Buying and selling securities through the stock exchange is one of the ways to enhance your savings. However, this is one of the riskiest things to do in investing. You can earn quite a lot, but also lose money. It depends on which shares you intend to invest in, how much time you can devote to monitoring the market, what knowledge (or experience) you have, whether you invest in dividend stocks or, on the contrary, just plan to speculate on price changes, but in the end it also depends on luck. Therefore, let’s talk about trading on the stock exchange. Learn how to invest.
The stock exchange is where the supply of free money meets the demand for it. This is the part of the financial market that we can describe as the capital market. That is, a place where long-term securities are traded, most often stocks or bonds.
What is stock trading
It is important to know that there is not only a market with already issued securities, but also a market on which a new issue will appear. From this point of view, we distinguish between the primary market and the secondary market. An issuer of securities enters the primary market in order to obtain the largest possible volume of funds from investors, with which it intends to finance its (usually business) activity.
The primary market is therefore the place where the opportunity to invest in a particular security (share, bond) first arises. In the case of the primary stock market, this is usually the point at which a given title is listed on a stock exchange and the company in question becomes (partly or fully) publicly traded. We are talking about what is known as an IPO (Initial Public Offering).
The primary public offering can take place in a standard way, when the company entering the stock exchange usually hires one of the banking houses, which will prepare everything necessary. In particular, the prospectus, which contains all important information about the planned issue.
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But this process tends to be lengthy, so the possibility of entering the stock market through a so-called SPAC company (Specila Purpose Acquistion Company) has developed, especially in the USA. In translation, it is a “company established for the purpose of acquisition”. In practice, it is a company that has been established purely for the purpose of public trading on a stock exchange, and with which a company that wants to list its shares will merge. SPAC companies therefore exist only on paper, they have no business activities and usually no offices or employees.
Therefore, as soon as the IPO or public subscription of shares takes place (their sale at a pre-announced price), the shares of the given company become the subject of trading on the secondary market. In other words, shares that have already been traded one or more times are traded here. While the selling price of shares on the primary market affects the final yield for the issuer, developments on the secondary market have virtually no effect on the yield for the issuer. In the secondary market, shares are already bought and sold de facto for two reasons: 1) I want to profit from the rise or fall of their price, 2) I want to get a share that will bring me a regular and decent dividend.
How to invest money in the stock market?
Are you thinking of becoming a stockbroker? Why not, it’s nothing too complicated. However, you should always keep in mind that it is a relatively risky business, so you should approach investing in stocks with caution. Especially if you have little or no experience with it.
And especially in light of the relatively small demands placed on you before the very start of trading on the stock exchange. All you have to do is choose a broker (a person who mediates trading on the stock exchange) and you can “go for it”. But be careful, every serious broker should warn you about the risks associated with buying and selling securities. You should even fill out an investment questionnaire before signing a contract with a broker. More precisely, its completion by you is required of the broker by Directive No. 2014/65/EU of the European Parliament and Council on markets in financial instruments and Act No. 256/2004 Coll., on doing business on the capital market.
But how to find the right broker? The safest will be to look for those who have been established on the market for some time. There is a relatively solid selection in the Czech Republic, and it is not necessary to choose only from these twelve to trade on the stock exchange. Today, it is quite common to also use business applications, which are also supported by brokers from abroad.
The following criteria may help you choose:
- Check the broker’s location and what regulation it is subject to
- Find out whether it offers the instruments (asset types) you want to trade
- Find out how much the broker charges, either for brokering the buy/sell or for account management
- Try trading on their platform and demo account, if they don’t offer this option, it’s probably not a good choice
- Contact customer support to check the quality of the service provided
If you have chosen a broker, open an account with him and you can start trading. A credible broker should also comply with the regulatory requirement to separate the client’s account (or the money deposited in it) from its own accounts. You should also know that the money you deposit with the broker is insured by law. Unlike money in a bank account, however, only up to 90 percent, but up to a maximum of 20,000 euros.
How to choose the right stocks and follow the market
There is nothing complicated about the trading technique itself. After all, you could try this through a demo account with your chosen broker. Now comes the hard part of investing in exchange traded stocks. And to choose the right titles. But how to recognize them?
It is important to realize that there is no universal criterion by which to say “avoid these stocks” or “these stocks are safe”. Likewise, there is no miracle strategy that will guarantee you success when trading the stock market. Trading and investing involves working with statistics, risk and money management, and to a large extent it is about psychology. If you manage to manage these categories well, you have hope that you can profit in the markets in the long run.
Before choosing the stocks in which you will invest, clarify what you actually expect from it. Do you want to earn a lot of money in a relatively short period of time? Well, who wouldn’t want to. But earning a lot and quickly is something like the stock market squaring the circle. If you were to try it, it means taking a huge risk for you, sitting practically 24 hours a day at the computer and watching what is happening not only in the markets, but also in the global economy and evaluating the possible effects of this or that political decisions in important countries of the world.
