Your Beginner's Guide on How to Invest In and Trade Stocks
Summary: If you're new to investing, knowing where to start can be tricky. Fortunately, we've created a comprehensive guide on how to trade stocks to get you started.
These days, talk of investing is everywhere. A near-record number of people worldwide now own and trade stocks, with 55% of Americans and 33% of Brits now directly owning shares in companies. In Europe, the number of people investing in stocks for the first time is growing rapidly. In the Netherlands, the number of first-time stock owners rose by 17% to 1.75 million people, while France saw 400,000 people buy stocks for the first time in 2021, according to the Financial Times.
Meanwhile, historic gains in the stock market through 2020 and 2021 encouraged record numbers of newcomers to enter the stock market. This was particularly pronounced among younger investors, with a record one-in-six people in the UK investing in stocks for the first time last year, according to Halifax.
If you're also considering getting your feet wet in the pool of investing and don't know where to start, we have got you covered.
Before you open an account with us and start trading stocks on your own, make sure to read this comprehensive beginner's guide on how to invest and trade in stocks.
- What is the difference between shares and stocks?
- Which companies can you buy stock in?
- Why do people buy and sell stocks?
- What is the difference between investing and trading?
- What are the benefits of trading stocks?
- What are the risks of trading stocks?
- What affects the price of stocks?
- How to trade stocks: a step-by-step guide
- Essential stock trading strategies for beginners
- Get started
What is the difference between shares and stocks?
First off, we thought we'd explain exactly what stocks are, and why the companies they belong to are such an important part of the economy. We also wanted to explain why stocks should be considered by any investor. The terms 'stocks' and 'shares' are often used interchangeably to describe a fraction of ownership in a specific company. However, there are subtle differences in the meanings between the two terms that are worth keeping in mind.
When people talk about "stocks", they are usually referring to what is known as common stock. This describes shares of ownership in a company that can be purchased. When a person purchases common stock, they can also have a say in company matters through voting rights, as well as a claim on profits, which comes as dividends.
Meanwhile, "shares" is a more technical term that describes the smallest possible denomination of a company's stock. When you are investing in a company, what you are actually doing is purchasing a direct number of shares, through which you can say you have 'stock' in the company. This is a minor difference, which is why you will usually see both terms used in the same context, including here at Saxo Bank.
Which companies can you buy stock in?
Not all large companies issue their stock for the public to buy. This is only reserved for companies that are listed on a public stock exchange, such as the London Stock Exchange or the New York Stock Exchange. In order to list on such an exchange, the company must first under an initial public offering (IPO), after which it becomes a public company. As a trader, you will normally only be able to buy stocks in very large companies that meet the requirements for a stock exchange listing.
Why do people buy and sell stocks?
Millions of people around the world buy and sell shares every day. At Saxo, we offer our customers the opportunity to directly purchase stocks and shares in thousands of companies, so that you can build a portfolio that works for you. There are many reasons people purchase and sell stocks on the market, such as:
Grow wealth over the long-term
By purchasing stocks and holding onto them for months or even years, investors aim to capitalise on long-term growth in the value of their assets and their overall wealth and net worth.
Historically, this has proven to be an achievable goal. This can be observed by looking at various major stock indices, which measure the performance of particular stocks grouped by market cap or a specific industry. One widely followed index is the S&P 500, which tracks the stock performance of 500 major listed companies in the US. Over the past 30 years, the S&P 500 has delivered a compound average annual growth rate of 10.7%.
Of course, this should not be taken to mean that the S&P 500 has consistently grown over the decades. There have been many notable slumps and declines in this index. For example, in the 2008 crash following the financial crisis and the 2020 crash following the global COVID-19 outbreak, the S&P lost over 25% of its value in just a few days, highlighting how even the most popular indices are not immune to slumps.
These peaks and troughs remind us that, while equities can form a crucial part of any portfolio, they are also riskier than many other asset classes, such as bonds.
Make a profit from rising share prices
Some people buy and sell stocks with shorter-term goals in mind. You could buy shares in a company hoping to sell them again later at a profit, provided that the price of those shares increases in the meantime.
For example, let's say you bought 10 shares of Tesla stock at $900 a share on December 20, 2021, and then sold those shares on December 27, by which point the Tesla share price had hit $1,093 per share. At a 21.4% price increase of $193 x 10, you would have made a gross profit of $1,930.
Receive a passive income from dividends
An investor can also earn money without selling the stock outright. Some companies offer dividends to shareholders, in which a certain monetary payment is given per share owned. The amount of the dividend is usually decided on a quarterly or annual basis, according to how well a company has performed during the preceding period.
For example, Apple offered a 2021 dividend of 22 cents per share for the third quarter of the financial year. This means that a shareholder who owns 100 shares in Apple would have received a dividend of $22 from the company at 0.22 x 100, with no effort required.
