Trading and investing on the stock exchange is an interesting way to grow your money. Before we start trading or investing, however, we should gather as much useful information as possible. In this article, we focus on the basics of stock exchange trading, look at the individual investment instruments and outline the key steps for investing.
What is the difference between trading and investing on the stock exchange? These terms are often used interchangeably. Trading is more active, with more frequent buying and selling, whereas investing usually means buying and holding shares and other assets over a longer period.
Trading on the stock exchange
A stock exchange is an institution through which you can buy and sell various investment instruments, such as shares, bonds, investment certificates, futures and others. The exchange closely supervises the smooth running of trades and their correct settlement. The exchange infrastructure itself is a very extensive network of computers that constantly quote sell and buy orders, update market data, and execute and record trades.
Up to 99% of trades on the stock exchange take place between investors. This means that we do not buy shares directly from the company (for example ČEZ), but from another investor who is currently selling them. An online trading platform handles the whole transaction for us. The whole trade usually takes a few dozen minutes.
The good news is that trading on the stock exchange is easier today than ever before. Thanks to mobile apps and other platforms, there are more and more successful investors among “ordinary” people. As mentioned above, you need a broker to invest, that is, an intermediary between you and the stock exchange. Today there is a wide range of them, and you can easily manage your transactions from your mobile phone or computer.
How to start trading or investing?
The first step is often the hardest. Many people have no idea how to start trading on the stock exchange and are also worried about the risk. Each of us has different financial resources, courage and appetite for risk. However, a few basic tips can open the way to successful investing.
To grow our money effectively, we need capital. However, nobody will tell us a specific amount. It always depends on the investor, their financial situation and their willingness to take risks.
Another important point in investing on the stock exchange is choosing a suitable investment instrument, or asset. We can choose from a wide range of shares, commodities, cryptocurrencies, ETFs and other instruments. If you are a beginner and want to put your money somewhere relatively safe, ETFs that track a particular segment, or even better a whole index, are a good choice. An ETF is made up of dozens or hundreds of companies, so the investment is much safer than picking individual shares.
We must always remember that no investment is risk-free and that we can lose the money we put in. To reduce risk, it is important to diversify your investments (spread them across different types of instruments).
Before we start trading on the stock exchange, we should study the key information. Valuable advice can be found in books on investing, courses, articles and presentations by financial experts and brokerage firms. Practical advice from people with investing experience is especially important. Many large brokerage firms let us invest our money according to our specific goals.
To invest, we will need a broker. A broker is an intermediary between us and the stock exchange that allows us to carry out trades.
In his book Rich Dad Poor Dad, Robert T. Kiyosaki explains that “when we know what we are doing, it is not gambling. Gambling is putting money into a venture and just praying and waiting to see how it turns out”.
Shares
Shares are among the most popular and also the riskiest investment instruments. They are securities issued by joint-stock companies. By buying shares, we put our money into the company. This entitles us to a share of the profits (dividends). We can also take part in running the company by voting at the general meeting (for example, electing the board of directors). Although share prices fluctuate, their value is expected to grow over the long term, bringing a return when they are sold.
Commodities
Commodities include, for example, gold, platinum, oil, wheat, cotton, coffee, natural gas and others. A commodity is a type of goods that is traded regardless of differences in quality. Supplies from different suppliers are interchangeable. They can therefore be traded on global markets at a single price.
Cryptocurrencies
In recent years, cryptocurrencies have found their place in the world of investing. The best-known cryptocurrency is undoubtedly Bitcoin. You can buy this virtual currency on cryptocurrency exchanges, at an exchange office or from a crypto ATM. In terms of fees, cryptocurrency exchanges are the most cost-effective. The simplest way to store units of a virtual currency is a cryptocurrency wallet.
ETFs
Exchange Traded Funds (veřejně obchodovaný fond). These funds are traded on stock exchanges around the world. They track the price of an underlying asset (e.g. bonds, a stock index, commodities). Instead of being actively managed by expensive fund managers, the investing follows a precise algorithm (an index). They are therefore passively managed funds. The advantages of ETFs are high transparency, high liquidity, low costs and a high level of diversification. ETFs are ideal for beginners in the world of investing or for people who want to grow their money safely over the longer term.
CFD contracts
CFD stands for Contract For Difference (rozdílové smlouvy). It is a contract between a seller and a buyer under which the seller must pay the difference between the current price of an asset and its price at the time the contract was concluded. CFDs are mainly suitable for short-term trading and for experienced traders. We can buy a CFD (betting on the price rising) or sell it (betting on the price falling). Betting on a price fall is called shorting. We can mainly trade commodities, shares and stock indices. For experienced traders, CFD contracts have the big advantage that they do not need as much of their own capital and can use leverage. Although very risky, they are a popular instrument among experienced traders.
Trading shares is not very suitable for beginners, and it is better to allocate around 80% of your portfolio to safer ETFs.
Forex
Forex is the largest financial market in the world, where you can buy and sell different currencies. Its average daily turnover is more than 5 billion USD, and it works much like going to an exchange office to change Czech crowns into pounds, for example. We buy one currency and sell another at the same time. The forex market is decentralised. This means it has no physical location (unlike, for example, the Prague Stock Exchange (BCPP)). Trades take place only through computer servers. The idea behind this type of investing is to respond to one currency gaining or losing value against another.
Step by step
First, we open an investment account with a broker. We should be very careful when choosing a broker. Fees are an important criterion, as different brokers charge different fees. Other important criteria are good customer service and support from the broker, and a stable trading platform. To sign a contract with a broker, we will need an identity document. The broker will prepare the necessary documents with us, give us login details for the online application and explain how to use it.
We transfer money from our current account to the investment account to use for buying assets. We choose the amount based on how much we plan to invest and how much the fees are.
The trading itself is very simple. We choose the company shares we want to buy, enter the quantity and buy. In the online application, we can find charts, informative articles, a record of our orders and transactions, the number of securities we own and much more. We can also use so-called smart orders. We choose the price (including a time frame) at which we want to buy the shares. As soon as the price reaches this level, the shares are bought automatically in the quantity we have set. The same applies to selling.
Books on investing
There are many books on investing on the market. Each of them will enrich us and give us important information about the world of investing:
- The Intelligent Investor (Benjamin Graham),
- Rich Dad Poor Dad (Robert T. Kiyosaki),
- Market Wizards (Jack Schwager),
- Think and Grow Rich (Napoleon Hill),
- Fooled by Randomness (Nassim Nicholas Taleb),
- The Habits of the Successful (Napoleon Hill),
- The Essays of Warren Buffett: Lessons for Corporate America (Warren Buffett) and others.
In today’s world, trading on the stock exchange is fast, easy and relatively cheap. Stock exchanges have market makers. These are mainly banks and brokers that provide liquidity on the financial market. Thanks to the transparency of the exchange, we can see straight away when the last trade took place, at what price, and how much we can sell our securities for. Stock exchanges operate in electronic form, so we do not need to go anywhere and can do everything online. We simply place an order to buy or sell.
