How to buy stocks?
The coronavirus has had and continues to have a strong impact on our daily lives. Confinement, health and safety measures, barrier gestures, remote work, new ways of shopping, communicating… and living !
As well as a continuous flow of information about the situation, numerous death toll updates, interviews with doctors, nursing staffs, and various officials...
…furlough schemes, job losses, economic shutdown, business bankruptcy...
…and falling global stock markets !
But skyrocket again, because we will soon find a treatment and a vaccine, and everything will go on as before… or will it ?
This may have caught your attention. You tell yourself that there are things to be done, that it is time to go public, that it is possible to make money with all these market fluctuations. And you are right.
But where to start ? How to take advantage of it ? To buy what ? And how ? And can I sell ? Sell something I do not own ? It may all seem complicated to you.
Let’s try to get a clearer picture in order to get started in the right conditions.
Types of products and markets
The financial markets are immense. There are dozens of markets and market segments, and thousands of products available for individuals who wish to invest in the stock market.
To put it simply, there are four main markets :
- Raw materials
Each of these markets have several types of products.
For the sake of simplicity, we will focus on the stock market.
From this market, you can actually buy individual securities, each of which correspond to a company. This what we call a "stock", the topic of our article.
You should know, however, that in the "stock" market there are also index products, trackers, ETFs… but that is not today’s topic.
The broker, a mandatory step
In order to buy stocks, you must register (open an account) with a broker. They are an essential intermediary. They will give you access to the markets. There are dozens of brokers. They make most of their money through their clients’ transactions. Make sure to look at their conditions and transaction fees.
Choosing a broker is not easy. The simplest way is to go through a broker comparator to sort through them, see their specifics, advantages, disadvantages, special conditions…
The benefits of online brokers
Online brokers are an individual’s best choice. The overall costs are fairly low, and access is simplified. Registration is 100% online. In short, you can start buying stocks in a few clicks.
You must of course submit identity documents, proof of address, etc. and fill out an investor profile questionnaire. The entire account creation process may take a few days, but still remains very fast.
During this time, preparing your strategy is advisable…
Possible earning types
First of all, remember that holding stocks is no trivial matter. You have to know why you are doing it.
There are two main earning sources with stocks :
- capital gain
Be careful, there is obviously a risk of capital loss, and all brokers will remind you of this permanently.
Not all companies pay dividends. This is an amount that is periodically paid to shareholders.
A share is worth £10 and a return of 3%. The yield corresponds to the dividend that will be paid, or rather the last dividend paid.
If you buy 5 shares for this company : 5 x £10 = £50, you have just invested £50 in total.
On the dividend payment date, you will receive 3% of £50, i.e. £1.50.
Be careful ! This is a gross amount : you have to subtract the various taxes and compulsory deductions…
The capital gain (or loss) is the difference in stock price between purchase and resale.
Using the example above : you bought the shares for £10… 6 months later, a share is worth £13 and you decide to sell your 5 shares. The performance is 30% (from £10 to £13) and the capital gain is of £15 (£3 x 5 shares).
We can also do the math in terms of performance : a 30% increase in your £50 initial investment leads you to £65, or £15 of capital gain.
Again, this is a gross amount, your £15 will be taxed.
Share dealing vs CFD trading
We were talking about product types above. You can buy stocks "directly" or through CFDs.
If you buy stocks directly, then you own a share of the business, no matter how small. In this case, you will open a Stock Savings Plan or a trading account and receive any dividends.
If you buy a CFD (Contract for Difference) on this stock, you are buying a derivative product, the underlying of which is indeed the stock in question. But in this case, you do not have a share of the business. The principle here is to bet on price variations, without owning the actual share.
CFDs are interesting because they are very flexible, but relatively riskier than direct shares because they can easily call on financial leverage. In other words, the broker will allow you to invest more than your capital.
It is possible to go to CFDs without leverage, but it may be best to buy shares directly to begin with.
What strategies for stocks?
Once we have our broker, it is not about blindly buying stocks that the media are talking about or that you vaguely know about.
Your personal financial capital is at stake, you have probably worked hard to earn it and save it... It is not a question of betting everything in the hope that everything will work out to your advantage.
That being said, myriads of strategies exist and that is what makes investing in the stock market both interesting and exciting.
In addition, there is no magic formula, martingale strategy or method that will succeed every time.
If you are a beginner, here are 2 main principles you should know :
Diversification is the act of "not putting all your eggs in one basket". It is a risk management principle. Again, it is not all black or white. It is not about buying dozens of stocks. Because diversification kills diversification... and performance. Conversely, betting only on one or two stocks can be fatal. Balance is key.
Then, there is time. Making money on the stock market takes time. Of course, there are short-term strategies but if you are just starting out, I would really recommend that you have a time frame of several years. Do not buy stocks if you expect to win within a few weeks or months. It is not impossible but very complicated in practice, not to mention the transaction costs with each purchase/sale.
Do you want to invest and buy stocks? Fantastic! It is an exciting field. The more interested you are, the more you can develop your own strategies. Independence of mind is paramount to investing in the stock market.
It will take you time and experience before you get into cruise mode, but it is the journey that counts.
Learn. Don't rush. Harvest the fruit.
Last Update on 19/05/20