HOW TO INVEST
IN STOCKS

Getting started with stock trading and investing might seem daunting, but understanding the fundamentals can help you develop an approach which ties in with your objectives. Whatever your investment aims, this guide will walk you through everything you need to know about entering the stock market.

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The stock market offers opportunities for wealth creation, but success requires knowledge, patience, and a clear understanding of your financial goals. These are factors to consider when starting out trading and investing in stocks.

What Are Stocks and How Do They Work?

Stocks are securities that represent part-ownership in a company. When you purchase shares you’re buying a small piece of that business, making you a shareholder with certain rights and potential benefits.

If the prospects of a firm improve and demand for its stock increases then everything else being equal, the stock price should rise and generate a positive return for shareholders. This fundamental principle drives the stock market and creates opportunities for investors to build wealth over time, but there are no guarantees.

What Is the Stock Market?

The stock market is a collection of exchanges where shares of publicly traded companies are bought and sold. These stock exchanges are regulated marketplaces where investors buy and sell company shares, with prices changing based on supply and demand.

Notable exchanges include: the New York Stock Exchange, the NASDAQ, the London Stock Exchange and the Australian Securities Exchange. These organisations have rules and regulations to ensure that the market operates efficiently and fairly and provide investors with opportunities to invest in both domestic and international companies.

How Stocks Make Money

Stocks generate returns through two primary methods: capital appreciation and dividend payments.

A capital gain occurs when a share is sold for more than its purchase price. Gains are not guaranteed because market conditions and company performance can shift unpredictably.

Some companies also distribute dividends, which are portions of their profits shared with shareholders. These may be reinvested to increase future ownership and potentially benefit from the compounding effect, or used as income.

These different forms of gains are broken down in the table below.

Capital Gains vs Dividends

Return Type	What It Means	Example
Capital gain	Selling a share for more than you paid	Bought at $20 → Sold at $26 = $6 gain
Dividend	A company distributes part of its profits	$0.40 per share × 25 shares = $10

Trading vs Investing: Understanding the Key Differences

Trading involves frequent buying and selling of stocks to profit from short-term price movements, whilst investing focuses on long-term ownership. The terms are often used interchangeably, but refer to different styles of navigating the market.

Appreciating the distinction between trading and investing is crucial for developing an understanding of the risks and potential opportunities of the stock market, with a summary of the key differences outlined in the table below.

Aspect	Trading	Investing
Time Horizon	Days to months	Years to decades
Focus	Profit from price movements	Build wealth through growth and dividends
Analysis Type	Technical analysis, charts	Fundamental analysis, company financials
Risk Level	Generally higher	Generally lower
Time Commitment	Requires active monitoring	Periodic review sufficient

Long-term stock investing focuses on a buy-and-hold approach. Investors select stocks with the intention of holding them for an extended period, for years or even decades.

How To Open a Brokerage Account

A brokerage account is a financial account that allows you to buy and sell stocks.

Opening an online brokerage account involves registering with a regulated broker, providing personal information, verifying your identity, and funding your account.

When reviewing the pros and cons of a broker, consider these key factors:

• Commission structure: Some brokers charge a commission on each trade, whereas others offer commission-free trading, instead making their return on the bid-offer spread
• Platform usability: Look for intuitive interfaces and educational resources
• Available markets: Ensure access to domestic stocks and international exchanges
• Regulatory compliance: For example, verify FCA authorisation for UK brokers

Most brokers accept bank transfers and debit card deposits, making it straightforward to begin investing and setting up an account and making a first trade can be done in a matter of minutes.

How to Choose Your First Stocks

Stock selection involves analysing companies based on financial performance, business model,growth prospects, and valuation relative to peers. That way you can establish the risk-return offered by different stocks and whether they might fit with your investment aims.

The price of stocks will fluctuate over time, but some stocks are more volatile than others. Stocks and stock-based funds which potentially offer lower levels of price volatility include:

• Blue-chip stocks: Large, established companies with stable earnings
• Index funds or ETFs: Provide instant diversification.
• Dividend-paying stocks: Companies that regularly distribute profits to shareholders in the form of dividends.

