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How do I invest in stocks?

Most people never question investing in stocks for fear of large losses. Yet stocks, or sometimes referred to as shares, can be a profitable alternative to traditional forms of investment and an important pillar of wealth accumulation. This guide explains how the stock market and securities trading work and which basic rules you should follow when investing.

Where can you trade stocks?

To buy stocks, you need a stock trading platform. Stock trading platforms provide you with an online account where you can store, buy and sell stock assets. Before making your first investment, you should know your investment strategy and risk tolerance. Alternatively, it is worthwhile to start with small amounts of money to get a feel for investing without a great risk of loss. The choice of the right financial product also depends on this. In addition to individual shares, your money can also flow into actively managed funds, index funds, ETFs or government bonds.

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What are shares and how are they created?

A share is first and foremost an asset referred to as a security, i.e. an intangible piece of property in a company to which a certain monetary value is attributed. The amount of this value depends on the success or failure of the company offering the shares for sale. In technical jargon, the ups and downs of companies are called bulls and bears. With a share, you therefore become an investor and acquire a small part of a company of your choice.

More precisely, a share is a portion of a company through which you get a fraction of the share capital of a company. Companies that issue shares usually have the legal form of a public limited company (AG). These companies, if listed on the stock exchange, can make it possible for the public to sell shares in their company through an initial public offering (IPO). The process of making shares available to a broad mass is also called an issue.

The buyer has a vested interest in trading shares, the return. The yield is the return on a financial investment that is achieved and is significantly related to the success of the company. Thus, the profit of a company usually increases the value of the corresponding shares. If you have invested €90 in shares and have €125 in your account after selling them, the return is €35 – not including administration costs, taxes and trading costs. An important factor of the return is also the so-called dividend, which is directly related to the rights of a shareholder.

What should you know?

With stocks, you buy shares in a company. The capital provided by the shareholders when the shares are issued is in turn used by the company to achieve its economic goals. Shares in listed companies and other securities are traded on the stock exchange or, in some cases, over the counter. There are various ways to profit from shares. In addition to individual shares, one can also invest in equity funds or ETFs, for example. Share investments always involve a company risk as well as a market risk, which is expressed in fluctuations in value. You can eliminate the company risk as far as possible through diversification.

What types of shares are there?

Not all shares are the same and can be divided into different types of shares, which also say something about the rights and obligations you have as a shareholder. Not every distinction is directly relevant to investors, but it is worth knowing which type of share is being addressed.

  • Ordinary shares: Holders of ordinary shares have the right to participate in a company’s general shareholders’ meetings and to exercise voting rights, for example, to determine the payment of dividends. These are more widely held than preference shares.
  • Preference shares: Unlike ordinary shares, they do not include the right to vote at general meetings and thus have no say. On the other hand, investors can expect a higher dividend, i.e. they are “preferred” in the distribution.
  • Bearer shares: The name of the shareholder is not known to the AG. The identity of the current owner is only known to the respective custodian bank or the clearing house, a settlement office for payment claims from securities transactions. Transferring shares to other persons or selling them via a stock exchange is not much of a problem with the common bearer shares.
  • Registered shares: The shareholder is known to the AG, is entered in the shareholders’ register and the AG finds out when shares of this owner are to be sold. In the case of some AGs, the AG must first agree to the transfer of the shares to a new shareholder. This case is rare.
  • Young shares and old shares: Young shares or new shares are additional shares that are newly issued when a company increases its capital. Old shares, on the other hand, are share certificates that were already on the market before such an increase. The criterion for differentiation is therefore the time of issue.
  • No-par-value shares: No-par-value shares are widespread today. Like par value shares, they also express a proportion of the share capital of a public limited company. However, this is not expressed by a fixed value, but relatively and as a percentage. With a share capital of 5,000€ and 5,000 available shares, the value per unit is 0.02% (calculation 5,000€/5,000 shares = 1€, per share 0.02%).
  • Par value shares: Par value shares can be compared to banknotes and denote a nominally fixed share of the share capital of a company. A share is then worth €3, for example, and is as unchangeable as a banknote. If a company issues 1,000 shares with a nominal value of €3, the AG’s share capital is €3,000. Since the introduction of the euro, however, this form of share hardly exists anymore.

Stock trading order types

Buying stocks is not just about the ownership of company shares. When you place a buy or sell order on a stock trading platform, there are several ways in which this order, i.e. the purchase, can be executed.

  • Market Order: The order is executed as quickly as possible. The shares are either bought cheapest or sold best. In this case, “cheapest” means that the purchase of a share on the stock exchange is made with the seller who is the cheapest at the current time. “Best”, on the other hand, means that the share is sold on the stock exchange at the best price at that moment. However, the best price is not necessarily achieved when selling or buying. The securities may well be bought at a cheaper price or sold at a higher price on the trading day. The market order only executes the transaction at the next possible time at the then prevailing market price.
  • Stop Order: The transaction (buy or sell) is executed when the price exceeds or falls below a level. When selling, for example, there is the advantage of setting a downward limit at which shares are sold in any case, thus averting widening losses without having to be present.
  • Stop Buy: Shares are bought when a set price is reached. The trade is then executed as a market order at the lowest price.
  • Stop Loss: Relevant when selling shares. If a predefined price is reached or undershot, the sale is executed at best. After that, it does not matter whether the price matches the set price.
  • Limit order: A trading instruction that is executed when a certain price level is reached that is more advantageous than the current price of a share. With a limit order, an entry order can set a maximum price at which to buy or an exit order for a minimum price at which to sell. A Tesla share costs 100€. If the share falls to 95€, I want to buy with an entry order. Should the share then rise to 105€, an exit order has already been placed in order to safely take profits. Disadvantage: My limits never have to be reached and my order goes nowhere.
  • Stop Limit Order: Combination of limit and stop order. When the stop is reached, however, the trade does not take place at the cheapest or best price, but is converted into a limit order. Prices above the limit are not executed when buying, just as sales below the limit are not executed.