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With investing your savings, the first thing that probably comes to mind is the stock market, where securities are traded. But do you understand what the stock market is or how it works? Do you know what steps to follow or what fees to pay in order to invest? Discover the answers to these and other important questions here.
The stock market is where people trade fixed and variable income securities, including shares, corporate or government bonds, and exchange-traded funds. A publicly-traded company, in search of financing and capital, sells shares; and investors, who seek a return for their money, get liquidity as the company’s shareholders.
A share is a security that grants a shareholder a proportion of a company’s profits. Therefore, shareholders “own” a percentage of the business in proportion to the number of shares they hold.
To be publicly traded on stock exchanges, companies must show regulators solvency and transparency, aside from other requirements. The world's largest stock exchanges by market capitalization are in New York, Tokyo and London.
How much money do you need to invest in a stock exchange?
There's no minimum amount to invest; but you should remember that trading carries many fees and commissions, like for executing orders, purchasing and clearance. If your investment is small, fees could by and large affect your returns. Remember to ask for all fees and commissions in writing.
What is the first step to invest in the stock market?
Before you invest in the stock market, the first thing you must do is get your finances in order. You should know how much money you earn, spend, have saved and owe to figure out if you have enough to invest in a stock exchange. Because shares are considered a medium-to-long-term investment, checking your finances will also enable you to plan for the future.
Next, you should understand how stock exchanges work. Asking trading experts, reading financial news and taking courses are some ways you can get answers to your questions and understand important aspects about your investor profile, such as your financial goals, the amount of time you’ll need, and your risk tolerance.
Nowadays, apps and websites enable you to create an account to simulate trades, become more familiar with the market, and test your investment decisions without investing any money.
Once you have gauged your finances and understood your investor profile, the next step is to contact a chartered financial intermediary to execute your trade orders. Because investors cannot trade shares by themselves, two important agents come into play. The first one is the broker, which can be a person or a company that is authorized to execute their clients’ trade orders for a fee. The second one is the trader, who buys and sells securities for their own benefit or that of others. Traders use a broker's platform to make trades.
Which markets and securities should you invest in?
You invest in shares because you expect the company to grow and make a profit over time. Most experts recommend that you diversify your investment portfolio in terms of companies, industries, assets and regions so that your money isn't left at the mercy of a single market. You can diversify the shares in your portfolio; but you’ll have to make a sizeable investment and do a lot of research.
The stock market signals not only the state and expectations of companies but also the economy as a whole. Environmental disasters, political crises and armed conflict are just some facts that impact on companies’ performance and share price.
You can also choose financial products that are good for the environment and give you a return on your investment. Sustainable investment follows environmental, social and good governance (ESG) standards.
Which financial product you should invest in depends mainly on your investment capacity and risk profile (i.e. how much time you are willing to wait for capital gains). Shares can give you a return from a company’s profits in the medium-to-long term or be sold whenever you need liquidity. In contrast, bonds have a set term (generally of five to ten years) in order for you to get your investment back along with any capital gains
Three tips for investing in the stock market
Having enough money to invest, understanding the stock market and selecting the best financial product for your investor profile are, overall, the first step to investing in stock exchanges. You should also know how to manage your assets based on your investment goals.
You’ll need to be patient for whatever return you’ll get on your investment over time. Don’t act impulsively when markets get volatile. Generally, investing in the stock market is something long-term, and share prices always rise and fall at different times.
Before you invest in shares or other capital instruments, you should set limits based on how much money you’re willing to lose and expect to gain. When you reach those limits, making a decision about trading will be easier and you’ll avoid financial biases, like endowment and reflection, that could lead you to take on more risk.
Whether you’re not sure about what to invest in, don't want to make trading decisions, or don’t have time to manage your assets, you can get help from people or companies specialized in trading. Make sure whoever you work with is chartered and licensed to trade.
