How To Invest In Stocks For Beginners

Stock Market: Definition

A stock market is any collection of exchanges where the shares of publicly listed companies are traded. The global stock market includes all listed stocks and the exchanges they trade on. A country's stock market includes all exchanges based in the country and the stocks listed on those exchanges.

In some cases, OTC (over-the-counter) marketplaces may also be considered part of the stock market. OTC marketplaces are where unlisted securities are traded.

What is the purpose of the stock market?

Stock markets and stock exchanges exist to give companies access to capital and allow investors to find investments to see positive results in their trading.

Companies and the Economy

New companies need to be started, and existing ones need to develop for an economy to grow. A stock exchange is a regulated marketplace for companies to access capital from investors looking to earn a return on their capital.

From a company's perspective, an exchange aggregates investor capital, ensuring that large companies can access the capital they need.

Investors

For investors, a stock exchange, and the stock market in general, is a marketplace for investment opportunities. A stock market provides a platform for investors to buy and sell shares in companies and access their information. Stock exchanges regulate the trading of stocks, ensure that information is made available to investors and ensure that companies comply with certain requirements.

From the investors' perspective, a stock exchange aggregates companies in one place. 

Traders and Brokers

Stockbrokers act as an intermediary between investors and the exchange. They make sure orders are entered and trades are settled according to the exchange's rules and guidelines.

Brokers and active traders also provide liquidity to a market. It allows investors to easily buy and sell shares when they need to. Greater liquidity attracts more investors, which lowers the costs of capital for companies. Traders can benefit from short-term price movements in stocks whilst also contributing to the market's efficiency.

How Does the Stock Market Work?

The stock market's role can be divided into two parts: the listing process and trading operations.

Listing

To be listed on a stock exchange, companies must comply with requirements. Some of these depend on the legislation of the country in which they want to be listed, while others are specific to each exchange. Typically, companies must provide audited financial statements for a certain number of years and have a minimum paid-in-share capital. In many cases, the company's market value and liquidity will need to meet a minimum threshold.

An OTC market has less onerous listing requirements. Typically, the stocks traded on it belong to smaller companies and those that don't meet the exchanges' criteria. OTC stocks are therefore often riskier than publicly listed stocks.

Trading Operations

A stock market operates as a continuous auction during which buyers and sellers can enter orders. When buy and sell orders match, a trade occurs. After a trade takes place, cash and shares change hands during a settlement period. 

Nowadays, nearly all trading is electronic. Exchanges are responsible for making systems available to manage and match orders and settle trades. Orders can only be entered into the system by brokers that are members of the exchange.

Exchanges manage the market with a set of rules that govern issues like trading times and the types of orders that can be entered.

What is a Stock Market Index? 

A stock market index is an indicator that reflects the price performance of a collection of shares. The index is a weighted average of the prices of stocks in the index. Most indices are weighted by the market value of the companies they include, so larger companies have more influence on an index's value.

Indices can include all the stocks in the market or companies by size or sector. Headline indices, like the S&P 500, FTSE 100 or Nikkei 225, generally include the largest companies in a given market and typically account for around 85% of the value of listed companies in a market.

Stock Market Instrument Types

Stocks are the primary trading instrument in a stock market. However, as markets have evolved, other instruments related to stocks have emerged. However, all other stock market instruments are based on the prices of stocks.

Stocks

The terms stocks, shares and equities are all used when discussing stock. A stock or entity represents a company. A share is an equal unit of ownership in a company. Most shares are common shares that entitle their owner to one vote per share and the right to an equal share of any dividends paid. If the company is liquidated, each common share gives its holder an equal claim on remaining assets after creditors are paid.

Non-voting shares are the same as common shares but without voting rights. Preference shares, also known as preferred stock, are shares that pay fixed dividends and give their holders a preferential claim on assets in the case of liquidation. Preference shares are similar to bonds but trade on a stock market.

Exchange Traded Funds (ETFs)

ETFs, or exchange-traded funds, are baskets of shares that are listed on exchanges and traded just like listed companies. ETFs track popular stock indices like the S&P 500 and custom indices that expose investors to specific sectors, industries and investment themes. Exchange-traded funds allow investors to own lots of stocks with just one investment.

Mutual Funds

Mutual funds are investment funds that contain multiple stocks. They differ in three respects. First, they're actively managed by a fund manager and don't track an index. They aren't traded like other instruments. Instead, capital is invested in the fund based on the fund's value each day. Mutual funds are more expensive to own since they're actively managed.

Futures

Futures are exchange-traded derivatives that are agreements to buy or sell an underlying asset at an agreed-upon price at a future date. Stock-related futures contracts are traded on individual stocks and stock indices. 

Futures contracts offer two significant advantages. They're margined, which means the full value of the contract is not required to trade them. They also make the process of short selling easier than it is for stocks. Futures for stocks and stock indices are typically traded on separate derivative exchanges.

Contracts for Difference (CFDs)

CFDs are similar to futures contracts but aren't traded on exchanges and have no expiry date. They're agreements between traders and brokers or banks and are rolled from one day to the next.

CFDs can be traded on stocks, stock indices and other asset classes. They also offer leverage and simplicity when short selling. CFDs are ideal for independent traders who require leverage and the ability to short sell.

How to Invest in the Stock Market

What to Choose?

Over the last decade, growth investing and trading have become more popular approaches in the stock market. Value stocks and dividend stocks have underperformed growth stocks because the technology sector has come to dominate the economy.

Trading platforms like Libertex offer advanced tools and instruments like CFDs that make trading accessible to more people.

How to Choose Stocks to Buy and What to Look for Before You Do It

Tens of thousands of companies are listed worldwide. An investor's job is to narrow that down to between 10 and 60 stocks they expect to perform well over a number of years. Traders have shorter time horizons and look for stocks thatthey expect to move up or down over a period of days, weeks or months.