It seems like a more reasonable option to first observe the market for some time, evaluate how the shares of companies from various sectors are developing, how sensitive they are to the course of the business cycle, central banks’ decisions on monetary policy or geopolitical events. It is very likely that pharmaceutical companies will be on course during a health crisis, on the contrary, arms companies will be on the rise during wartime conflicts. If the world’s major central banks signal interest rate hikes, then it’s bad news for stocks en bloc.
In the long term, it pays to invest in shares of companies that are subject to the described external influences as little as possible. This can be, for example, companies from the food sector, healthcare, but also the energy sector, for example. On the other hand, companies sensitive to the business cycle can include technological titles, partly also energy companies (mainly mining) or the banking sector.
If you want to dive deeper into market observation, you can follow the analyzes of various consulting firms. Analyzes are basically of two types: fundamental and technical. Fundamental analysis is based on the tangible results of a given company or circumstances that may affect its situation. In addition to financial criteria (such as profitability, turnover, etc.), criteria that affect the company environment can also be taken into account. On the contrary, technical analysis is based purely on the historical development of the value of the given stock on the stock exchange. For long-term decision-making, fundamental analysis is more relevant, from a short-term perspective, you can bet on technical analysis. However, both have their limits, which lie in the fact that you might have missed something or that history may not always repeat itself perfectly.
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How to invest – minimise the risks
It has been said several times that investing in stocks is one of the riskiest ways that people try to value their savings. However, this does not mean that the outlined risks cannot be reduced. It is essential to create an investment portfolio. Its composition should be such that a fall in the value of one type of asset is balanced (ideally outweighed) by an increase in the value of another type of asset. This kind of portfolio composition is called diversification.
You can also diversify your portfolio by investing in shares. In short, it’s about not investing the entire package of money that we have set aside for buying shares in only the shares of a single company or a single sector.
A balanced stock portfolio can be built from stocks that are sensitive to the course of the economic cycle, but also those that hold value regardless of how the economy is doing at the moment. The weight we assign to individual types of stocks within our portfolio depends primarily on our preferences, or more precisely on our relationship to risk.
If we are willing to take risks, we can invest to a greater extent in cyclical stocks, which typically include some energy (mainly mining) companies, banking stocks, construction companies, and currently also stocks of arms companies. Stocks that are not so subject to business cycles include (as already mentioned) stocks of food companies
If we decide to stick to the ground, then it is advisable to “load” our stock portfolio with non-cyclical titles. If we are risk neutral, our equity portfolio should be equally neutral.
Investing in so-called dividend stocks can also be considered reasonable. As a rule, you do not expect or anticipate a quick and significant appreciation with them, but you promise to collect a share of the profit from their possession. And if, during the period you hold the stock, that stock also increases in value, consider that as additional income.
However, we should not forget one more parameter that can affect our success or failure of investing in shares. And that is the liquidity of a specific stock exchange and a specific stock title. The liquidity of a market or a share is a characteristic that tells us in what volume a given market or a given share is traded.
The lower the liquidity, the less often the share price is formed on the given market, and the higher the risk we take. Sometimes one or two trades are enough to create a price that can fluctuate significantly. On the contrary, in markets where huge volumes of shares (and therefore money) are traded, such a market is more readable, including its share pricing. The Prague Stock Exchange and the secondary market within it are a relatively low-liquidity market. Conversely, well-known stock exchanges such as Frankfurt am Main, London, New York or Tokyo are among the very liquid markets.
When investing, don’t forget to set an investment goal. Do you rather want to earn on the appreciation of shares, or is a stable dividend yield more interesting to you? And also determine your strategy. Will you buy stocks regularly in smaller volumes (recommended) or will you take a risk and try to buy when the stock value is low?
How to invest – Some tips for successful stock trading
The worst thing that can happen to you when trading the stock market is to succumb to your emotions. That’s why it’s good to set a goal in advance with which you go into the stock adventure. And then stick to that goal or plan. Be prepared for the fact that the development of the stock market is largely influenced by the psychology of investors. It is very easy to fall into a buying spree and invest in stocks almost without thinking, as well as panic selling.
One of the rules says that it pays to buy when the market is bouncing off the bottom and to hold the stock when the market is falling. And when it falls, use the opportunity and buy a few shares at a favorable price. The famous American investor Warren Buffett is even convinced that a successful strategy is to go against the market. So when everyone is selling, you buy. And when everyone else is buying, you sell. You can try it. At the same time, keep an eye on what’s going on around you, especially the policy that central banks are implementing or are about to implement. If monetary tightening is on the horizon, equity markets are likely to head south. If central banks are easing their policy, stocks are likely to rise.
Another key aspect of successful stock trading is conducting thorough research and analysis. It’s essential to dig deeper into the companies you’re considering investing in and evaluate their financial health, management team, competitive advantage, and growth potential. Fundamental analysis can provide valuable insights by examining the company’s financial statements, earnings reports, and industry trends. Additionally, keeping track of news and market developments can help you make informed decisions. Technical analysis, which involves studying price charts and indicators, can also be used to identify patterns and trends. By combining both fundamental and technical analysis, you can develop a more comprehensive understanding of the stocks you’re interested in and make more informed investment choices.