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Lesson 2: Stock Investing

Lesson 2: Stock Investing

If you are ready to start investing in stocks but aren't sure of the first steps to take, you’ve come to the right place. Here’s how to invest in stocks and the basics on how to get started.

It might surprise you to learn that a $10,000 investment in the S&P 500 index 50 years ago would be worth more than $1 million today. Stock investing, when done well, is among the most effective ways to build long-term wealth. Unfortunately, there are no guarantees. A stock may look great based on the factors discussed below but continue to fall in price.

There is quite a bit you should know before you dive in. If you want to invest in stocks right away, here is a quick guide:

  1. Decide how to invest in stocks - trading lets you speculate on the price movement; dealing lets you take direct ownership of the shares.
  2. Select your favoritesif you are not interested in ownership, you can choose from over 2,000 CFDs on shares and funds with CAPEX.com
  3. Take your positioncreate an account with us to start leveraged trading.

For more info about how to invest in stocks, you can discover everything you need to know in this guide.

Why Do People Invest in Stocks?

Investing in stocks means buying shares of ownership in a public company or speculating on the rising or falling price of the underlying asset via CFD trading.

For companies, issuing stock is a way to raise money to grow and invest in their business. For investors, stocks are a way to grow their money and outpace inflation over time or to capitalize on short-term share price gains.

Stock prices will rise and fall in value according to how well a company is seen to be doing. Better-than-expected earnings will most probably make stock prices rise, while weaker earnings might make stock prices fall – but there is a wide range of reasons why a company’s share price can change.

You can choose to invest in stocks by purchasing the shares directly, or you can speculate on the price of shares rising or falling with derivatives. Both have their own unique pros and cons, which we explain later in this guide.

One of the best ways for beginners to get started with stock investing is to open an account with an online broker. With many online brokers, you can start investing for the price of a single share.

The attraction

Investment Gains - One of the primary benefits of investing in stocks is the chance to grow your money. Over time, the stock market tends to rise in value, though the prices of individual stocks rise and fall daily. Investments in stable companies that can grow tend to make profits for investors. Likewise, investing in many different stocks will help build your wealth by leveraging growth in different sectors of the economy, resulting in a profit even if some of your individual stocks lose value.

Dividend Income - Some stocks provide income in the form of a dividend. While not all stocks offer dividends, those that do deliver annual payments to investors. These payments arrive even if the stock has lost value and represent income on top of any profits that come from eventually selling the stock. Dividend income can help fund a retirement or pay for even more investing as you grow your investment portfolio over time.

Ownership - Buying shares of stock means taking on an ownership stake in the company you purchase stock in. This means that investing in the stock market also brings benefits that are part of being one of a business's owners. Shareholders vote on corporate board members and certain business decisions. They also receive annual reports to learn more about the company. Owning stock in the company you work for can be a way to express loyalty and tie your personal finances to the success of the business.

Short-term speculations – Active, risk-on investors (traders) might be seeking to capitalize on short-term share price gains. Rather than purchasing shares of stock, they speculate on the share’s value. They can speculate on its rising price by going long, as well as falling price by going short. This is made possible by trading with derivatives.

The risk

Returns are not guaranteed – While stocks have historically performed well over the long term, there is no guarantee you will make money on a stock at any given point in time. Although a few things can help you assess a stock, no one can predict exactly how a stock will perform in the future. There are no guarantee prices will go up or that the company will pay dividends. Or that a company will even stay in business.

You may lose money – Stock prices can change often and for many reasons. You must be comfortable with the risk that you might lose all your money when you buy and sell stocks, especially if you are not planning to invest for the long term. If you use leverage to invest in stocks, like buying on margin or short selling, you could lose more than you invest.

Leverage - Available when you use derivatives products, leverage gives you full market exposure for an initial deposit – known as margin – to open your position. But bear in mind that leverage can increase both your profits and your losses as they will be based on the full exposure of the trade, not just the margin requirement needed to open it. This means that losses, as well as profits, could far exceed your margin.

How to start investing in stocks?

