Wondering how to invest in shares? One of the most recommended approaches to wealth creation is to invest in stock market.
July 19, 2021, | AtoZ Markets – Investing in stocks can be a great way to increase your wealth. Anyone with access to a computer or smartphone and a little cash aside can do so.
Of course, every time you invest online, as you can multiply your money, there is a risk of losing it. This risk is not only based on market fluctuations but transaction costs that can significantly reduce returns.
In this guide, you will find everything you need to know about how to invest in shares. We will explain how to buy, own, and sell stocks, including the cheapest ways to buy and tips for new investors.
Lets get started!
Know how to invest in shares market
The first and foremost step on how to invest in share market is to understand what it is.
What is a stock?
A stock is a share in the ownership of a company. Once you buy shares of a company, you become one of its shareholders.
If, for example, the total number of Apple shares was 1,000 and you bought 300 then you would be a shareholder who owns 30% of Apple and is entitled to vote at its annual meeting.
More importantly, it gives you the right to participate in the profits. If the company has profited at the end of the year it can pay dividends, ie payments made to shareholders depending on the number of shares they hold.
Also if the share price increases, the same goes for the value of your shares.
Why would a company sell its shares?
As companies grow, they often need to raise money to fund the next phase of their projects. One way is to borrow from the bank. Another way is to sell shares through a process called IPO (Initial Public Offering).
The advantage of selling shares is that the company does not have to pay interest or repay the debt.
The main place where shares are bought and sold are the stock exchanges (more on that later) but also through private agreements.
The majority of the world’s largest companies are listed on a stock exchange with their shares being traded in public.
Some examples of popular Shares:
|Alphabet||Johnson & Johnson|
What is the stock market?
The stock market is a place where investors can trade, that is, buy and sell company shares.
The shares are traded on dozens of stock exchanges around the world, such as the London (FTSE 100) and New York (S&P500). Each company can choose in which stock exchanges its share will be traded.
How do I make money from the shares market?
Once we have learned what a stock is, the next step is to see why everyone wants to get it, which is nothing more than putting money in it.
If you own a stock you can make money from it in two ways:
- by increasing share value
- through regular dividends
Increase in Share Value
The first way to make money from stocks is if their value increases.
How does the value of a share increase?
Take, for example, the Tesla stock (TSLA) which has been at the forefront of stock market news in recent years.
If in January 2019 you had chosen to buy 100 shares of Tesla while each cost $61.40 then you spent a total amount of $6,140.
A whole year passes and January 2020 comes with the Tesla shares now worth $130.11 each.
Now, the initial capital of $6,140 that you had invested is worth $13,011, so it has increased by $6,871.
So, to secure this $6,871 profit, you need to sell your Tesla shares in January 2020.
What will you do, though?
What is the right choice?
Will you choose to sell them or keep them?
If you had chosen to hold Tesla shares for another year, then January 2021 would find your portfolio worth $88,020, as the share price surged to $880.02.
On the other hand, however, there is no guarantee that their performance will continue to be positive in the future.
In a different scenario, the Tesla stock could have returned to the levels of January 2019 or even lower and you would have missed the opportunity to liquidate the profit of January 2020.
So when should you sell and when should you buy?
Sounds like a difficult decision, eh?
And it is!
The truth is that it is and no one can give you a valid answer.
The only thing you can and should do is to have built an investment strategy from which you will not deviate.
It will constantly guide you and give you the answers to these dilemmas that will arise constantly.
Regular Share Dividends
The second way to make money from shares is through the regular dividends that companies distribute to shareholders.
What are dividends?
Think of the dividend as a payment of a certain amount of money from the company to you for each of its shares that you hold.
Dividends are usually distributed by companies that are highly “mature” and “established” for years in the market without much room for growth.
They can be considered as a “thank you” from the company to its shareholders for the preference and support they provide.
When are dividends distributed?
There is no commitment as to when the dividends are distributed by the company and each is free to choose the dates and the frequency that will do so.
Usually, they are distributed per month, 3 months, 6 months, or even annually.
Why are dividends important?
Dividend payments are a realistic way to earn passive investment income as all that is required to receive payments is to own shares.
There is a whole class of investors who successfully “chase” shares of companies that regularly and high dividends and build entire investment portfolios with them.
