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Investing Stock Market for Beginners

Stock Market for Beginners

For many, the stock market is a secret world in which modern finance alchemists capture and lose their fortunes. However, really investing in shares is an activity available to almost everyone. Here’s what the stock market is and how to go about buying shares.

In this guide, we will describe in turn the steps to be taken to become a stock exchange investor. We assume that you have already completed the decision stage. You know that you want to start investing, but you do not know how to do it yet. We also hope that you are aware of the risk of losing money, which is inherently associated with stock exchange speculation.

In this text, we will only deal with technical issues. The issues of character traits that an investor should have or strategy choices are described in the guides ” How to invest in the stock exchange ” and ” 5 tips for a novice investor “. Let’s start with the basic definitions. The stock exchange is a place where people and institutions want to buy or sell shares, bonds, certificates, and other securities. Investors are the buyers and sellers of securities. The investor invests money in financial instruments, counting on a profit in the form of interest, dividends, or an increase in the price of the purchased asset.

Step 1. Creating an Investment account

The beginning investor takes the first steps to the brokerage house to enter into an investment account agreement. It is used for storing and trading securities and other financial instruments. The brokerage account contract can be signed directly at the customer service point, or an online application – then the contract will be signed by courier. You only need your ID card or passport.

Step 2. Payment of Money to the Brokerage Account

Once we set up an account, you would have to pay the money for it. The amount we will turn over is an individual decision. It is recommended that in the first investment period, they should not be too high. Of course, for each “small amount” means something else. However, it is better to treat the first payment as money that we can lose, and it will not have a significant impact on the state of our finances and our well-being.

Usually, the payment to the investment account is made by bank transfer to the account number defined by the brokerage house. Only some brokers allow you to deposit cash. You can also bring cash to the bank and order a transfer there. In addition, some banks integrate the investment account with ROR, and then you can buy shares directly using cash on your bank account.

Step 3. Placing orders, or how to buy and sell shares

To buy shares, you must place an order. It used to be the point of coming to the customer service point (POK) of the brokerage house and submitting an oral or written instruction to the broker. This issued a relevant receipt and sent our order to the trading system. Now, most of the orders are placed via the Internet and applications of brokerage houses. The order still goes first to the DM system, from which it goes to the stock exchange. As a result, it is cheaper (commissions from online orders are much lower than telephone or personal), faster and more convenient.

Types of broker’s orders are a topic for a separate guide. In the beginning, it’s enough to know that there are two basic types of orders: buy orders and sales orders. Under the former, we offer cash in exchange for shares, and in sales orders, we offer shares in exchange for cash. The second important criterion is the issue of our priorities.

Step 4. Fees and Commissions, or how much it costs to buy and sell shares

Individual investing in the shares of listed companies is not a particularly expensive job. The basic versions of investment accounts are often offered and run free of charge or for an amount of several dozen zlotys a year. More you have to pay for additional options: e.g., access to information services or a deeper view of the order book. As standard, we only see one best buy/sell offer, and we have access to quotes without delay. And the simplest package, in 95% of cases, should be enough for a novice investor.

The brokerage house earns commissions levied on us each executed purchase and sale transactions. For several years, the standard on the Polish stock market is a commission of 0.39% on orders placed via the Internet. But some brokers can even go down to around 0.20%.

Step 5. Counting profits and making losses

From the moment the order is placed, the investor gives the market an impact on his money. It is up to the decision of all market participants, whether the prices of purchased shares will increase or decrease. Why prices of some shares are growing, and others are falling is a topic for another occasion – this is the essence of art called investing.

Step 6. Cash withdrawal

You can withdraw funds on a cash account in a brokerage office at any time. Usually, the withdrawal takes place by transfer to the bank account previously defined by the investor. You submit the transfer order, and you should have the money on your account the next day at the latest.

Some brokerage houses also allow cash withdrawals in their own branches. However, this operation may involve an additional commission, and in the case of larger amounts, it must be previously notified.

Quantity and validity of the trading offer
Investors must indicate how many securities they wish to buy. This is queried under the keyword “Quantity.” This refers to the number of shares.

They can also decide how long the order should be valid. This can be useful if you cannot buy the shares at the best price – i.e., “cheapest” – and therefore want to set a limit (see order types). This is done in the so-called order book, in which all buy and sell orders for security are recorded.

There are various ways of limiting the validity of a buy or sell offer:

Good-for-day: The buy or sell order entered is valid for the current trading day until the close of trading.

Good-till-date: The set buy or sell order is valid until the close of trading on a set day.

The order types

Before first trading on the stock exchange, newcomers should familiarise themselves with the most important types of orders, which also serve as security. The order types are noted in the so-called order book.

Market order: In a market order, the purchase or sale of a security is executed at the next possible price. This means that the security is sold at the lowest selling price when a buy order is placed and at the highest selling price when a sell order is placed. The exchange transaction is executed immediately.

Limit order: This type of order contains a limit when buying or selling a security. A buyer determines the maximum price up to which he is willing to purchase a share, for example. On the other hand, the seller sets a limit up to which he is willing to sell the stock. This stock exchange transaction is executed when the limit conditions are met. The limit limits the risk for the buyer and seller either not to pay too much or to get too little.

Stop order: With such an order, the buyer or seller has the option that a transaction will only take place at a certain price. Usually, the order is suspended until exactly this price is reached. With a buy stop order, a transaction occurs when the price falls below the stop price. With a sell stop order, on the other hand, if the price is quoted above the stop price.

With combinations of order types, exchange traders can limit the risks involved in trading securities, including equities.

Stop Loss: With this order, possible losses can be limited, or on the other hand, profits can be hedged. This means: If a share price reaches a defined price threshold or falls below it, a selling process is set in motion – usually as an unlimited sell order. However, this can also be combined as a stop limit order. In this case, the whole item is not sold, but only within a price corridor.

Stop-Buy: This protects the exchange trader against an excessive price increase. If the stop price is exceeded, the buying process is interrupted. In a combination as a stop-buy limit, the purchase price is converted into a limited buy order when the fixed stop price is exceeded, which is executed within the defined range.

Price fixing: the bid price and the asking price

The price fixing of security must be imagined as in an auction. One side offers a price for the purchase of a security, and the other side demands a price for the sale of the security. The difference between the two prices is called the bid-ask spread or spread.

Bid price: This is the highest price a buyer is willing to pay for a security at that time. He makes an offer to buy. This is also known as a “bid.” The bid price is usually lower than the ask price because the buyer wants to buy the security cheaper than the seller wants to sell it.

Ask price: This is the price a seller asks for his security. This means that this is the market price at which the seller is willing to sell the security. In English, the asking price is referred to as the “Ask.” It is usually above the bid price.

A few more useful tips for stock trading

According to experts, stocks belong in every portfolio. Stock prices can fluctuate sharply – up or down. If you don’t have strong nerves, you should pursue a long-term investment strategy. Price fluctuations can be better absorbed over an investment horizon of ten to thirty years.

Books to Help Grow Your Knowledge

The Little Book of Common Sense Investing

The Intelligent Investor

A Random Walk down Wall Street