So, you want to begin investing in stocks? Here’s a five-step checklist to help get you going:

  1. Choose how you want to invest in stocks
  2. Know the difference between stocks and stock funds
  3. Understand risks and charges
  4. Determine what moves the price of stocks
  5. Research and select your stocks

Step 1 – Choose how you want to invest in stocks

There are several ways to start a stock investment. Choose the option below that best represents how you want to invest in stocks, and how hands-on you’d like to be in choosing the stocks you invest in.

The main things to consider when defining your investment strategy are your time horizon, your financial goals, risk tolerance, tax bracket, and your time constraints. Based on this information, there are two main approaches to investing.

Passive stock investment

Passive investing is a way to manage your stock investments for maximum efficiency over time. With other words, a stock investing method that takes a buy-and-hold approach.

The main idea behind buy-and-hold is that you stay invested throughout market cycles, as even missing just a few of the best days can have a major impact on your long-term returns.

But despite the evidence in support of buy-and-hold investing, many investors find it difficult to sit tight and leave their investments alone.

This is often because the anxiety and discomfort associated with a higher level of investment risk can make it tempting to over-trade. During periods of market volatility, a sensible buy-and-hold investment can quickly turn into an active stock trading strategy. This can mean that not only do you end up buying and selling at just the wrong time, but you also increase your investment costs via trading commissions.

The idea behind buy-and-hold is that you are eventually rewarded for taking an extra risk but only if you stay the course and sit tight.

But there are no guarantees. You can buy and hold but may still lose money in the end.

Investors may also fail to achieve good returns because their portfolios are too concentrated in the shares of just one or two companies. Whilst this higher level of risk could potentially earn a higher return, there is a very real danger that a specific company doesn't perform as expected, or even goes out of business. A well-diversified portfolio helps investors reduce the risks associated with the company or industry-specific events.

You might do this to benefit from long-term upward price movements, or to receive dividends and compound returns.

Active stock investment

An active approach to stock investing that requires buying and selling, based on market conditions. Active investing in stocks takes the opposite approach, hoping to maximize gains by buying and selling more frequently and at specific times.

If you’re looking to take a shorter-term position, you could consider stock trading, a more speculative form of investing. Because you’ll use derivatives like CFDs (contracts for difference), you’ll be able to ‘go short’ in addition to going long. Going short is the reverse of going long, enabling you to profit if you correctly predict a depreciation in a stock's price.

However, please note that short selling is a high-risk trading method because stock prices can keep rising – theoretically, without limit. It’s essential to take steps to manage your risk.

It’s also important to note that CFDs are leveraged instruments that differ from traditional stock investing.

When passive investing, as you buy and own the asset, you pay the full amount for the asset upfront. By contrast, leverage means you can open a position with a small deposit (called ‘margin’) instead of paying the full value of your position. However, loss and profit are still calculated based on the full position size and can outweigh your initial margin deposit.

You might do this to speculate from short and medium-term upward and downward price movements of individual shares.

Once you’ve set up a live trading account with CAPEX.com, you’ll have over 2000 CFDs on shares from which to choose, including 0 Commission, unleveraged fractional CFDs on shares. However, you could also use CFDs to take positions directly on the major stock market indices and ETFs (Exchange-Traded-Funds).

Step 2 – Know the difference between stocks and stock funds

Now it's time to start doing research on what to invest in. There are diverse ways to invest in stocks and there's a lot to know so doing your research is well worth your time.

Stocks are a good option to consider if you want to invest in specific companies. Just keep in mind that you should analyze the company itself and how it's performing over time:

Stocks

A stock is a security that gives stockholders the opportunity to buy a fractional share of ownership in a particular company. There are many diverse types of stocks to choose from, so make sure you understand your options, what they offer, and what matches your budget and investing goals:

Value stocks - This is how you can invest like Warren Buffett. He’s been using this strategy since he first stepped into investing in the 1950s.

Value stocks trade at low prices for several reasons. Sometimes a company is recovering from a difficult stretch. Others may have faced legal or regulatory problems in the past. But once these companies recover, they have historically been the best investments on Wall Street.

Investors like Buffett have made a fortune investing in the stocks of these companies. They tend to outperform the general market over the long term.

High dividend stocks - These are stocks that pay dividend yields higher than the average yield on S&P stocks, which is currently around 1.9%.

