Shares for dummies
Are you looking for a simple guide to buying and trading stocks for beginners? Then you’ve come to the right place! In the article stocks for dummies we explain everything about shares. With this explanation, you will learn what you need to make money on the stock market.
You can start trading shares with an online broker. With online brokers, you can trade in every popular type of shares. These are the biggest benefits of trading shares through a broker:
- You can use orders to automatically open a stock position.
- Short selling ensures that you can earn even in the case of a price drop.
- Thanks to their user-friendly software, dummies can also buy shares.
- By using leverage, you can even invest with small amounts of money.
- You can get a free demo to try out stock trading.
The best way to get started with shares as a beginner is to open a free demo. Use the button below to instantly compare the best demo accounts:
Stocks for dummies: an explanation of the stock market
Big companies are not owned by one person. Big companies like Google and Shell are in the hands of shareholders. Shares are proofs of ownership. As soon as you buy a share, you co-own the company. Many shares are traded on the stock exchange, where a price is created by supply and demand.
Increased demand for certain shares in case of an equal supply, usually leads to an increase in the price of the share in question. When there are multiple buyers, you can ask more for the share. Ultimately, you can predict the price of a stock by remembering that supply and demand determine the final price:
- Do you think more people want the share? Then the price rises.
- Do you think more people want to sell their shares? Then the price drops.
Before you start investing in stocks, you need to follow a few steps. Here we look at the steps you need to take before you can buy your first share.
Make sure you have enough money
Before you can start trading stocks, you must first have enough money. It’s important to invest only with money you can stand to lose. It is possible to trade in stock with as little as $100. However, with a smaller amount, it is more difficult to spread your risks, which lowers your chances of success.
Decide what kind of investor you want to be
Before you make your first stock purchase, it is important to decide what kind of investor you want to be. Do you want to speculate on the price of shares in the short term? Then it is best to use derivatives. With derivatives, you can speculate on changes in the price of a share in the short term.
Would you rather make long-term stocks investments? Then it may be wise to buy the shares and hold them for a longer period of time. Of course, you can also combine both strategies.
Find a good broker
Buying a share is different from buying a vegetable in the supermarket. You can only trade shares with an official broker. A broker is a party which makes it possible to buy or sell shares. It is important to choose a broker with low transaction costs. One additional percent of transaction costs can quickly cost you tens of thousands in the long run.
Do you want to know where you can buy shares as a beginner? Click the button below to compare the different providers:
Choose some stocks you want to buy
After you opened an account with a broker, you must select some stocks that fit you as a ‘dummy’. To do this, you first need to determine your risk profile. Would you rather invest in risky stocks with a potentially high return, but also a potentially high loss? Or do you prefer stable but less profitable stocks?
Research the companies
Before you buy the share, it is important to examine the company behind the share carefully. You can perform fundamental analysis for this goal. By using fundamental analysis, you can investigate whether the value of the share corresponds to the intrinsic value of the company. If the shares are undervalued, it may be wise to buy them. This method is similar to Warren Buffet’s investment strategy.
If you prefer to speculate on short-term price movements, then technical analysis is a better technique. With technical analysis, you look for patterns within a graph. Based on technical analysis, you can find good opportunities to enter the market.
How can you make money from stocks?
There are two ways in which you can make money from shares. In this brief explanation, we will discuss these methods:
You can get a positive return on shares by selling them at a profit. You can do this by buying the shares relatively cheap. To discover cheap shares, you will have to research the company. You can analyse whether the company will be profitable in the future by applying fundamental analysis.
When you use derivatives, you can also benefit from a price drop. You can benefit from a price drop by short selling the share. When you short a share, your potential loss is unlimited. In theory, the price of a share can rise indefinitely. However, in economically bad times you can achieve high returns by going short.
The second way you can get a return on shares is by receiving a dividend. When a company makes a profit, the company can choose to pay out part of that profit in the form of dividends. Do you want to learn more about dividends? In our article ‘what is dividend’ you can read everything you need to know!
By paying close attention to the news, you can predict the price of a stock. Keep in mind that there is no need for a logical connection. Think like the masses and how they are likely to react to the news. Beginners often react with panic, which can cause a share price to collapse after negative news.
In the case of a profit warning, it is clear that the company is doing less well than expected and shareholders often panic. Because many people try to sell the stock at the same time, the price can sometimes fall more than five percent in a day. However, when a well-known CEO resigns, this can also have a negative impact on the share price.
Aside from the news, it is also important to try to spot patterns. Prices often move in logical patterns. It is wise to first determine whether a share price is mainly decreasing or increasing. Once you have established the general trend, you can determine at which point the price most often bounces back. Share prices often bounce back at the same level.Tip: have a look at our technical analysis course for more information on this topic!
Buying stocks for beginners
Are you still a dummy when it comes to stock trading? Then we would like to give you some tips that could help a beginner such as yourself.