Many of them have managed to replace their daily work and survive with the money offered to them by the dividends they receive.
Sounds great, but is it true?
The truth is that in order to earn a respectable monthly amount through dividends (especially to be able to support you), you have to invest very (very) large sums of money.
Before we proceed further, we’ll summarize what we’ve explained so far on how to invest in shares for beginners in the video below.
Before investing in shares, do not forget the five golden rules
- The higher your hunting performance, the more risk you usually have to take. Remember that the value of an investment can increase or decrease and depends on many factors;
- Do not put all your eggs in one basket. Try to diversify your investments as much as possible to reduce your risk exposure;
- If you want money in the short term, you better not take too much risk. It is recommended to invest for several years. If you can not, it is better to put your money in a savings account;
- Check your investment portfolio regularly. The situation and the market may have changed since you first invested but do not panic. Do not make hasty moves just because others do;
- Do extensive research before you decide to invest. If you do not understand how some type of investment works and its risk, then it is better not to invest or turn to a professional investment consultant.
5 simple steps on how to invest in shares
- Decide how much money you will invest in share market
First, the stock market is not a place for money that you may need for the next five years, at least. While the stock market based on historical data is growing in the long run, there is uncertainty in stock prices in the short run. Take for example the financial crisis of the last decade or the coronavirus crisis.
It may be much better to save for an emergency or to pay off your debts. You can read in detail here how to make your budget and use the 50/30/20 system to set the right priorities.
Suppose now that you have distributed your money accordingly and have decided to invest in stocks. The next step is to open an investment account.
- Open an investment account
To invest in stocks you must open an investment account. These accounts are offered by organizations that act as brokers, such as banks, online investment platforms, applications, and investment consulting firms. There is no limit to how many accounts and which broker/platform you will use. You can combine your investment goals accordingly.
The process is simple and can usually be done online. But there are some things to consider before choosing a broker.
Access to stock exchanges and stock exchange products
Almost all brokers/platforms can offer you access to the world’s largest stock markets and basic stock trading. The differentiation comes if you want to invest in non-widespread markets, such as the Athens Stock Exchange, and in specialized stock market products.
Transaction and portfolio maintenance costs
One of the most important factors to consider when choosing a platform is the charges. These charges can greatly reduce your returns, as evidenced by years of research.
The main charges to look out for are:
Commission for the purchase/sale of shares: You may be charged a commission for each transaction you make. The commission can be a fixed price, a percentage on the transaction, or a combination
Account Billing/Portfolio Maintenance: As above, some brokers may charge a fixed or scalable amount for access to the platform. In some cases, you can avoid this charge depending on the number of transactions or the size of your portfolio.
Stamp duty and other taxes: These charges may be the same for all platforms, depending on the country on which each stock exchange is based.
Other charges: You may be charged more if you want to access additional services, products, market news, transactions in other currencies, etc.
The choice of platform in this case should be made based on the frequency and amount of transactions you intend to make.
How much support do you want?
The more support you want the higher the charges are usually. The most expensive scenario is to trade through an investment consultant who can guide you to decide which stocks and how to invest online.
But if you want a basic platform for your trading with access to educational tools and stock market research then it will cost you less. An interesting option is the eToro platform. The difference with other platforms is that it places great emphasis on the investor community. You can participate in discussions but more importantly, you can analyze and copy other users’ investment strategies directly.
Ease of use
Finally, you should consider the usability and functionality of each platform. Many allow you to try out a demo version before committing money. For example, in eToro you can open a Demo account
What are your choices?
As mentioned above you can open an investment account on various brokers/platforms.
Online platforms: These platforms give you access to a large number of stock exchanges, rich analytics, and some innovative features. It is usually very easy to register and use them. Most offer virtual accounts to try them out. Charges vary but are very low and even free for basic services. The eToro platform is a prime example as it offers:
- Free for unlimited buying or selling of shares on all international stock exchanges
- Zero charges for portfolio maintenance, with a charge of $10 per month if you do not login to your account for 12 months
One of the pioneering features of eToro, as mentioned above, is the emphasis on the investor community. At no extra charge, you can exchange views and share analytics and strategies with other investors on the platform. In addition, you can view the returns and portfolios of other investors (if they allow it) and copy their strategies at the touch of a button.
