Investing in stocks: Your guide to the stock market
Ever picture yourself owning part of a company? Investing in stocks lets you do just that — without being an entrepreneur yourself. The basic goal of buying stocks is to benefit from rising prices or company profit sharing. But things can get much more complex, from diversifying your portfolio and choosing stocks to setting an investment strategy and making smart decisions. Keep reading to dive into the world of stocks.
What are stocks?
Stocks represent ownership in a company — so, when you buy stocks, you become a partial owner. Companies issue stocks to raise more money, giving shareholders a claim on part of its assets and earnings. Shareholders can earn returns through dividends and price appreciation, and common stocks give shareholders company voting rights. Stocks are traded on exchanges like the New York Stock Exchange, London Stock Exchange, or Euronext.
Learn more about stocks
How stocks work
Stocks work by representing ownership in a company. Companies issue shares to raise capital, then investors purchase these shares on stock exchanges and become part-owners. Stock prices go up and down based on company performance, market conditions, and investor sentiment. Shareholders can earn money on their investment by selling their shares at a higher price or through company profit sharing. Brokers facilitate buying and selling, and market analysis and strategies guide investment decisions.
Advantages & disadvantages of buying stocks
Advantages of buying stocks
Potential returns: Historically, stocks have brought in higher long-term returns than other asset classes like bonds or cash investments. Past performance isn't any guarantee of future results, but stocks have a good historical track record. Ownership stake: When you buy stocks, you become a partial owner of that company. This gives you voting rights on certain corporate decisions, such as electing board members. If the company pays dividends, then you’ll also share in the profits when business is good. Diversification: Investing in stocks allows you to diversify your portfolio, spreading your investment across different companies, industries, and regions. Diversification helps reduce your overall risk, because even if some of your holdings don’t perform well, others might pick up the slack. Flexibility: With stocks, investors can tailor their portfolios to their investment goals, risk tolerance, and time horizon. You can choose from a wide range of stocks, including growth stocks, dividend-paying stocks, or value stocks.Disadvantages of buying stocks
Market risk: Stock prices are unpredictable — and so are the potential profits and losses. With stocks, supply and demand can change quickly based on lots of different economic and political factors. That’s why it’s so important to never invest more money in stocks than you can afford to lose. Lack of control: Investors can’t do much to influence the value of their stocks — especially if they hold only a few shares. Large shareholders have more influence because they might have company voting rights. But you'd have to buy a lot of shares to really make a difference. Time-consuming: Researching stocks and managing a portfolio can take a lot of time. Following a very short-term investment strategy means even more effort, because you need to monitor prices in real-time and keep an eye on analyst recommendations to maximize your returns. If you’re busy with work or family and don't have much time for trading, a long-term investment strategy might be better for you.Getting started with investing in stocks
- Set your targets: Determine your time horizon and financial goals.
- Get informed: Learn about stock markets, types of stocks, and investing strategies.
- Choose a broker: Open an investment account with a reliable brokerage firm.
- Set your budget: Decide how much money you can safely invest.
- Do your research: Analyze companies, industries, and market trends.
- Buy stocks: Spread your investments across different sectors to limit your risk.
How to buy stocks
Research and select stocks
Criteria such as revenue growth, market trends, or dividend history can help you choose which stocks to buy.
Choose a brokerage platform
Take a closer look at fees, conditions, and the user-friendliness of the providers.
Place an order
Decide how many shares you want to buy, secure your position, and open your position in the market.
Monitor and manage your investments
Regularly check your stock portfolio to track prices and rebalance your holdings.
Choosing the right broker for investing in stocks
Regulation and trustworthiness
Make sure the broker is regulated by reputable financial authorities, such as the BaFin in Germany.
Fees and commissions
Compare the commission rates for buying and selling stocks — some brokers offer commission-free trading.
Range of products
Check that the broker offers the types of investments you’re interested in, such as stocks, ETFs, mutual funds, options, bonds, and more.
Educational resources
If you’re a beginner, choose a broker that has educational resources such as webinars, tutorials, and articles.
Investing in stocks at N26
Intuitive design, transparent costs, hundreds of stocks — get all this and much more directly in your N26 app.Manage your stock portfolio from your smartphone and enjoy the security of an online bank with a full German banking license and customer service in 5 languages. Say goodbye to hidden fees and enjoy up to 15 free trades per month, depending on your account.Small budget? Stocks are available with us starting at just €1! Open your N26 account in just a few minutes and start right away.
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Types of stock investments
Blue-chip stocks
These are shares of large, well-established companies with a history of stable earnings and dividends, less volatility, and steady growth — so they’re good for conservative investors.
Growth stocks
Growth companies can to do better on average than the rest of the market, and that potential is appealing for some investors, even though growth stocks can be more volatile & risky than other stock types.
Value stocks
Value stocks are shares of companies that are valuable on paper but overlooked by the market — good for visionary investors who like a bargain and don’t mind taking a risk on the underdog.
Dividend stocks
Some companies regularly share profits with their shareholders by paying dividends, and dividend stocks are popular with investors looking for regular cash flow.
What should you consider when buying stocks?
There’s a lot you can think about when buying stocks. Before you jump in and open a position in the market, here are some important factors to consider.
