What are stocks? A complete walkthrough for beginner investors

The stock market is becoming more accessible — you can even make trades on your phone. But what are stocks, exactly? Here's what new investors need to know to add stocks to their investment portfolio.

6 min read

The following statements do not constitute investment advice or any other advice on financial services, financial instruments, financial products or digital assets. They are intended to provide general information. The following statements do not constitute an offer to conclude a contract for the purchase or sale of financial instruments and financial products or an invitation to submit such an offer and to buy or sell any particular digital asset.

Stocks and ETFs are subject to high fluctuations in value. A decline in value or a complete loss are possible at any time. The loss of access to data and passwords can also lead to a complete loss.

The world of investments sometimes feels like a maze of jargon and uncertainty. Beginner investors venturing into the financial market for the first time might wonder: What are stocks, exactly? In this comprehensive guide, we demystify stocks for beginner investors, so that you can fully understand what they are and how stocks work. 

What are stocks?

Stocks represent ownership in a company. When an investor buys a stock, they’re buying a share of ownership in that company, and as a shareholder, they earn some of the company's profits through dividends – and possibly through capital appreciation, if the price of the stock goes up. 

Stocks are tradable securities, bought and sold on stock exchanges. Their value varies according to the company's performance, market conditions, economic trends, and even investor sentiment. When investing in stocks, you can participate in the growth and success of companies across different sectors and industries.

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What are the key features of stocks?

Every financial asset is different. The features that make stocks unique are: 

  • Ownership stake: Owning a stock means owning a portion of a company. Shareholders might have certain rights, such as voting on corporate decisions and receiving dividends (more on that soon!).
  • Potential for capital growth: Stocks offer the potential for capital appreciation. If the company performs well and its value increases, the stock price typically rises, allowing investors to sell their shares at a higher price than what they paid.
  • Dividends: Some companies distribute a portion of their profits to shareholders in the form of dividends. Not all stocks pay dividends, but for those that do, it's a way for investors to earn regular income.
  • Liquidity: Stocks are generally liquid assets, meaning they can be bought or sold relatively quickly in the stock market.
  • Market exchange trading: Investors can trade stocks on stock exchange markets like the New York Stock Exchange (NYSE) or NASDAQ, where buyers and sellers come together to transact.

Like most financial assets, there's market volatility in stocks. This means their prices can fluctuate significantly — which offers both opportunities and risks for investors. The more you understand these features, the more you can make informed decisions while navigating the stock market.

Where did stocks come from?

Trading and investing in stocks might sound like a recent trend, but stock exchanges have existed since the 1600s — the Amsterdam Stock Exchange (now Euronext Amsterdam) started in 1602, and the London Stock Exchange, in 1698. These exchanges provided a regulated platform for buying and selling shares and gave investors opportunities to participate in economic growth. On this front, not much has changed. 

Over time, however, other things have changed. Technological advancements, the rise of global financial markets, regulatory changes, and the introduction of electronic trading have revolutionized stock trading, making it more accessible and interconnected than before. These developments have also added more transparency as a whole to the financial and investment markets.

Considerations and strategies for investing in stocks

Before investing in stocks, make sure you consider your individual financial goals, personal risk tolerance, and most importantly, your budget. Here are a few points to consider: 

What to consider when buying stocks

When buying stocks, it's essential to research the company you're interested in. Consider their financial health, growth potential, competitiveness, and any industry trends that might influence the company’s performance. 

Professional investors often analyze factors like earnings reports, management quality, and market conditions before making investment decisions. Strategies vary, from long-term investing in established companies to seeking growth opportunities in emerging sectors.

What to consider when selling stocks

Knowing when to sell stocks is just as important as knowing when to buy them. Investors might decide to sell stocks not only to profit, but also to cut losses or rebalance their portfolios. 

To support your financial health and protect yourself against major market fluctuations, it’s wise to define your exit strategies in advance. This could mean setting a target price or watching for certain changes in a company's fundamentals, for example.

Where can you buy stocks?

There are a few options for buying stocks: individual stocks, exchange-traded funds (ETFs), mutual funds, or even thematic portfolios. ETFs and mutual funds reduce risk through diversification, while individual stocks have the potential for higher returns — but come with higher risk.

It’s crucial to understand these considerations and develop a strategy that’s aligned with your goals. This can help you navigate the complexities of the stock market and build a robust investment portfolio.

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Stocks as part of investment portfolios

A diversified investment portfolio is key to financial health and risk management. Stocks play a significant part in that diversification, and they’re known as a tool for generating income and growing your wealth.

Stock markets have a framework of legal and regulatory standards to ensure fairness, transparency, and protection for investors. Stock issuance, trading practices, disclosure requirements, and even the behavior of market participants are all regulated. This reduces the risk of scams and makes the stock market more secure for both investors and companies.

Investing in stocks: what are the risks (and rewards)?

Investing in stocks comes with inherent risks and rewards. On one hand, there's the potential for high returns and creating wealth, not to mention financial stability in the long term. On the other, market volatility and fluctuations increase the risks, along with economic downturns, geopolitical events, and company-specific risks. Understanding and managing these risks is crucial to invest in stocks successfully and capitalize on the potential rewards. 

If you want to integrate stocks into your investment portfolio, make sure you have a clear grasp of the associated risks and rewards, and always align your investments with your individual risk tolerance and financial goals.

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Your money at N26

N26 offers a simplified and stress-free way of managing your money. Gain a deep understanding of your spending habits with Insights and get a monthly snapshot of your financial health with your Monthly Wrap-Up, helping you to stay on budget. Plus, you can easily start setting money aside with Spaces to help you reach your short and long-term financial goals. Find the right account for you.

How are stock prices determined?

Stock prices depend on the relationship between supply and demand. When more investors are eager to buy a stock than sell it, the price tends to rise due to the increased demand. If more investors are selling than buying, the price typically falls.

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