Stock investing ultimately comes down to picking the right stock to buy at the right time. Fundamental analysis can help you to learn more about the likelihood of a firm’s business model leading to growth and generating greater profits in the future. Key metrics to evaluate include:

• Price-to-earnings (P/E) ratio
• Trends in revenue growth
• Debt levels and financial stability
• Competitive position within the industry

Understanding Stock Market Risks

Stock market investing carries various risks including the potential for capital loss, market volatility, and company-specific risks. Understanding the different types of risks associated with stocks is essential for making informed decisions and common risks include:

• Market volatility: Stock prices can fluctuate significantly in the short term
• Company-specific risk: Individual businesses may face challenges affecting their stock price
• Economic risk: Broader macroeconomic conditions can impact overall market performance
• Currency risk: For international investments, exchange rate fluctuations matter
• Operational risk: The risk of loss resulting from ineffective or failed internal processes, people, systems or external events.

Building a Diversified Portfolio

Portfolio diversification involves spreading investments across different stocks, sectors, regions, and asset classes. Doing this rather than putting all your money into a single stock can help protect your portfolio from losses.

It’s generally recommended to diversify your portfolio and build a collection of stock positions that complement each other, smooth out returns and mitigate risk. The different aspects of diversification to consider include diversifying across different:

• Industry sectors (technology, healthcare, finance, consumer goods)
• Company sizes (large-cap, mid-cap, small-cap)
• Geographic regions (UK, European, US, emerging markets)
• Investment styles (growth stocks, value stocks, dividend stocks)

To enable investors with limited capital to still apply the principles of diversification many brokerage firms now offer fractional shares . These allow investors to buy a portion of a stock even if they don’t have enough money to purchase a full share.

Stock Market Strategies for Beginners

Investment strategies provide structured approaches to building wealth. Those stock market strategies which prioritise maintaining discipline and avoiding emotional decision-making can be beneficial for all investors, including beginners. These investment techniques include:

• Dollar Cost Averaging: Investing a fixed amount regularly, regardless of market conditions. The dollar cost averaging approach helps smooth out the impact of market volatility over time.
• Buy and Hold: Historically, the stock market is well-known for making long-term gains and the buy and hold involves committing to riding out the inevitable short-term slumps in price associated with bear market corrections.
• Dividend Investing: Focusing on companies that pay regular dividends, potentially providing income alongside capital appreciation.

Final thoughts

The core principles of stock investing include patience, continued education, and developing a clear understanding of personal financial goals.

Keeping informed of developments includes tracking how the relative value of the different stocks you hold changes over time. This may result in you rebalancing your portfolio to ensure it remains aligned with your goals and risk tolerance.

Visit the eToro Academy to learn more about stock investing.

Quiz

Frequently Asked Questions

How much money do I need to start investing in stocks?

A positive of investing in the stock market is that you don’t need a large sum of money to begin investing and some online brokers offer the ability to invest in fractional shares.

What’s the difference between stocks and shares?

The term “shares” is more commonly used in British English, while “stocks” is the preferred term in American English. Both refer to equity securities that can be bought and sold on stock exchanges.

Is stock investing suitable for beginners?

Stocks can be a good investment for beginners, though it depends on individual circumstances and risk tolerance. With proper education, research, and a long-term perspective, beginners can successfully navigate the stock market while managing risks appropriately.

How do I analyse stocks?

There are different ways of analysing stocks and getting a better idea of potential future price moves. Fundamental and technical analysis are both popular approaches, but investors can also use personal experiences of a company to know whether they want to invest. First-hand analysis of a business can be just as valuable as attempting to read the charts.

Can I lose more money than I invest in stocks?

When buying stocks without leverage, your maximum loss equals your invested amount. However, using leverage or short-selling can result in losses exceeding your initial investment. Always understand the risks of any trading strategy before implementation.