Enjoy compound returns over time
The more a company's share price appreciates over time, the greater the cumulative returns can be for investors. Let's say you invest $10,000 in a particular company. In the first 12 months, the share value rises by 10%, meaning that your shares are now worth $11,000, as 10,000 x 0.1 = $1000.
If you hold on to these shares and they appreciate by 10% again the next year, that $10,000 investment is now worth $12,100, since 11,000 x 0.1 = $1,100. This increasing appreciation is known as compound returns, as the increase gets larger with each subsequent price rise. This is a primary motivation that many people have for buying stocks.
What is the difference between investing and trading?
You will often hear the terms 'investing' and 'trading' used interchangeably, but there are some important differences that you should know. Let's start with investing.
This involves purchasing stock and holding onto it with the intention that its value will appreciate over time, usually on a long-term basis. A common saying among investors is that "time in the market beats timing the market". This means it's better to buy an asset and hold onto it for a longer time, rather than trying to "beat the market" by buying a stock at its lowest price and selling it at its highest, which is basically impossible to calculate.
Meanwhile, trading stocks is somewhat different. When you are trading, you are usually thinking short-term. Trading stocks is the act of speculating on the price of the asset, with the intention of timing the market and making a profit within a short time window.
You are 'taking a position' on an asset in the hopes of buying or selling to make a profit when the price moves. While you are taking ownership of the asset, you are not doing so with the intention of holding onto it for a long time, but rather to sell it for a profit. As such, trading requires significantly more time for which you expect an instantly higher return, whereas investing requires less time as the investments are kept for longer.
What are the benefits of trading stocks?
While there are risks from stock investing to keep in mind, there are also some very important benefits of doing so. These include:
Stocks are easy to buy and sell
This one is important. You can buy a huge number of company shares and sell them with ease. Equities are more accessible than assets, such as bonds or metals, which are often quite complicated to newbie investors. Here at Saxo, you can use our services to buy and sell stocks from thousands of companies at just the click of a button. All you need to do is set up your account.
You can earn passive income
As mentioned, the possibility of dividends is a powerful motivator for some investors. By buying dividend stocks, you can build up a passive income, provided the company does not slash your dividend payout (as happened during the COVID-19 crisis). The more shares you own, the more the company will pay you when dividend time arrives.
You can stay ahead of inflation
Inflation erodes the value of cash. If you leave your money sitting in a bank account for years, chances are that money will lose a significant chunk of its value over time. As we have seen, major indices such as the S&P 500 have shown annualised average returns exceeding 10% over the decades. With inflation reaching 8.4% in March 2022, it might be wise to buy assets that can stay ahead of this.
Enjoy superior returns
Stocks offer superior returns on the interest rates offered by banks, but they also offer better returns over the long term than many other assets. For example, assets such as gold and bonds usually offer much lower returns than blue-chip stocks. If you are seeking better returns over many years, stocks can often be the most effective way to go about this.
What are the risks of trading stocks?
Buying, selling, and investing in stocks always comes with risk. There is no guarantee that you will make a profit, nor is there a guarantee that you will ever recoup your initial investment. As an investor, it is absolutely crucial that you are aware of the risks surrounding every share transaction. Even if a share seems like a 'sure thing' to you, the risks will remain. Some important risks to consider include:
Some stocks are riskier than others by nature of the industry they represent and the geographies that the companies are tied to. For example, commodities companies such as oil or metals producers are exposed to risks that other types of stocks are not, particularly related to geopolitical volatility. Oil prices might go down because of conflict or crisis in a specific country or region, while certain tech stocks will not suffer a price drop for the same reason.
Meanwhile, companies with significant exposure to a high-risk country or region are more vulnerable to sudden depreciation if the political situation deteriorates there. It is important for investors to limit their exposure to high-risk assets such as these, especially for longer-term investment portfolios.
Unexpected price movements
It is impossible to say accurately what will happen to a company's share price over time. Your stock might go up, but it could just as easily go down. Meanwhile, unexpected events such as market crashes or companies' troubles could reduce the stock price, negatively affecting your investment at the same time.
Diversification across stocks and asset classes can help to mitigate this risk, as can a proactive investment approach in which you stay abreast of market developments and react accordingly.
Companies succeed, and companies fail. This represents another important risk for you to keep in mind. If a company goes bankrupt and enters liquidation, the shares in that company may cease to exist. If this happens, your investment in that company becomes completely worthless. Investors can mitigate this risk by reducing their stock holdings in troubled companies ahead of time. They can also opt to invest in company bonds since it will entitle bondholders to proceeds from the sale of a company's assets in the event of a bankruptcy.
