The basics of investing on the Stock Market: how to buy profitable stocks

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The stock market is a virtual market, where people go to buy and sell securities.

Moreover, you can also trade bonds, investment certificates, and derivatives.

Thanks to technological progress it is possible today to trade stocks practically anywhere in the world, all you need is access to the Internet.

People who are interested in this often wonder: how to invest in stocks?

In order to buy stocks, you need to have a trading account. It allows to both hold financial instruments, as well as trade them.

Moreover, the majority of transactions opened on the stock market are stocks.

What are stocks?

In simple terms, stocks are securities, which signify your share in the joint stock company's equity. The share of course will depend on the number of shares you have.

One of the biggest mistakes most people make, when planning to invest on the stock market, is not having adequate knowledge about how the market works.

Why you should invest in stocks? How to trade on the stock exchange?

You will find answers to all these questions in this article.

Why you should invest in stocks?

Stocks are the most popular financial instruments available on the market.

It is worth knowing that long-term investments in stocks can bring much higher profits to investors, when compared to bonds or deposits.

A perfect examples of this is DAX (the most important German stock index), which in the last 15 years has been generating 8-9% profits annually. As we know, there has been many market crises during this time.

Investing in stocks is also a form of saving money. This way money doesn't lose its value due to inflation.

Another benefit of investing in stocks is diversification of income sources. You don't need to invest all your capital in stocks of one company. This way you can minimize the risk of losing your capital.

Taking a look at home rental, when the tenant doesn't pay the rent, the income from this investment source is 0.

Moreover, profits from renting an apartment are not only lower, but at the same time it takes a lot more time to prepare an apartment, than you would think. An apartment is not a liquid asset. It's very difficult to sell it in a short period of time.

Deposit
Annual return on investment
1-2%
Liquidity
High, however, withdrawing sooner than the end date of the deposit means a lower return
Entry threshold
100 zł - lower threshold for most banks, but deposits with interest calculation usually have a higher threshold.
Risk
Low, bankruptcy of a bank is quite rare, they are additionally supported by the national bank and the state treasury.
Rental of apartment
Annual return on investment
4-5%
Liquidity
Low, in the event of a crisis, the asset can lose value and sometimes cannot be sold even close to the purchase price
Entry threshold
Around 100 000 zł, higher investments are usually required to achieve higher returns.
Risk
Average, usually selling is not a problem, investing in good properties is a sure thing, however, in special cases or miscalculation of the value it can be risky.
Stocks/Indices
Annual return on investment
5-20% - may fluctuate significantly in the case of individual stocks, but stabilizes having just average importance through diversification
Liquidity
High, can be sold in a fraction of a second. In case of large drops in value, you can use the Stop Loss order to automatically close positions after a certain level of loss.
Entry threshold
1000 zł - deposit to activate a real account on a trading platform.
Risk
Low to average, depending on the chosen stocks. Large companies typically give a lower return, but also lower risk is involved, whereas innovative startups may be highly risky, but at the same time bring annual returns of 100%.

Types of investors

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The first group are short-term investors.

Their aim is to gain small, but frequent profits from transactions opened during the day or week, and they earn through market fluctuations and changing moods of traders.

The decision making of short-term investors is largely based on technical analysis, as well as very developed transaction systems. It is also worth knowing that short-term players are very active when it comes to publishing macroeconomic data.

Medium-term investors, on the other hand, use various strategies.

Typically, this group of investors trade based on the current trend. Of course this strategy involves investing higher amounts of funds, which will allow them to hold their position in case of a potential correction.

Moreover, medium-term investors trade "against the current". This means that they search for hights and lows during existing trends. This not only requires a lot of experience, but also resistance and good risk management.

Furthermore, medium-term players often rely on technical analyses of the market, which are signals that are generated through technical indicators.

Finally, long-term investors use both the technical analysis and the fundamental analysis.

It is very often the case that long-term investing entails opening a position that will be active for a longer period of time. Hence it means using a much higher capital, than in the case of short- and medium-term investments.

Long-term investors may gain similar profits as day traders, but their investments are more stable and sure.

It's worth knowing, however, that their possibilities will be significantly limited. This style of trading requires a lot more preparation.

Where to buy stocks?

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Beginners often wonder: how and where to buy stocks?

One of the options are brokers' offices. This is an obvious option for many people, but it is a very old way of buying stocks via an intermediary, a brokers' company. The first broker appeared in 1792!

Among the characteristics of a brokerage office one should distinguish high fees, little possibility of own analysis and choice of trading instruments, however, high level of service in the office and electronic, but limited working hours.

In the vast majority of cases, brokerage offices are additionally connected with banks.

A much better and more popular solution today is to buy shares on online stock exchanges.

They are noted not only for their significantly lower commissions, but also for their fees compared to brokerage offices. In addition, it is easier for the person interested to enter the online marketplace.

The Allianz Market platform is a perfect solution.

This is confirmed by rankings on stock trading portals, user reviews and reviews of industry experts.

How to choose the most suitable stocks for investment?

The selection of the most suitable stocks for investment at a given moment is made possible with the skillful use of fundamental and technical analysis.

We also recommend regular tracking of industry news. Experienced investors on their blogs very often inform what stocks are worth buying in the near future and why.