Historically, half the return on stocks has come from dividends. For that reason, stocks with high dividends tend to be the better performers over the long term.

The high dividend yield is indicative of a company with strong fundamentals. Many investors are looking for the combination of growth and income that high dividend stocks provide.

High dividend stocks typically provide at least some downside protection during market declines. That is when investors begin to realize the virtues of stocks that also produce income.

Though they aren’t always top performers in the short run, they tend to be among the best stocks to own long-term. And if you’re young, that should be your focus.

Growth stocks - These are stocks of companies that are growing faster than companies in the general stock market, and even faster than their competitors.

Most don’t pay dividends at all, preferring to reinvest earnings to generate more growth. The return on growth stocks is in their rising stock price over the long term.

These are also highly risky stocks to own and are best owned through funds. While they have strong potential for price growth, they can also be highly volatile. Though they usually lead the market during bull market runs, they often take the biggest hits in market declines.

Still, growth stocks are among the best type to hold for a long-term return.

In addition to buying individual stocks, you can consider ETFs, mutual funds, or index funds.

Exchange-traded funds (ETFs)

Unlike stocks, which represent just one company, ETFs represent a basket of stocks. Since ETFs include multiple assets, they may provide better diversification than a single stock. That diversification can help reduce your portfolio’s exposure to risk. Exchange-traded funds let you invest in lots of stocks all at once, and ETFs often have lower fees than other types of funds. ETFs are traded more easily too.

>> What is an ETF and how does it work

Mutual funds

This investment vehicle allows investors to pool their money to invest in various assets and are like some ETFs in that way. However, mutual funds are always actively managed by a fund manager, unlike ETFs that are passively managed. Most mutual funds fall into one of four main categories: bond funds, money market funds, stock funds, and target-date funds.

>> What are mutual funds and how do they work

Index funds

This type of investment vehicle is a mutual fund that's designed to track a particular index such as the S&P 500. Index funds invest in stocks or bonds of various companies that are listed on a particular index.

>> What is a stock market index and how does it work

You want to get familiar with the several types of investment vehicles and understand the risks and rewards of each type of security. For example, stocks can be lucrative but also very risky. As we mentioned before, mutual funds are actively managed, whereas index-based ETFs and index funds are passively managed.

This is important to keep in mind because your costs and responsibilities vary depending on an active versus passive approach. Mutual funds are professionally managed and may have higher fees. With ETFs and index funds, you can purchase them yourself and may have lower fees. Having a diverse portfolio can help you prepare for the risk and not have all your eggs in one basket.

Building a diversified portfolio with individual stocks can be time-consuming, especially for people just starting out. That's why experts recommend beginner investors focus on mutual funds, index funds, or ETFs, which give you a wide selection of stocks in one go.

Step 3 – Understand risks and charges

The risks and charges vary depending on whether you trade CFDs on shares or buy traditional shares. Trading can be seen as riskier than traditional share dealing, due to the use of leverage. But, buying shares of stock also carries a risk – and there is no guarantee that your investments will increase in value, so you could receive back less than you initially invested.

Before deciding how to invest in stocks, you should take steps to manage your risk. We’ve got courses at CAPEX Academy that take you through risk and money management and how to mitigate your exposure to risk in the global financial markets.

Buying shares and ETFs directly

Investing in stocks using a direct purchase carries its own risk because you are betting on one company rather than diversifying your exposure through an ETF or other fund.

You might invest in stocks by purchasing ETFs that track a group of companies, to benefit from the overall growth of an index or sector.

Leverage is not available for share and funds dealing, so you will have to pay the full value of it upfront.

Charges for investing vary depending on how you would like to take a position as in general is a small percentage of your investment value.

Trading shares, ETFs, and indices through CFDs

Your risk when trading online is higher than share dealing due to the use of leverage – which can increase your losses as well as your profits.

Attaching stops to your positions can help to mitigate your exposure to risk.

Trading also allows speculating on the price movements of an index – which is a collection of many different companies’ shares, giving you exposure to an entire sector or economy at once.

CFDs have in general a small commission fee when you open and close a position.