Inflation is an ever-present risk that investors must factor into their decisions. Inflation can hurt businesses in several ways. When inflation goes up, operating costs for businesses go up. Meanwhile, government policy to tackle inflation, such as rate hikes and fiscal tightening, can also make it more difficult and costly for companies to operate in some industries.
This often causes the value of shares to decline, which is why inflationary periods can be bad for a stock portfolio. So you might often hear talk from seasoned investors about the need to have a 'hedge' against inflation in your portfolio. This term describes investments that can protect an investor's wealth against the erosion of the purchasing power of money that is caused by inflation. Conversely, zero inflation is also bad for share prices, since healthy levels of inflation are vital for stimulating economic consumption.
Businesses must always balance their bottom line with the law and the needs of the government. There are many ways that legislative actions can affect your stock investments. A company might be fined as a part of an antitrust suit, which could negatively impact share prices. The government might seize the assets of a company or subject it to an audit, which can further erode share value. This is worth remembering because it is one of many risks investors have no control over, but must bear regardless.
What affects the price of stocks?
Stocks are freely bought and sold on the open market. As such, a vast range of market factors will affect the price of that stock. It is important to stay informed about the factors that affect stock prices so that you can put together a workable investment strategy. The key factors include:
How a company performs has a direct and profound impact on its share price. If a company posts a positive earnings report or an optimistic outlook for the year ahead, its share price may rise. The reverse is also true. For example, if Microsoft reports a lower-than-expected earnings outlook for Q3 2022, then it is possible that its stock price will fall once investors hear this news.
It's worth noting that "good" performance is usually relative to expectations, rather than to the company's bottom line. That's why a healthy profits report from Microsoft could still cause the stock price to dip if those profits are lower than what was originally expected.
It is not just the individual company's performance that affects the share price, but also the wider industry that it is part of. For example, the share price of an oil company such as ExxonMobil will fall if there are wider problems in the oil industry, such as demand shortages or supply bottlenecks.
It is important to remember that, oftentimes, a stock price will be completely influenced by how people feel. This is what is broadly meant by market sentiment. If the general sentiment is that a particular company or industry is going to do well in the future, more people will buy shares in that sector. As a result, the share price may rise, becoming a sort of self-fulfilling prophecy. We've seen this play out with green transition companies such as Tesla, which has seen its share price increase 900% between the end of 2019 and the end of 2020, as optimism about the future of low-emission vehicles rose across the market.
The broader economy of a nation or of the world will always play a role in the share price of a company. This is why, for example, during the Great Recession in 2008, stock indices around the world declined massively, with many companies seeing their share prices wiped out. Conversely, in better economic times, share prices tend to perform well as a whole. Of course, this is not always the case, and share prices can rise despite wider economic gloom. We saw this throughout 2020, when stock indices surged to near-record levels despite historic economic disruption.
How to trade stocks: a step-by-step guide
Now that you know the fundamentals of investing in stocks and shares, we're ready to help you get started. In a nutshell, here is how you can start buying and selling stocks today:
- Open your share trading account at Saxo.
- Choose the stocks you wish to buy.
- Pick your stocks.
- Choose your position. Do you want to invest in a stock long-term, or sell it for a quick profit?
- Choose how much of a stock you wish to buy. At Saxo, you can either buy full shares or invest a certain value of money (for example, if Tesla shares cost $800 and you want to invest $950, you would only invest $800 to buy the one share).
- Hit 'buy' on the stock.
- After this, you own some stock! You can choose to sell it later or hold onto it as part of your long-term portfolio.
Essential stock trading strategies for beginners
As a beginner, you will want to start slow. It is worth reading up on some of the most popular stock trading tips to help you get the most out of your investing experience. Here are some of our top tips:
- Diversify: it is always worth buying stocks from multiple different companies and sectors, rather than putting all of your eggs in one basket, as this spreads out and reduces overall risk.
- Do a lot of research: always read up widely on any company that you are considering investing in so that you can make a truly informed decision. For example, in our "Inspiration" section, you can find up-to-date news and analyses on a wide range of equities. Meanwhile, our Market Call Podcast offers bite-sized roundups of the essential developments that any investor should keep on top of.
- Only invest what you can afford: any investor must be prepared to lose money. Only invest what you can comfortably afford to lose.
- Read the small print: always read the small print on any shares you plan on purchasing, so that you know exactly what you are owning and if you can expect any extras, such as dividends or voting rights. Typically, this information can be found on the company's investor centre page, which will host this information, alongside other items like annual performance reports.
Get started with Saxo today
As a provider of multi-asset trading and investment, Saxo strives to empower people with a user-friendly, seamless and personalised platform experience that gives them exactly what they need, when they need it, no matter if they want to actively trade global markets or invest in their future.
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