Invest in things you understand
Many investors make the mistake of investing in things they find funny. Do you like weed, for example? Then you can randomly buy weed shares. However, this is not a winning strategy. Do you want to obtain good results as a beginner? Then choose a few shares and start studying the market carefully. Do not invest in a stock until you fully understand it.
Novice investors sometimes buy up shares at random. Buying Apple shares because you bought such a beautiful iPhone is not a good plan. Therefore, it is important to consider when and why want to buy certain shares. When you have a good plan, you can also start tracking the results. By tracking your progress, you can slowly start improving your trading strategy.
Take your profits
Profit is always great! Many beginner investors tend to beat themselves up when they see the value of a stock rise further after they sold it. That’s a shame! Every win is positive, and you can never predict with certainty what the top is.
Sometimes it may be wise to remove the portion you invested with your money from your investment. Has a stock gone up enormously? Then take your winnings and maintain only a small portion of your investment. That way you can reuse the money thus freed up for new trades.
Do not panic
Many novice investors panic when share prices collapse. Dummies sell their shares en masse during these kinds of crashes. However, this is not a good strategy: it is precisely when the share markets fall that you can achieve huge profits.
For example, you can make a profit by speculating on the falling share price. During a crash, you can buy new shares at advantageous prices. Short-term movements are rarely relevant to your long-term strategy.
Do not worry
A share loss is just a loss on paper. If your shares are worth 10 or 20 percent less, this is not final. You still own the same number of shares, and you can hold them for as long as you want. It is often wise to wait for better times when your portfolio is temporarily performing poorly.
This also directly illustrates why it is so important for both beginners and advanced investors to only put money on the line that you can really miss. Only make investments that do not keep you up at night.
Diversification makes safe
It is advisable to diversify your investments as much as possible. Many novice stock investors make the mistake of investing most of their assets in a handful of stocks. When you do this, you increase the likelihood that you will lose a large part of your money on the investment. It is therefore smart to spread your equity investments as much as possible. There are several ways to spread your investments:
- Time: enter the market at different times.
- Sector: buy shares across multiple sectors.
- Region: buy shares from different regions.
When you were learning to drive, you did not start driving a Ferrari. It is important to take some test drives first. Opening a free demo account is a good way to practice investing. You can also choose to keep fictional trades on paper. Either way, as a beginner, it is advisable to practice first. By doing so, you will prevent your first experience from turning into an expensive disaster.
I am not exaggerating when I say that everyone can eventually become a millionaire by investing in stocks. This also applies to novice investors. The power of exponential growth allows you to build a huge amount of capital with a small, monthly investment.
For example, if you invest $1000 every month for 10 years at a return of 8%, you already own $173,838 at the end of the journey. When you do this for 20 years you have $549,143 and after 30 years you own more than $1,359,398. Depending on how much money you can invest, you can quickly become a millionaire.
But how can your returns accelerate? This is due to the principle of interest on interest. If you invest the money you earn with your share investments repeatedly, you receive interest on it again and again. In the beginning, this effect is limited, but over a long period of time the effect increases enormously.
Over a period of 60 years, this amount even grows to $15,038,559 and over a period of 100 years to $329,814,188. Now you can easily understand why rich families often stay rich. All you need is time and when your assets have grown enough this effect just keeps growing.
Regardless of your situation, it is smart to start investing. As long as you do this with money you can stand to lose and in a way that suits your personality, then this works better than putting all your money into a savings account. After all, in a savings account, you can be sure that you lose money. Inflation makes everything more expensive and the money in your savings account barely vests a return. So, every year you lose money on it!
Things to remember regarding the stock market
Both novice and advanced share investors regularly forget the most important lessons regarding the share market. Stocks are always risky investments. The return on shares is higher over the general line and investors expect to be compensated for that. For that reason, shares have the highest returns long-term. However, this does not mean that you will achieve good results with shares short-term.
To build a large amount of capital with trading shares you need time. When you spread your investments sufficiently and wait patiently, you always get good results in the long run. Make sure you handle crashes in a smart way, because they will always occur. If you follow these rules you can build up a good sum of money by trading shares.
Ultimately, it is also important to remember that investing in the stock market can be fun. When you view it as a fun activity with money that you can afford to lose, then the profit becomes an afterthought. And when you can study the market without too many negative emotions, this often only benefits your results.
Equities explained: important concepts
Let us discuss some important concepts before you invest in stocks.
Shares are prove of property. Thus, with a share, you become part owner of a company.
Anyone can trade in shares. As a beginner, you can buy and sell shares just as easily as a professional investor.
Can you always trade in stocks?
Stock markets have fixed opening hours. You can only buy and sell shares during the opening hours of the exchange.
You buy shares from an online broker. Do you want to learn what the best parties are to buy and sell shares with? Press the button below and find out where to trade in stocks: