July 15, 2021, | AtoZ Markets – Is investing in stocks still worth it in 2021? Can you make money from trading stocks? Many beginners think that investing in stocks is difficult, too complicated, or that it takes a lot of capital to start with. Still, others think that the stock market is not convenient and that, usually, beginners end up losing a lot of money.
It is true, it may happen that those who start investing in shares have to suffer heavy losses but this is not the case for everyone. Choosing to invest in stocks through online brokers is still considered to be very profitable.
However, it is essential to understand what stocks are, how to invest in stocks and the elements that influence this type of investment.
What are stocks?
Before investing, we need to start from the basics and be aware of what stocks are.
Stocks are a financial instrument that allows you to purchase a portion of a company: in fact, they represent a share of ownership (or capital) of the company that issues the share.
The ownership of the shares gives the right to participate in the operating and financial results of the company, as well as the control of a part of the company assets.
Learning how to invest in stocks
There is no magic formula to understand how the market works: the only way is to get information, study, and experiment.
To learn how to invest in the stock market, start reading finance journals, studying business valuation principles, and using a trading simulator.
Focus primarily on fundamental analysis and pursue stock value.
With it, you can be able to evaluate if a company is solid or not, if it is expensive or cheap, if it is profitable for its investors or if it is a slot machine.
Speculation passes, new trends and fashions will go on the market, but the value and growth remain.
As far as technical analysis is concerned, some indicators are certainly useful, especially for the timing of an investment (when to enter and when to exit), but I would not decide what to aim for just by looking at it.
I suggest you initially focus on volumes, trend-lines (resistances and supports), and moving averages.
Finally, it is possible to experiment directly in the field thanks to completely free demo accounts, which allow you to invest in the stock market without putting your capital at risk.
How the stock market works
The stock market is divided into two, the Primary Stock Market and Secondary Stock Market.
Primary stock market
Newly issued securities are placed in the Primary Stock Market, where you will find:
- New bond issues (such as BOTs or BTPs)
- New issues of shares
- IPO (initial public offering), i.e. the first public offering of shares belonging to companies that have just been listed on the market
Secondary stock market
The Secondary Stock Market is what interests us most because it is where the buying and selling of shares take place.
Within the Secondary Market, anyone can purchase shares of any company listed on various international markets.
To understand how the stock market works, let's take a trivial example:
- I decide to sell 100 Apple shares for $200 each
- You think they are worth more, so you sniff out the deal and buy my 100 shares at $200 each
- The sell and buy orders (which are anonymous) from all investors are thus compared, and, since ours are matched, the trade is made.
How much do you earn by investing in stocks?
The question that those who start investing in stocks always ask themselves is: how much does a trader earn? And how much can I earn? There is no one-size-fits-all answer, as profits depend on many factors such as:
- Investment platform
- Initial capital
- Time available
- Time spent studying and practicing
In any case, forget the idea that investing in stocks is a way to earn money quickly. It is true that the famous Warren Buffett became one of the richest men in the world starting with a capital of a few dollars just by investing in stocks, but it took decades!
Usually, those who promise easy money are scammers. This does not mean that earning on the stock market is complicated: by choosing a reliable and safe platform, small initial capital, and a little study and commitment you can achieve spectacular results.
Choosing which stocks to buy
In this section, we will explain which stocks to buy and how to choose the best ones when making an investment with a medium-long time horizon.
First of all, I want to give you some positive news: the fundamental characteristic for a successful investment in the stock market is common sense.
In fact, I can assure you that all those mathematical formulas are not necessary for small investors.
Obviously, there are some notions that you need to know even when deciding what to bet on based mainly on common sense, and below I will explain them one by one.
Behind the shares are companies
First, remember that when you buy shares: you are putting shares in a company that you believe is valid in your portfolio.
You will become a full shareholder of the company, albeit in a low percentage of the company's total outstanding shares in the market.
So if you invest in Amazon stock, you won't be able to sit on Bezos' right on the board of directors, but you will share the fortunes of his company.
Invest in what you know
If you don't know a business, what's the point of betting on a company operating in that business?
It pays to invest in sectors and companies that you fully understand.
If you know nothing about biotechnology, how can you tell if the products of a company like Bayer are good compared to those of the competition?
On the other hand, if you are interested in video games, movies, or technology and are about to release a new Netflix series or the latest generation Nvidia video card, you could consider buying their shares.
Think about what your skills or passions are and specialize in those fields.
The stock market looks to the future
The stock market is forward-looking, that is, it always looks to the future.
In fact, all official or verified announcements regarding future events will be immediately taken into consideration by the market.
Sometimes this also applies to rumors.
For example, if Apple presents an innovative iPhone model, the price movements will be immediate and will not wait for the actual smartphone release.
Then, when the product is actually available to the public, the listing will not move in view of the distribution of the new device.
It is obvious, however, that if users particularly appreciate the new phone and sales skyrocket, incredibly positive operating results will be reported in the next budget and the price of the stock will jump forward again. However, the movement will come from the cash produced, and not from the iPhone news.
So, if you want to invest in a company project, be careful that this is not already priced by the market, because you may not find the earnings you are looking for until the actual performance is published.
Investment timing
When you invest in the stock market, it is not only important to understand which shares to bet on, but also when to buy them. In fact, the market is not always efficient in pricing a stock.
It is possible that the market is inefficient and underestimating the business potential, thus leading to a low price of the relevant stocks. It is much more common than you might think.
In any case, in the long run, stock exchange mechanisms are supposed to produce a fair price for all shares: it is only a matter of time.
Therefore, the timing of the investment (i.e. the decision of when to open a position) is of paramount importance.
Money is sovereign
There is an old saying that is very popular among stock market traders: CASH IS KING.
Money is sovereign: a company that grinds money will most likely represent a reality to bet on, while a company in constant loss does not seem to be an attractive investment.
In the next section, I will explain how to control how many profits a company generates so that you can make your own assessments. But first, I want to point out that there are exceptions to the “Cash is King” rule.
An example? Tesla.
For years Tesla has never, operationally speaking, brought a dollar of profit to its investors, yet the cost of the shares has far exceeded $300.
This is due to future expectations of what Tesla may become, or, in the opposite view, pure speculation.
There are therefore two different types of companies:
- Valuable companies are the ones that make money
- Companies with good growth potential are companies, often relatively young, that record operating losses for a medium-long period of time due to the large investments required to start their business (in fact some fail, so be careful)
What is the attractiveness of companies belonging to this latter category?
If a company with a winning idea but in constant loss starts producing money, rest assured it will make a bang.
Factors to consider before buying stocks
To understand which stocks to buy, it is very important to take into account many factors that influence market prices.
The first to consider before buying shares on the stock exchange is whether the stock has high trading volumes or not. The best stocks have very high volumes and can often have strong fluctuations and therefore a high capital is required to be able to wait for the right moment to exit the investment.
In fact, if you intend to invest in the best shares it is necessary to take into consideration the capital to invest.
In the event that the capital to invest is high, the choice of which shares to buy would be easier. In fact, it is essential to establish how much to invest in stocks before starting with investments in the stock market.
After having established the capital and the type of stock to buy, it is necessary to check the stock market prices of the previous days, to understand if it is a suitable time to buy a certain stock.
Next, it is important to see how the stock market behaves in real-time to understand if it is a day of strong fluctuations or not.
Having decided on the capital and studying the performance of the best stocks on the stock exchange, you can start investing in shares.
Which are the best stocks to buy?
Nowadays the best stocks are American ones and many investors decide to enter the American stock market and try their luck.
The best companies to invest in are listed on the Nasdaq and can be purchased through a bank or intermediary broker.
The US actions are characterized by a large volume of purchases and sales, but despite everything, they can in most cases to maintain a certain stability.
The best shares on the Nasdaq to buy are definitely Amazon, Apple, and Facebook even if there are also important companies such as Tesla and Google.
Although it is possible to buy American stocks easily for Americans, for the rest of the world it can be a problem, in fact, many prefer to invest in American stocks directly on online brokers.
The purchase costs of foreign stocks can be sometimes high and for this reason, many who want to buy stocks without commissions, do so by speculating online.
Investing in stocks during Covid19
During times of economic crisis, many people try to take advantage of the stock market crash by deciding to buy cheap shares in the future.
In recent months, the world has been hit by Covid, a terrible pandemic that has resulted in many deaths and shocked the world population. Due to Covid, losses in the stock market have been estimated to exceed $55 billion, particularly in companies related to tourism and shopping centers.
In fact, because of the virus, countries have begun to close their borders and put cities in lockdown. This has led airlines and entire chain stores to lay off staff and thus lose investor confidence, causing many stocks to collapse.
On the other hand, there are companies that have seen a substantial increase in profits, as these were related to time spent at home and smart working or online shopping.
The companies that have seen the most marked improvement, however, are certainly the pharmaceutical ones, which have obtained great trust from investors and for this reason, practically all of them have been listed on the stock exchange.
The pharmaceutical activities are definitely the ones that have led people to invest during the Coronavirus and they also brought large profits from investments.
A lot of stocks that have risen lately are part of pharmaceutical stocks and this will surely be a trend that will last for a long time.
Many have wondered how to invest today, given that there are a huge number of pharmaceutical stocks listed on the stock exchange and investing in all of them is practically impossible.
