Understanding Stock Trading As A Form Of Investing

Stock trading is the best known and most popular form of investing. A share is actually a security. Listed companies spend these in order to raise money. The value of share ascertains the price that you pay out for this type of security. Values change regularly and are dependent on demand and supply. If many people want to buy the share, the price rises. If many people start selling the stock, the price will fall.

Stock Trading 101

Price return of shares

By buying shares you can earn money and thus achieve a return. These returns are often higher than the returns that can be achieved with a savings account. In the long term, the price of shares usually rises well. There may be an economic crisis, decline or stock market crash, but fortunately, these do not happen much and in the longer term you are often not bothered by this. As a result, it is often possible to achieve a good price return after a number of years and to be able to sell your shares for more money than what you bought them for.

Share in a company

By buying a share, you buy a small piece of the company. You literally buy a share in the company. These shares can give you control of the company. If you own shares in a company, you are a shareholder and welcome to the annual shareholders’ meeting. Here you can express your opinion and you will hear what the management has to say. This can offer benefits because others do not have this information. In addition, some companies also distribute part of the profit to shareholders. This is called a dividend. Large multinationals, in particular, payout stable and high dividend yields. This is especially profitable in the longer term. If you want to invest in the short term, you better look at other aspects.

Stock exchange and (online) brokers

Control in the company is not the reason for most investors to buy shares. Shares are usually purchased to make a profit with this. Stock traders come together on the stock exchange. Here the shares are bought and sold again. The major financial organised institutions trade the shares for their clients on the stock exchange. As a private investor, you buy the shares at a financial institution. These settings are also called brokers. For example, you can invest with your own bank. But this is not often done. Since the rise of online brokers, much has been traded online. Online brokers also often trade at lower rates than the larger financial institutions.

How does stock trading work?

When investing in shares, the goal is to sell the share for a higher price than the price you bought the share for. This way you make a profit. So, for example, you buy a share of ten euros and sell it again for thirty euros. You have then made twenty euros in profit. This profit is called a return.

There are two types of investors, long-term investors, and short-term investors. Short-term investors often sell their shares within a few days and sometimes within a few minutes. They take more risk and expect a high return. They keep a close eye on the economic news and respond to the rates. Long-term investors sometimes hold their shares for years. They often do research in advance into the company they want to invest in and invest in companies they trust. They take less risk and often have a lower return.

What are the advantages?

  • Control in a company
  • Dividend return on company profit
  • Good price return in the long term

What are the risks?

  • Does not offer a guarantee for making a profit
  • If the company is not doing well, the value of shares goes down

In addition to the price return that you as an investor can achieve, you can also achieve dividend returns. If you buy a share, you buy a small part of the company. Many larger companies distribute part of the profit to their shareholders. This profit is called a dividend yield.