It is worth checking whether the assumptions will be reflected in reality. It is recommended to record the most accurate analyses, because they can be used in the future.

It is also great to observe a given market, and then listing day after day, how the price changed, and what was the reason for it.

This way you can find out how the market reacts to individual situations without investing your money.

How does technical analysis work?

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Technical analysis is a number of techniques that allow forecasting future changes in the prices of individual financial instruments, based on the analysis of price changes that have taken place in the past. Moreover, technical analysis uses not only the price, but also numerous indicators whose task is to support the chart analysis.

The technical analysis therefore uses price, time and volume. According to this analysis, prices are subject to trends.

The trend is the direction in which prices move.

This means that in case of growing prices, it is not recommended selling. On the other hand, if prices fall, buying is not recommended.

Moreover, according to technical analysis, history likes to repeat itself. Investors do not learn from their mistakes and react very similarly to particular stock market situations. Therefore, it is possible to draw conclusions from their past behavior.

How does fundamental analysis work?

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Fundamental analysis in its simplest concept is a study aimed at estimating the value of a given financial instrument or asset.

An investor who will apply this analysis in practice will not only look for assets underestimated by the market, but will also sell those that have been overly optimistic.

The analysis of financial reports is very important. You can check them on Yahoo Finance.

The most important indicators of fundamental analysis, which need to be taken into account, are:

1 price to profit indicator,

2 price indicator to book value,

3 price indicator to Graham's book value,

4 cash flow indicators,

5 debt and solvency indicators,

6 profitability indicators.

Most traders find technical analysis simpler and use it for short-term profits.

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When investing in stocks on the Allianz Market platform, you have automatic clues from Autochartist based on various analyses.

So, all you have to do is buy or sell the stocks as prompted.

Why is diversification needed?

It is important to be aware that the purpose of diversification is not to maximize profits but to limit the impact of volatility on the portfolio.

It is therefore recommended to purchase stocks from different countries or industries. In this way it is possible to reduce the risk of diversification. According to experienced investors, you can only profit from the diffusion of risk.

How does the leverage work?

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Leveraged trading gives you much more opportunities, but you don't have to use them.

The mentioned financial leverage allows opening positions with a higher value than the funds on a given investment account permit.

In this way you borrow funds, on which you will then have to pay interest for the entire period of holding the position.

A person who decides to open a position twice as high as the value of funds held on the account may, in the case of the same market movements, not only achieve twice as high a profit but also the loss.

It is therefore recommended to use stop loss and take profit orders skillfully.

What are stop loss and take profit orders?

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It is worth knowing that stop loss and take profit orders are automatic functions available on most platforms.

Their task is to determine the level of maximum loss (stop loss) as well as the level of profit execution (take profit). Moreover, these are very important factors when it comes to managing emotions or risk.

It is also worth noting that take profit and stop loss orders are executed automatically. Therefore, the trader does not have to control whether or not to track the position all the time.

Depending on the approach to risk, the trader can set up an order which will be tailored to the needs. It is not necessary to make complicated manual calculations.

In case the trader forgot to set the Take Profit or Stop Loss orders when opening a position, he can do so after entering his open positions.

It is recommended to set the Take Profit in such a place that, if the decision is successful, the profit is at least twice as big as the possible loss after closing the position on Stop Loss.

How does the Stop Loss order work?

Stop Loss is an order used to close a sale or buy transaction of a given financial instrument in case the price falls or rises to a given level in the order.

For the vast majority of people this is a way to limit losses, but Stop Loss serves to secure their capital.

The mechanism of operation is extremely simple. When the price reaches a predetermined level, the order to close this position is automatically activated.

How does the Take Profit order work?

In simplest possible terms, when you create a buy trade and then set a take profit order at a given price, the mentioned Take profit will be a sell order, which will be automatically activated if the price after the growth reaches that level.

Conclusion

You can get lost in the multitude of new information about the stock exchange and stock trading. The industry is huge, there are many tools for technical and fundamental analysis, traders' blogs, portals with news from the stock market and much more.

However, you do not need to know everything to start a profitable trade.

Below you will see a list of the most essential information you need to start trading stocks on the platform, such as Allianz Market:

1 investing on the stock exchange is not as difficult as you might think,

2 investing on the stock exchange is much more profitable and also smoother compared to renting apartments or bank deposits,

3 there are short-term investors on the stock exchange (they use technical analysis, earn from stock fluctuations in a very short period of time), medium-term investors (they use fundamental and technical analysis, focus on playing with the current trend) and long-term investors (they use technical and fundamental analysis, usually choose stocks of companies with very high growth potential),

4 it is worth using take profit orders as well as stop loss to limit possible losses. They are used to close buy or sell transactions of a given financial instrument. In this way the investor can secure his capital,

5 leverage gives investors a lot of opportunities. It allows opening positions with a much higher value than the funds on the investment account would permit,

6 the main factor that makes investors buy stocks is that they are too sold out (according to tools like RSI oscillator), the sale usually takes place at the moment of buyout. However, it depends on the type of investor how much time will pass from buying to selling.

7 share trading requires a certain amount of time to be spent on fundamental and/or technical analysis,

Have a successful trading!