It is a recommended work for both novices and experts in the field.