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Stock trading. How to do it and what to watch out for?

Updated on March 10, 2024

March 9, 2022

How to trade stocks? You can invest in shares today from the comfort of your home. All you need is an internet connection and some awareness of the current market situation. It doesn’t matter whether you want to invest directly in shares or just expand your portfolio with another asset. Not even on the volume of trades you want to make. It is important to realize which companies are worth investing in and which are not. That is why it is important to familiarize yourself with the basics of the stock market. Today, it offers several options for trading shares.

What is an action?

But pretty neat. First, it is important to understand what a stock actually is. Trading shares is different from, for example, trading commodities, cryptocurrencies or currency pairs. Each of these investments has its own specifics. No matter what volume of trades you want to make. That’s why it’s a good idea to familiarize yourself with the given asset first. But we do not claim that stocks are some kind of science. We are just conveying that every investment carries a certain degree of risk. That’s why you should first learn to walk in the world of business before diving into it.

Shares are securities that are traded on stock exchanges. And those who buy this security become shareholders of the company. This means that they hold a share of the company. Their share depends on how many shares of the corporation they buy. Share trading is not only important for the shareholders themselves, but above all for the company. Every company needs capital. Either for initial expenses or for its subsequent expansion. And in addition to various loans, shares are another source of initial income for them.

Consider the following example. We decide to start a glass factory, for example. From the saved funds, we will finance the material and part of the production premises. But we will need additional capital to pay the workforce, complete the glassworks space and promote it. The bank will either refuse us a loan, or we will simply not want to use its services. Therefore, we decide to enter the stock market and issue shares of our company. By some traders choosing to buy shares in our company, we get capital. And we can use it at our discretion. But shareholders don’t just give us their money. Of course they will expect something in return.

Shareholder benefits

Now we move again to the role of shareholders. Of course, we don’t just give our savings to companies. We will demand some kind of consideration for them. It is important to clarify at the outset that a shareholder does not become the owner of any of the company’s assets. The property of the corporation is, on the contrary, separate from the property of the shareholders. Therefore, if a shareholder comes to the company’s building, he cannot take whatever he likes. Simply because it doesn’t belong to him. In the same way, shareholders are left out, for example, if the company is sued for something. The advantages of shareholders consist of dividends and the possible right to participate in the development of the company.

Dividend

A dividend is a share of a company’s profit. Here, the company can pay us either regularly or irregularly. Some may not pay us at all. It is necessary to add that the payment of dividends is a right, not an obligation of the company. Therefore, if the company decides not to pay a dividend for a given period, it simply does not pay it. That can happen too. The amount of the dividend is dependent on the amount of the company’s profits. So if her profits are low or even non-existent, she doesn’t have to pay anything.

The dividend is given as a percentage for each share. Its amount therefore depends on the share you own. Some companies do not pay a dividend at all. Especially start-up companies that need their own profit for initial deposits. However, this does not mean that investing in such a company should be completely useless. Such companies, on the other hand, invest all their collected money in development. This increases the intrinsic value of the company. So the company is growing. This can mean higher profits for you in the future.

Preferred and common shares

The benefits of stock trading differ depending on whether we are buying preferred or common stock. When we acquire preferred (preference) shares in a company, we have a preferential right to receive dividends. Moreover, these are usually fixed. In addition, we also have a priority right to payment in the event that the company ceases to operate. However, we lose the opportunity to vote at the general meeting. This advantage, on the other hand, goes to ordinary (ordinary) shareholders. So both types of stock trading have their advantages.

By voting at the general meeting, you can indirectly influence the future direction of the company whose shares you own. You are electing the presidency here. Again, the weight of your vote will depend on how many shares you own. This depends on how many shares the company has issued and how many of them you own. So if a company has issued say 100 shares and you hold 10 of them, you own 10% of the company’s stock. Your voting weight will also correspond to this. However, limited or no voting rights at general meetings are not a big problem for a large part of investors. They are primarily concerned with profit. It is often higher in the case of priority shares.

Stocks and bonds

In addition to issuing shares, the company can also raise the necessary capital by issuing bonds. Basically, it works similar to stocks. A corporation needs finance, so it offers bonds for purchase on the stock exchange. Investors who become owners of these bonds become creditors of the company. They are also entitled to interest. In addition, bondholders, as creditors, are among the first to be entitled to repayment in the event that the company ceases to operate. This does not apply to shareholders. And neither the tribal nor the priority ones. On the contrary, they are among the last. So we can say that in essence, trading stocks is a bit riskier than investing in bonds.