Investment Advisers: The charges here depend on the type of service you receive, but it is definitely the most expensive option due to the human factor. You will be charged for advice, execution of actions, and general management of your portfolio. You will have access to a large number of purchases and possibly personalized tips.
Do not forget in any case, that your capital is at risk and that past returns do not guarantee future ones.
3. Select the shares you want to buy
Once you have created your investment account, it is time to choose which shares to buy. We can not exhaust all the factors that you need to consider when choosing and analyzing stocks, but here are some tips to help you get started:
- Decide what kind of investor you are and how much risk you are willing to take.
- A good start is to do research on companies you already know from your consumer experience
- Invest only in companies that understand how they operate and make money
- Do not let the flood of news and market fluctuations affect you when conducting your research.
- The goal is simple: look for companies that you want to become a shareholder of
- Learn the basic parameters and concepts used to evaluate stocks
- Avoid high volatility stocks until you develop your knowledge
- Diversify your portfolio, ie invest in shares of different companies, industries, geographical coverage, etc. However, beware of excessive diversification. At some point, it loses its importance and your returns will simply follow those of the market
4. Buy the shares you chose
To buy shares you must first finance your account and choose when to make the purchase. You should not feel pressured to buy a certain number of shares or invest all your money at once. You can start with small amounts and increase your investments over time as you gain more experience.
Here we must add one more advantage of this technique. By investing your money over time and not all at once you can reduce the impact that time and volatility can have on your returns. For example, suppose a share of a company costs $30 today and $27 a month from now.
- If you buy 10 shares today you will pay $300 and they will be worth $270 a month from now. That is, you will have a loss of $30
- If you buy 5 shares today and another 5 in a month, you will pay a total of $285. Their value in a month will be $270, ie you will have less damage ($15 versus $30)
Of course, this technique also has its drawbacks. E.g. more transactions and corresponding charges (if any), loss of profits due to a large rise in stock prices, etc.
Basic terms of stock trading
Do not be disappointed by the terms used on the platforms. We have compiled some of the key terms in the table below.
|Ask/Price –||The price at which sellers are willing to sell the stock|
|Bid /Offer Price –||For Sellers: The price at which buyers are willing to buy the stock|
|Spread –||The difference between the highest bid price and the lowest demand price|
|Market order –||An order to buy or sell a stock as early as possible at the best possible price|
|Limit order –||An order to buy or sell a stock at a certain price or better|
There are many more terms you could learn, but modern platforms make it easier to invest in stocks without extensive knowledge of terminology.
5. Keep investing and improving your portfolio
We hope that your first stock market marks the beginning of a series of successful investments. But if things go awry, remember that even the best investors go through difficult times. The key to good returns, in the long run, is to maintain your perspective and focus on the things you can control rather than the ups and downs of the market. What you can do is choose the right tools for the job, pay attention to any charges and improve your behavior and knowledge as an investor.
Watch Warren Buffett in the video below as he mentions 7 investing principles that he has used to get high returns.
How to invest in shares – Frequently asked questions
What is a stock and how do you make money?
Once you buy shares of a company, you have a share of its assets and it gives you the right to participate in the profits. If the company has profited at the end of the year it can pay dividends, ie payments made to shareholders depending on the number of shares they hold. Also if the share price increases, the same goes for the value of your shares.
5 steps on how to invest in shares
- Decide how much money you will invest
- Open an investment account
- Choose the shares you want to buy
- Buy the shares you chose
- Continue to invest and improve your portfolio
What charges to pay for the buying and selling of shares:
Proven that charges can greatly reduce your returns. The charges to pay attention to are: commission for purchase/sale of shares, charge for holding a portfolio, stamp duty, and other taxes and charges. You can avoid many of these charges with the eToro platform which offers a free purchase or sale of shares and a zero charge to maintain a portfolio.
What are the five golden rules when investing?
- The higher the return the greater the risk
- Do not put all your eggs in one basket
- Invest in a long-term horizon
- Check the investment portfolio regularly but do not make hasty moves
- Do extensive research.
If you do not understand how an investment works then it is better to avoid it or consult professionals.