Everyone who wants to move in this world must know the basics of investing in shares. Shares are a popular financial instrument for appreciating money and trading them is not complicated. Before we start, however, we must know a few basic rules so that this investment pays off.
In the article, we will outline the basics of investing, types of shares, options for trading them and what mistakes to avoid.
The concept of shares
A share is a security issued by a joint-stock company, which thus obtains funds for its business. By purchasing these shares, we become a shareholder. This means that we have the right to the payout of dividends, thanks to which we obtain passive income in money. Furthermore, we can vote at the general meeting. If we own, for example, 30% of Apple’s shares, it means that we own a 30% stake in this company.
The Czech Republic represented by the Ministry of Finance of the Czech Republic achieves a stake of 69.78% in ČEZ. This means that it is its majority shareholder. Thanks to this, over a billion crowns flow into the state budget from the payout of dividends every year.
Investments in shares are suitable especially for investors who can assess risks and have experience with trading. The value of shares changes constantly. Therefore, it is advisable to invest long-term. To minimise the risk of losing money, it is advisable to diversify investments. This means not relying only on one investment instrument, but spreading your money among more shares of various companies. This helps us when the value of some shares starts to drop significantly.
Types of shares
In terms of form, we divide shares into bearer shares and registered shares. In terms of type, we divide them into ordinary shares, preference shares and employee shares. According to their appearance, we divide them into certificated and book-entry shares. Let us explain them in more detail.
Bearer shares
Sometimes they are referred to as share warrants and it means that we can transfer them to someone else without restrictions. Neither former nor new owners have to report the transfer to the company, because shares are not tied to a specific shareholder. The exercise of rights can be performed by whoever is their owner and their transfer is possible by mere handover.
Registered shares
The company issues a share in the specific name of a natural or legal person. Its transferability to another owner can be restricted by this company, but it must not completely exclude it. It also has the obligation to keep a list of all shareholders who hold registered shares.
Ordinary shares
So-called basic ones, with which no special rights are associated. This is the most common form and their holder can use all rights that are associated with their holding. They are entitled to the payout of dividends, the right to participate in the management of the company (participate in the general meeting), the right to the liquidation balance and the subscription of new shares to such an extent that their basic stake remains unchanged.
Preference shares
They allow their holders preferential payout of dividends and of a share in the liquidation balance ahead of holders of ordinary shares. However, they may lose the right to vote at the general meeting.
Employee shares
Some companies offer their employees shares at a discounted price. They are registered and transferable only between employees and pensioners of the company. Their grant with a discount is not income subject to taxation for the employee. This obligation arises only upon their sale in the event that a period shorter than 6 months has elapsed since their purchase.
Certificated shares
Certificated shares have a real form. They contain a coupon sheet and a certificate. The certificate states the name of the company, registered office, value of the share, its form, numerical designation and other information. The shareholder keeps this security with them. Coupons in the sheet represent the right to the payout of dividends.
Book-entry shares
Book-entry shares do not have a physical form. They are recorded in the records (electronic form) in the Central Depository of Securities (CDCP). The transformation of the form of shares from certificated to book-entry is usually carried out in the form of an amendment to the articles of association of the company. The general meeting must approve this change.
Basics of investing
Every investor must know the basics of investing. As soon as we decide to invest in shares, we must be ready to bear responsibility for the appreciation of our financial funds. Especially with shares, we speak of a higher degree of risk, but also of the possibility of a large yield. The truth is that when we know what we are doing, it is not that much of a risk. The worst way of investing is to put money into some instrument and wait what happens.
How to start investing
The easiest way to start investing is trading using the internet. We do not have to go to a branch and we can handle everything from the comfort of home. First, we select a dealer through whose intermediation we will trade securities. An already experienced investor can help us with their selection. To conclude a contract with an online broker, we will need an identity document. The dealer will draw up the necessary documents with us, give us access to the internet application that will serve us for trading and explain to us how to work with this application. Everything is possible online, but in this case, personal contact at a branch is better. Furthermore, we can work solely via the internet.
We transfer our chosen sum to the investment account of the given dealer, for which we purchase shares. The minimum amount is not set, but it is necessary to consider the investment in view of fees.
Trading is simple. We select shares of the company that we want to buy, choose the quantity and purchase. In the application, we have plenty of necessary information including charts, various informative articles, we see records of all transactions here, the number of shares owned by us, information about fees and about instructions entered by us. So-called smart instructions are also available, when we set the amount for which we want to buy shares and as soon as the share reaches this amount, the number of shares chosen by us is purchased automatically. The same applies to sale.
How to avoid beginner mistakes
It is said that a person learns from mistakes, or after every failure comes success. Sometimes, however, it is better if we avoid mistakes. Especially because we save the most precious thing we have, our time. Nowadays, investing in shares is an increasingly popular way to appreciate your savings. At the same time, it is a means to protect money against inflation. However, a lot of investors make the same mistakes. And what is worse? They do not learn from them. How can we avoid these mistakes?
The most common mistake is when we put all our eggs in one basket. The basics of investing include diversifying your savings. And that among several businesses from various fields and ideally from various corners of the world. So when some sector starts to weaken, the others that remain unchanged or conversely strengthen will balance it out.
Many beginning investors jump on the bandwagon. They purchase shares at the end of the growth trend just before a slump occurs. They rely on the fact that the company’s shares offered extraordinary appreciation in the past. However, one rule says that when above-average yields occur for too long, below-average yields can rather be expected in the future.
Every investor has their estimate of at what price they will sell the shares and how much they will obtain from it. Not infrequently, however, it happens that as soon as the share grows to the set target, the investor does not sell the shares because they hope they will still grow. Then the slump comes. If nothing changes and the business is still in a similar situation as at the time when we set this target, further growth can hardly be expected.
Another reason for disadvantageous trades tends to be investors’ impatience. As soon as we have prepared money that we want to invest and we are waiting for a significant drop in price that has not happened for a long time, our patience may run out and we buy the shares. And that at a time before the slump. Impatience in investing is therefore out of place.
So how to do it?
The basics of investing in shares include gathering as much information as possible. There are plenty of analysts and brokers on the market who can estimate the development of the share price. There are also many people among us who have plenty of experience with investing in shares and will provide us with valuable advice. Thereby, we can avoid potential investment mistakes.
We will also find plenty of books on the basics of investing that can help us. The important thing is to choose a goal that we want to achieve. We determine the target price upon whose achievement we will sell the shares and further invest and diversify the earned money. We must not forget that we always invest only the money we can afford to lose.
Read the article on the topic of the best Czech shares that are worth monitoring.