Where to buy shares

Stock trading usually takes place on a stock exchange. For this, you need to use one of the intermediaries. This can be either a bank or an online broker. It depends only on you which of the options you choose.

Online stock trading

Long gone are the days when you had to enter the stock market with millions. Today, the stock exchange is also adapted for small traders who want to send their savings to the world. In order to evaluate them, of course. Therefore, making an investment in any asset today really only takes a little peace of mind. At the same time, the volume of trades you carry out does not have to be groundbreaking. It depends purely on your discretion. And then also on the restrictions of the given broker.

Today, online share trading is the daily bread of almost all investors. Firstly, because it is simpler and more accessible. And on the one hand, because they can check the development of the market themselves and, accordingly, subsequently decide which of the companies is worth investing in. At the same time, they have an overview of their investments and decide for themselves which assets they will trade with. They can also decide independently what volume of trades they will make. In addition, they build their portfolio themselves in such a way that it is as low risk as possible. And as profitable as possible.

What to watch out for

Choose the right broker

Especially if you are new to stock investing, choosing the right broker is the key to success. Which can sometimes be a bit of a pain. There are really many of them. Various reviews will help you with this, for example. It is good to make a decision based on whether the given broker is licensed and subject to some regulation. Also, check out the experiences of other users. Ideally somewhere else than on the broker’s official website. And finally, decide according to the fees. It is mostly fees that online brokers make money from. However, you will not pay the same for all of them. Also, check that you are comfortable with the broker’s set minimum for trade volume.

It is also a good idea to test your broker first. The vast majority of them offer a free demo account. Some, however, only for a limited time. However, this does not prevent you from trying trading with a particular broker. You will get virtual money from him. With these, you can “sell and buy” various assets through your account. You can test how it works with the given online broker. And also how skilled a trader you are.

Trade smart

Furthermore, it is also good to spread your risk. So don’t bet all your capital on one horse. On the contrary, it is a good idea to carefully spread your trading volume between several assets. Therefore, compose your portfolio in such a way that it offers the lowest possible level of risk. Because, frankly, investments always carry a certain amount of risk. It is therefore important that you also have some protection when it comes to non-hippo. Because if you put everything into the stock of a single corporation, and then it goes out of business, you’re left with nothing.

 And that ties into another well-intentioned piece of advice we’d like to give you. Before you dive headfirst into stock trading, educate yourself. Learn how to do market analysis yourself. Whether you bet on technical or fundamental analysis, bet on your own opinion rather than on the advice of a broker. Similarly, social trading may not always pay off.

Growth and value stocks

There are two ways you can choose to invest in stocks. You will either trade growth or value stocks. Growth investing means that corporations are not currently paying dividends. They don’t even have to make high profits. As investors, it is enough for you that the given corporation has the potential to grow in the future. It can be, among other things, an IPO (Initial Public Offering) of shares. This means that the corporation has gone public and is issuing its shares for the first time. Such shares can be purchased by anyone who believes in a particular corporation. It can often be a worthwhile investment. Such stocks are often undervalued. So he relies on the fact that their price is yet to rise.

The second option is the already mentioned value investment. In that case, we will rely on fundamental analysis. We will calculate the intrinsic value of the company. Based on this, we can subsequently estimate whether the shares are undervalued or overvalued and accordingly make a purchase or, conversely, a sale.

Blue Chip in your portfolio

The term blue chip stocks refers to the stocks of large, established companies. These corporations have been in the market for many years. they are stable and financially sound and are known for paying regular dividend to shareholders. It should be either stable or even growing. Such corporations include, for example, Coca Cola , Microsoft , or McDonald’s. Investments in shares of such companies are considered safe. It is therefore good that they form the core of your portfolio.

You should definitely focus on expanding your portfolio as well. This should include multiple types of investments. Whether shares of several corporations, or several types of assets. It just depends on your decision. Even such corporations as Blue Chip can be subject to various market influences. So it is not always ideal to bet only on them. Even though it may seem like the best idea.