A stock screener is a tool you can use to find stocks that conform to specific criteria. For companies listed on US exchanges, the FinViz screener is a good choice. For global stocks, you can try the MarketInOut screener, or you can find more detailed data on the Reuters website.

Growth

The value of a stock increases as the company's earnings grow. Over the long term, earnings and revenue growth are essential for the valuation to increase. In reality, a stock's price movements depend on how earnings growth compares to expected earnings growth. The price at any given time reflects the market's expectations for future growth. If growth is lower than expected or expectations fall, the share price should decline. If growth is better than expected, or if expectation rises, the share price should rise, too.

Revenue growth and earnings growth are both important and should be compared to previous periods and a company's competitors.

Value

The other important factor is the valuation of a stock when you buy it. If a stock is fairly valued, its stock price can be expected to increase along with its earnings growth. If the valuation is low, earnings may not need to grow for the stock price to increase. However, a low valuation may also indicate that there are problems with the company. If the stock is expensive, earnings will need to grow rapidly for the price to continue rising.

Common valuation metrics to consider are the P/E (price-to-earnings ratio) and P/S (price-to-sales ratio). These can be compared to similar companies in the same sector and to the market as a whole to get an idea of a company's relative valuation.

Margins

There are two ways for companies to grow their earnings. They must increase either their revenue or their profit margins. Margins vary widely from one industry to the other, but what really matters is whether margins are increasing or decreasing. 

You can compare a company's gross margin, operating margin and profit margin to its competitors' and to those from previous years to get an idea of how well it's performing. 

Size and Liquidity

Larger companies tend to be less risky. Companies with a market value above $2 billion are usually more stable. Those with a market value between $500 million and $2 billion are still worth considering but require more analysis. Stocks with an average trading volume above 200,000 will also offer more liquidity and can be exited quickly.

Balance Sheet Strength

Companies with too much debt can run into trouble easily. Generally, a debt-to-equity ratio below 0.5 is considered safe. Debt levels do vary from one industry to the next, so you should also look at the debt levels of similar companies.

How to Trade on the Stock Market

Here's a step-by-step guide to investing in stocks for beginners. In fact, whether you're trading or investing, you can follow the steps below to get started.

Step 1: Open a trading account

The first step is to open a trading account. Even opening a demo account without committing any money will allow you to create a watchlist and begin tracking the stocks that interest you.

Step 2: Decide on a strategy

You may decide to trade actively or invest for the long term. Either way, you should develop a process and rules to follow to select stocks and make trading decisions. This will help you to prevent emotions from influencing your decisions. Your strategy should also determine the amount you risk on each trade and a risk management strategy.

Step 3: Create a watchlist

Once you have a strategy and process, you should begin to build a watchlist of stocks you're interested in. This will help you focus on the stocks that fit your strategy and ignore all the other noise in the market.

Step 4: Monitor the stocks on your watchlist

By closely tracking the stocks on your watchlist and how they respond to news events and market trends, you'll get an idea of what affects them the most. This will help you decide what will trigger a decision to trade.

Step 5: Enter trades when the time is right

After you've monitored a stock for some time, you'll get an idea of the price that may offer you an opportunity based on your strategy. This is when patience is required, and you'll need to wait for the price to reach your level. When the price gets close to your level, you can enter a limit order to open a position.

Step 6: Monitor positions closely

Once you have an open position, you'll need to monitor it closely.

At this stage, you should stick to your strategy and only exit when the price reaches your target price or if your risk management levels are breached.

Strategies for Stock Market Trading: How to Play the Stock Market Actively

Below are four of the most popular strategies for trading the stock market.

Momentum Trading

When the price of a stock or index is in a clear trend, trades can be entered in the direction of the trend after a retracement or a period of consolidation. The objective is to hold a position while the price continues to move and then exit when momentum slows.

Range Trading

Stock prices frequently consolidate in a tight range for weeks or months at a time. This gives traders the opportunity to buy at the bottom of the range and sell, or open a short position, at the top of the range. If the price breaks out of the range, positions should be exited quickly. 

Breakout Trading

If the price of a stock breaks out of a trading range, it will often move quite quickly because the momentum attracts new traders. Like with momentum trading, potential profits should be taken as soon as momentum slows, and losing trades should be exited quickly.

News Trading

News traders track the news flow around a handful of stocks and base their trading decisions around changing narratives. Typically, a stock price will move immediately after news is released and then again a day or two later. This gives traders who understand specific companies well a few chances to trade a stock after each news release.

What is the Best Way to Learn About the Stock Market?

Whether you're an investor or a trader, the best way to learn about the market is by opening a trading account so you can create a watchlist and begin tracking the market. The first step is to find a good broker that suits your needs.

When choosing a broker, it's important to consider the following:

• Does the broker offer all the instruments you want to trade?
• Is the broker properly regulated?
• Are their commissions and spreads competitive? Cheaper doesn't always mean better, but the fees you pay should be competitive.
• What are their platforms like? They should be able to offer you a free demo account that will allow you to test the platform.
• What is the minimum amount required to open an account, and what is the minimum trade amount? Obviously, these two considerations should suit your budget.

Conclusion

Trading and investing are skills you can develop over time and may ultimately allow you to become financially independent.

Trading is one of the ways to learn about the stock market. Even if you eventually become a long-term investor, active trading will give you more practice and allow you to find your niche in the market. And it costs nothing to get started if you open demo account with Libertex. You can do it to test out some of the ideas and strategies discussed here.Another option is to open a live trading account with as little as 100 EUR, which will allow you to begin your trading journey immediately.