Stock Investing - CFD Trading
Source: CAPEX WebTrader

With a CAPEX.com CFD trading account you’ll be able to trade with zero commission and leverage up to 1:30:

>> Learn how to trade stocks

Step 4 - Discover what moves the price of shares

Before it goes public through an IPO, a company’s shares will have a set price range – often determined by the underwriter of the IPO (normally a large bank). This range will be set according to the anticipated interest in the listing, as well as the company’s fundamentals – including its revenues, its products, and its existing popularity.

Once the IPO has been completed, fluctuations in the share price are caused by changes in the supply of and demand for the stock. If supply is higher than demand, the share price could fall; if demand is higher than supply, the share price could rise.

In the long term, there is a range of reasons that the demand for a share can fluctuate over time. These reasons include:

Earnings reports

Companies usually release interim reports on their financial performance once every quarter and a full report once a year. These reports can influence a company’s share price as traders and investors use figures including revenue, profit, and earnings per share (EPS) as part of their fundamental analysis.

Macroeconomic data

The state of the economy a company operates in will affect its growth. Data releases such as gross domestic product (GDP) and retail sales can have a significant influence on company share prices – strong data can cause them to rise, while weak data can cause them to fall.

Market sentiment

Share price movements aren’t always based on fundamental analysis. The view that the public, as well as market participants, have on a particular stock can cause demand to fluctuate. This is how some speculative bubbles are formed.

Interest rates

If interest rates are low, the stock market might see increased activity – despite the previous factors mentioned here. That’s because more people could turn to stocks and shares to achieve greater returns than they might otherwise be able to if they saved their money in a bank account.

Step 4 – Research and select your stocks

Stock investing is filled with intricate strategies and approaches, yet some of the most successful investors have done little more than stick with the basics. That means using funds for the bulk of your portfolio — Warren Buffett has famously said a low-cost S&P500 ETF is the best investment most people can make — and choosing individual stocks only if you believe in the company’s potential for long-term growth.

If individual stocks appeal to you, learning to research and study stocks is worth your time.

When you’re choosing a stock, it’s important that you carry out your own due diligence on a company, sector, and economy. You should use both fundamental and technical analysis when assessing a company’s financials and potential future share price performance.

First Screening – the quality of the underlying currency

Today, much of the advice that purports to cover investing in the stock market focuses on individual foreign or local stock picking without regard to a critical aspect – the quality of the underlying currency.

Anyone whose stocks are too concentrated in a falling currency has paid the penalty countless times whether they realize it or not.

To protect yourself, you need as much of your stocks as possible to be denominated in the currencies that are likely to hold their real value or appreciate in the long run and lift your portfolio along with them. Because a good stock investment denominated into the wrong currency may become a bad stock investment and vice-versa.

Step 1 – Identify the currencies you want to be represented in your portfolio

  • Study currency market weekly or monthly charts or representative currency indexes for your projected holding period. If you’re planning to buy and hold stocks for months to years, you want to see trends over the prior few years.
  • Identify the currencies with the healthiest uptrends over that period.
  • Check that the underlying national economic fundamentals support that trend with good growth, or at least consistently low ratios of debt to the gross domestic product (GDP) and culture of fiscal discipline, not growing budget and trade deficits.

Step 2 – Allocate a percentage of your portfolio to each currency

Allocate percentages of your portfolio for instruments denominated in or tied to those currencies that are more likely to appreciate in the long run.

Step 3 – Choose the individual shares that provide that given percentage exposure

Then shop around for specific assets you want that are denominated in or exposed to those currencies so that you have a set portion of your portfolio in both the right currencies and assets in those currencies.

Second Screening – the quality of the companies

Consider looking for stocks with a low P/E, for example, greater than zero (shows the company is profitable) but less than five. Also, consider looking at stocks where the Forward P/E is lower than the current P/E. This shows earnings are expected to increase, and if they do the stock is a better buy at the current price.

IPO date should be more than a year ago; preference is given to stocks that have been publicly traded for 10 years or more.

Look for prices over $2 per share, no penny stocks. Also, take into consideration the average volume (over 300,000 shares) and operating margin (over 10%).

If dividend stocks are on your radar, look for a yield over 5%, but a pay-out ratio below 100%.

Screening for stocks based on the filters above will produce a list of trade candidates. Usually, all are not worthy of investment though.