Company fundamentals
Financial health: Look at company financial reports, like income statements, balance sheets, and cash flow statements. Look for profitability, revenue growth, debt levels, and cash flow. Earnings: How much has the company grown in the past and how much growth is projected for the future? Consistent earnings growth is a good sign. Dividend history: If the company pays dividends, check the dividend yield, payout ratio, and history of dividend payments.Industry and market position
Market position: See what the company's position is within its industry. Look for market leaders with strong brands and a competitive edge. Industry trends: Learn about the trends and dynamics of the company’s industry. Look for companies in industries that seem likely to grow.Valuation
Price-to-earnings (P/E) ratio: Compare the P/E ratio to historical averages and to other companies in the same industry. This will help you gauge if the stock is over- or undervalued. Price-to-book (P/B) ratio: Use this metric to compare a company's market value to its book value. Other ratios: Consider other valuation metrics like price-to-sales (P/S), price-to-earnings growth (PEG), and dividend yield.Growth potential
Future growth: Look for companies with strong growth prospects. New product lines, market expansion, or innovative technologies can all be positive signs of future success. Analyst projections: Find out what financial analysts are saying about the company and/or industry.Management and governance
Leadership: Research the track record and reputation of the company’s management team. Corporate governance: Ensure the company follows good corporate governance practices.Economic and market conditions
Macro environment: Think about the overall economic environment, including interest rates, inflation, and economic growth. Market sentiment: Understand the current market sentiment and how it may affect stock prices.Personal financial situation
Investment horizon: Decide whether you’re investing for the short term or long term. This will influence your criteria for choosing stocks. Portfolio balance: How does a certain stock fit into your overall portfolio? A well-diversified portfolio helps to manage your risk. Affordability: Only invest money you can afford to lose. Consider your financial goals, cash flow, and overall investment strategy.Common mistakes in investing in stocks
Forgetting about transaction costs
Fees can reduce your profit, so remember to factor them into your budget.
Lack of diversification
Going all in on one particular investment could lead to high profits — or significant losses.
Emotional decisions
When prices swing, emotions can run high — don’t let them take the wheel.
Frequent trading
It’s best not to get too carried away with trading, because acting too quickly can lead to losses, and there’s usually a fee for each individual trade.
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FAQs
- Financial goals: Are you investing short-term or long-term? Do you want high or moderate returns?
- Time horizon: How long can you commit your money without needing it?
- Financial situation: How much can you afford to lose without jeopardizing your financial stability?
- Personality: Are you comfortable with risk or do you prefer to play it safe?
That depends on your broker. There are many providers where you can start investing with small amounts of money. With N26, you can invest in “fractional shares,” i.e., a portion of a share, starting from as little as €1.
Your risk tolerance is how well you handle it when the value of your investments goes up or down (or both). Knowing what your risk tolerance is can help you set an investment strategy and choose investments. Here are a few things to think about to figure out your risk tolerance:
Stock dividends are payments that companies make to their shareholders, usually from profits. They can provide regular income for investors and can indicate a company's financial health and shareholder-friendly policies. However, not all stocks pay dividends.
It depends on your risk tolerance, investment horizon, investment strategy, and available budget, among many other things. Some ETFs are already diversified, and you can set up monthly savings plans. For many people, broadly diversified ETFs are a long-term investment.
Individual stocks carry more risk, but with a bit of luck, you can also achieve higher returns in a shorter period. Many investors diversify their portfolios by buying both ETFs and individual stocks.
This mostly depends on your personal financial situation. In general, you should never invest more money in stocks than you can afford to lose.
Remember: Losses (and gains) are all unrealized until the moment when you sell your shares. As long as you hold stocks, your money is tied to this investment, and the price could recover or fall. But if you're short on cash and have to sell your shares when the price is low, you might lose a significant amount of money.
Always make sure to set aside an emergency fund you can fall back on if needed. Also, take regular expenses such as rent, insurance, or groceries into account to determine how much money you really have left to invest. The good news is: Even with a small budget, you can invest and buy stocks.
With a limit order, you set the maximum price you're willing to pay per share. This means that your purchase won’t go through if the price is above your limit. The same applies to selling, where your stock won’t be sold if the price falls below a certain value.
With a market order, there aren’t any price restrictions, and the order is executed at the current market price.
Stocks are ownership certificates of companies. When you buy shares, you become a co-owner and benefit from any dividend payments or price developments.
Exchange Traded Funds (ETFs) are traded index funds. They’re a pool of investments in numerous companies within a sector or region (or even several regions), and are structured according to the index they track. So, you’re only indirectly investing in these companies.
It depends on your investment strategy. People who follow a short-term, higher-risk strategy tend to check their portfolio daily or even multiple times a day. With a long-term investment horizon, you don’t need to check as often.
Also, keep in mind: Since stock prices fluctuate a lot, constantly checking your portfolio can be stressful. It’s important to make rational choices and not to let your emotions drive your decisions.
Short-selling is a strategy where you sell stocks now that are expected to lose value, and then buy the same stocks back later. The idea is that short sellers borrow the stocks from a trading partner and return them after the short sale. Their profit is the difference from this short sale. It’s a short-term, very risky strategy, and trading fees also apply.
Not directly. There are real estate stocks, where you can buy shares in real estate companies. If your capital isn’t enough to buy your own property, real estate stocks can be a sensible alternative. But it’s not clear whether the stock market or the real estate market has more influence on how stock prices develop.
You can invest in commodity stocks, meaning shares of companies that produce or process commodities like energy, agricultural products, or metals. This allows you to indirectly benefit from rising commodity prices. However, commodity investments are considered risky.
First things first: You can’t predict stock prices, and hindsight is 20/20. This applies to both beginners and professionals. The main deciding factors for buying are your available budget, risk tolerance, and strategy.
Beyond that, you can take stock market hours into consideration. Stock market hours affect the spread, i.e., the difference between the bid and ask price of a stock. When the exchange is open, this spread is usually lower due to higher liquidity, compared to when it is closed. That means it’s better to buy stocks when the stock exchange where they’re listed (or multiple exchanges, such as the Frankfurt Stock Exchange and the NYSE) is open — as a lower spread reduces the cost of buying stocks.
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