ETF

Speaking of portfolio diversification, investing in ETFs is also a great option for diversification . Simply put, they are baskets of shares of individual corporations. By buying them, you get a small percentage of the shares in the companies that fall into this basket. ETFs can contain shares of companies in various industries. For example, shares of healthcare corporations or, for example, industrial companies. Alternatively, they can focus on companies based in one specific region. For example, to American, German, or even Japanese companies.

The advantage of ETFs over individual stocks is that they enrich your portfolio more. The trading volume of shares of individual companies will be lower. However, it will be diversified. The risk of your investment will thus be spread among several corporations. And should it happen that one of them finds itself liquidated, there are still many more. And you will profit from them.

Stock CFD trading

If you decide to trade shares, it doesn’t always have to be physical shares only. In fact, the vast majority of stock investing for small traders is done through CFD contracts. When trading CFDs on stocks, you are not buying or selling real stocks. The point is that you are entering into a contract with the other party. If you trade through an account you have established with your broker, you enter into this agreement with the broker. With the contract, you both agree to pay the difference between the sale and purchase price of the asset. In this case, shares.

Investing in stock CFDs means that you are speculating on the growth or, conversely, the fall in the price level of a particular stock. If you predict the price development correctly, you will make money. If you get it wrong, you lose. In this case, real shares are not completely out of the question. They act as underlying assets. The CFD will thus copy the price development of the specific share whose price development you are following.

The advantage of this method of trading is that the trade can be executed almost immediately. In addition, you can speculate on a drop in price. This means that you can enter to sell a stock that you do not actually own. And make money at the same time. Or, on the contrary, spend. For investing in CFD contracts, easily several times as much. CFD trading of shares and any other assets cannot be done without leverage.

In real terms, this means that you do not need to have the funds to match the volume of trades you will make. It is enough to have only a fraction of it. Subsequently, your profit is also multiplied. That sounds good, doesn’t it? But only until you realize that it’s your loss anyway. It is therefore ideal to think carefully about each investment and the resulting volume of trades. And of course also pay attention to the financial leverage you are trading with.

Shares and taxes

Income from stock trading can be very nice. But do not forget that this profit must also be taxed. Otherwise, it could turn into unpleasant braids. So don’t forget to add them to your tax return. So if you have produced some profit through investing in shares. And watch out. Even trading at a loss should be acknowledged.

Taxes only apply to you if you make a transaction with the shares. You pay nothing for just holding the stock. For example, if you sell stock in a corporation at a profit, you must recognize that gain. The basis of this declaration is the calculation of the tax base. It’s not a science. You simply take the total volume of trades you have made. That is, all income from it. And then you deduct all the costs you have invested. So, in case you sold shares whose original price was 1,000 crowns for 10,000, your net profit is 9,000 crowns. That is the tax base. It then has a rate of 15%.

How to avoid taxes

There are two ways to avoid these taxes. One of them is that your income does not exceed 100,000 crowns. But you have to pay attention to the fact that the tax base, i.e. the net profit, is no longer taken into account here. But with income as such. So if you sell shares worth 150,000 crowns, you will have to pay tax regardless of how high your original investment was.

The second option to avoid taxes is the time test. This means that if a certain amount of time passes between the purchase and sale of a particular share of a corporation, it may not be subject to tax. Currently, this time test is three years. So if you bought a share on March 1, 2020 and sell it on, say, May 20, 2023, you don’t have to pay tax. The FIFO (first in, first out) rule applies here. So you should sell stocks gradually. The one you buy first should also be the first to sell. It is primarily about multiple shares of one company. The purchase and sale of each share is calculated separately.

Is it worth trading stocks?

Just like trading any other asset, investing in stocks is also risky. Especially if you decide to trade with leverage. For licensed brokers, the amount of leverage is limited by law. On the contrary, with illegal brokers you can choose the amount of leverage you want. We recommend paying attention to financial leverage. Especially if you are a beginner trader. And also, of course, to choose a suitable and regulated broker.

But investing in stocks can pay off. You increase this chance if you educate yourself before entering the stock market. In particular, you will learn to analyze the market yourself and choose your own trading strategy. Based on it, you can then make a decision about which shares are worth investing in. Furthermore, you will be able to decide on the volume of trades yourself. This is more worthwhile than taking the advice of some unsolicited phone calls or following other investors.

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