Third Screening – charts of the stocks

View charts of the stocks produced by the screeners above. The next criteria for stock investment are:

  • Only buy stocks at the major long-term support area. We want to buy stocks at cheap prices (compared to historical values), not expensive prices. Investment trades don’t require a stop loss, but you should have a price in mind where you get out if conditions don’t improve for the stock. An investment doesn’t mean you hold it forever if it doesn’t do what you expect. Have a low tolerance for stocks that keep dropping.

Also, have an exit plan for how you will exit a profitable or losing trade. Define how and why you will exit. Since we used to support to get into the trade, you may consider exiting just below a long-term resistance level. Once you are out of your trade, don’t worry about what the stock does after. Take the money and invest in other stocks, going through the same process again, as discussed above.

This brings us to one final guideline on how to pick stocks:

  • If buying at the support line planning to exit just below the resistance line, the upside potential should outweigh the downside risk. In many cases, market strategists find the ideal risk/reward ratio for their investments to be approximately 1:3, or three units of expected return for every one unit of additional risk. Investors can manage risk/reward more directly using stop-loss and take-profit orders.

We’ve got over 2,000 CFDs on international stocks and ETFs for you to choose from – as well as our own ThematiX, which are top trending stories & topics of interest in stock portfolios. If you’re looking for inspiration for a stock to take a position on, consider using our QuantX smart portfolio builder.

Final words about investing in stocks

Buying shares of stock or opening buy positions on shares through CFDs are somehow similar terms that some people will sometimes use interchangeably – but there are significant differences for you to be aware of before investing in stocks.

Investing in stocks through traditional shares dealing means that you are taking direct ownership of a company’s shares. This will make you a shareholder, making you eligible to receive voting rights and dividend payments if the company grants them.

You’ll need to commit the full value of the shares upfront because leverage isn’t available. While this means that you might need more initial capital to get started when compared to CFDs, your losses are capped at this initial outlay. That said, you should be aware that you might receive back less than you initially invested.

Investing in stocks through CFDs means that you’re speculating on a share’s price movements – without taking direct ownership. CFDs are leveraged products, which means that you won’t need to commit the full value of the position. But bear in mind that leverage can increase both your profits and your losses.

With CFDs, you can ‘buy’ (go long) the shares if you think the stock’s price will rise, or you can ‘sell’ (go short) if you think the stock’s price will fall. Shorting with derivatives can be an effective way to hedge against downward price movements in your non-leveraged investment portfolio, or it can be a way to generate profits outright from shares that are falling in value. But when you go short your potential losses are theoretically uncapped because there is no limit on how high something’s price can rise.

Choosing between buying and owning shares or speculating on the price movement is a decision for you as an individual – depending on your unique style and what you’re looking to get out of the markets. If it’s the possibility of slow and steady returns with lower risk, then buying shares of stocks might be preferable. If it’s the possibility of quick gains with higher risk, then you might prefer trading CFDs on shares.

Before you start investing in stocks, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more-informed investment decisions.

Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for stock investors who are looking to make a transition to leveraged trading.

Stock investing FAQs

Do you have advice about stock investing for beginners?

All of the above guidelines about how to invest in stocks is directed toward new investors. But if we had to pick one thing to tell every beginner investor, it would be this: do not invest more than you can afford to lose.

Can you get rich by investing in stock?

Investing in the stock market is one of the world's best ways to generate wealth. One of the major strengths of the stock market is that there are so many ways that you can profit from it. But with the exciting potential reward also comes significant risk, especially if you're looking to get rich quick.

How much should you invest in stocks first time?

There's no minimum to get started investing, however, you need at least $100 — $1,000 to really get started right. If you're starting with less than $1,000, you’ll not be able to apply proper risk and money management.


The information presented herein is prepared by ae.capex.com and does not intend to constitute Investment Advice. The information herein is provided as a general marketing communication for information purposes only.

Users/readers should not rely solely on the information presented herewith and should do their own research/analysis by also reading the actual underlying research. The content herewith is generic and does not take into consideration individual personal circumstances, investment experience or current financial situation.

Key Way Markets Ltd shall not accept any responsibility for any losses of traders due to the use and the content of the information presented herein. Past performance and forecasts are not reliable indicators of future results.
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