To answer this question, it is essential to explain how to invest in pharmaceutical stocks, since they are very volatile stocks that can often gain and lose very high percentages in a short time.
When you want to invest in volatile stocks it is very important to check the news of the day on stocks, as the value previously reached by the chart is often irrelevant. As for the companies researching the Covid vaccine, it is essential to wait for one of these giants to announce the results and invest accordingly.
Worst stocks not to buy
In my opinion, the worst stocks belong to those companies that stop innovating and, so confident in their strength, fail to glimpse potential threats or new competitors.
I'm talking about companies with deep roots in the old economy dominated by metallurgy, mining, and all other highly polluting activities.
Contrary to what one might think, finance today looks a lot to the ecology.
Of course, companies are talking more and more about social responsibility, but basically, it is above all an economic question. Traditional companies are often fined for excessive pollution or pay dearly for permission to pollute, becoming less and less profitable.
How to invest in stocks
Those who start from scratch are led to think that investing in stocks means buying shares when the price is low and then reselling them when the price increases. Surely this is a method of investing in stocks but it only works when the markets go up.
Those who limit themselves to buying shares risk not earning much (or losing money) because the stock market goes up but also goes down. Of course, if the investment time horizon is several years and you have a very large capital, then buying shares and holding them (perhaps collecting dividends) may be a good idea.
Those who decide to operate in this way must have a lot of cold blood since there will be years in which the value of the investment will drop a lot (the years in which the stock market falls).
For those who have only a small amount of capital available (eg $250), this approach is absolutely not applicable.
In fact, in this guide, we are mainly concerned with small investments in stocks that can generate (possibly high) profits in the short term.
Short selling
The secret of investing in winning stocks lies in short selling. It is a purely speculative operation that allows you to make a profit when the price of a share falls.
Conceptually, it is equivalent to selling a stock that has never been bought, which is why it is called in the open.
For the novice investor, it is enough to know that it is a transaction that the best investment platforms make available and that allows you to earn from a stock when its price falls.
At this point it is clear what winning investors are doing: they buy stocks when the market goes up, they sell them short when the market goes down. They can always make money, no matter what the market does. Profits can then be further multiplied by applying leverage.
Not all investment platforms provide these two fundamental tools.
Best platforms for investing in stocks
We have selected the best investment platforms, safe and reliable, also suitable for beginners. These stockbrokers charge no fees (zero costs) and can be used to invest in stocks by buying or selling short.
Some of these platforms offer free training services, which are particularly valuable for those new to stock markets. The advantage of all of these platforms is that they offer a CFD (contract for difference) service.
eToro
eToro is truly the preferred choice of many of those who start investing in stocks. Among the key features of this platform is the possibility to operate without paying commissions, in a simple and safe way.
eToro is famous above all because it is the only platform that allows you to automatically copy what the best investors in the world do.
TradeOr
TradeOr is the other great alternative for those who want to start investing in stocks without errors and without particular problems.
The platform is characterized by its great simplicity: it is truly intuitive, even for those starting from scratch. Those who sign up are then followed on the phone by a real investment expert who provides information and advice.
AvaTrade
AvaTrade is a platform particularly appreciated by those who want to invest in shares or other financial securities and do not have a large amount of capital available (or who in any case want to invest very little).
The platform, in fact, allows you to start with a capital of just $100. The other investment platforms usually have a minimum investment of $200 (which however is not high).
How to invest in stocks - Conclusion
In this article, we have discussed how to invest in stocks and the main aspects to monitor when investing money in the stock market.
I remind you, once again, that companies are behind the shares. Therefore, there is no instrument more linked to the real results of a financial entity.
While other contracts have more speculative characteristics, shares can be used if there is a strong belief in the operational projects of a company.
In fact, the valuation of equities is based on numbers and budget estimates, which in effect report the profitability and growth of a company, as well as on the economic context that it faces every day.
However, consider that stocks are also suitable for speculative investments: by betting on the goodness or otherwise of the financial statements, before the day of publication, significant price fluctuations may be encountered.
I happened to observe, in a single market session, movements between 5-10% in more stable sectors and up to 50-100% in volatile businesses such as biotechnology.
Frequently asked questions
How to invest in stocks?
First of all by choosing a professional platform, secondly by operating with free CFD contracts, and finally by studying the reference stock market well.
What are the best platforms to buy stocks?
Due to the variety of assets available and market conditions, eToro and FBS are a step above the competition.
Is investing in shares worthwhile?
Equity investing has always been one of the most used by investors around the world. Its historical performance is up sharply, so it will be essential to choose the right Timing for our investment.
Is it better to invest in stocks or bonds?
Much depends on the investor's degree of risk. To date, bonds yield very little, while with a slightly higher level of risk, the equity sector offers greater satisfaction in terms of returns.