How to Trade in Stock Market for Beginners

Investing is the only way to beat inflation right now. But, considering the countless investment opportunities, you must wonder where should you invest your hard-earned money?

Unfortunately, the answer to this question isn’t easy. Individuals have distinct levels of risk tolerance and expected returns. Meaning, what might be a “No-brainer!” for you, might just be a “Certainly not!” for someone else.

This is where stock market investments come in.

The stock market comprises of many companies in different sectors opening different opportunities for investors, investors can either invest in growth stocks or high dividend stocks or composite sector index.

Stock investments are available in different instruments as ETF or individual shares – each with a different returns and risk-to-return ratio – making it ideal for new investors to not only grow their wealth but also comprehend their preferences.

In fact, stocks are one of the preferred investment vehicles among millennials.

But, as with any investment vehicle, gaining ample knowledge is the key to success.

But here are few basics that could help you understand and get started.

What are Stocks and Shares? And what is a stock market?

Stocks and shares represent the same thing – partial ownership of a company.

But, the word “shares” usually represent the ownership of a particular company, while the word “stocks” can represent shares of one or more companies.

For example, if an individual says, “I bought 10 shares of company XYZ”, it would be self-explanatory.

But, if he had said, “I bought 10 stocks”, it would’ve asked/begged the question, “Of which company?” This is because “10 stocks” can mean 10 shares of 10 different companies, just as much as it may mean 5 shares each of 2 particular companies.

In short, shares are collectively known as stocks.

There are 2 things you should know about shares:

• A company’s capital is divided into its shares. So, shareholders are usually entitled to an equivalent portion of the company’s profits proportionate to their investment.

However, the method of distribution of profits isn’t concrete as there are 2 ways in which companies utilize their profits:

• They may use it to grow the company. As the company grows, its share prices will go up and thus, its shareholders will benefit from capital appreciation.
• They may distribute the profits among its shareholders in form of regular dividend payouts (paid at fixed intervals of time, like monthly, quarterly or yearly).
• Though shareholders are partial owners of the company, they don’t always have the right to direct the company’s proceedings.

This means that you might not get a say in what the company does, even though you may own a chunk of the company’s stock.

Types of Stocks

In terms of types of stocks, there are 2 types of companies that shareholders can invest in:

• Public companies have their stocks listed on a local or foreign stock exchange (like the Johannesburg Stock Exchange).
• Private companies don’t offer their stocks to the public. Even if they offer their shares, only a selected batch of individuals (usually HNIs or High Net-worth Individuals) are allowed to invest.

Also, company officials, like founders and CEOs, can be a shareholder of the company. For example, Elon Musk – the CEO of Tesla – owns about 20% of Tesla’s stock.

A stock market (also known as the equity market or the share market) is where investors and traders come together to buy or sell shares. Investors in the stock market can be individuals or institutional (a company or firm).

Even though they’re called markets, stock exchanges are virtual marketplaces.

How can you buy or invest in shares of a company?

When a company is established, it usually starts by selling shares to the public through an Initial Public Offering (IPO).

Issuing an IPO changes the status of the company from “Private” (whose shares are held by selected shareholders) to “Publicly traded” (whose shares are held by numerous regular investors.)

Stock exchanges are secondary markets. Here, existing owners of shares can trade with potential buyers.

So, when you buy a share in the stock market, you don’t buy it from the company. You buy it from an existing shareholder. Likewise, when you sell your shares, you don’t sell them back to the company; you sell them to another investor.

There are 3 common ways South Africans can invest in stocks: 

1) Buying shares on the JSE

JSE of the Johannesburg Stock Exchange is the local stock exchange of South Africa.

To invest in shares of a company listed on the JSE, you need to invest through a JSE-licensed broker.

Your broker will send your request to the JSE, where it is registered on a central order book along with other buy and sell requests. If the seller agrees on the price you’ve mentioned, the JSE will ensure that your transaction is processed and you will become the owner of the shares.

However, once you’ve chosen a broker, you have to fill out some paperwork and agree on some terms and conditions. Also, you have to provide some general information and the Financial Intelligence Centre Act (FICA) documents, including:

• Copy of South African ID (Passport for foreign nationals.)
• Proof of residence.
• Copy of a South African Revenue Service (SARS) document confirming income tax number.
• Copy of a bank statement (less than three months old.)

Apart from investing in growth-stocks and dividend-paying stocks, the JSE also allows investors to speculate – buying and selling stocks within the same trading day. Speculators earn money by selling at a higher price than they bought the stocks at.

2) Investing in the stock market through Indices or ETFs

Index funds are non-investable theoretical funds that are based on returns of the top-performing companies from a specified interval time.

Index funds usually serve as a benchmark that other mutual funds try to beat. They can also provide an overview of how well a specific industry is doing.

The companies comprising an index keep changing with every evaluation. This is why mutual funds can only mimic the theoretical return rates of an index.

For example, you can invest in mutual funds that mimic the theoretical returns of the indices under FTSE/JSE Africa Index Series – like the All Share Index (J203) and the Top 40 Index (J200).

The All Share Index comprises of all the ordinary stocks listed under the JSE. The Top 40 Index is made up of the top 40 most profitable companies in the All Share Index.

You can also invest in mutual funds that track foreign indices, like the S&P 500, the NASDAQ 100 and the FTSE 100.

Another way to invest in shares is ETF. ETFs are baskets of securities that also track an underlying index, but they’re a bit different from indices, as they’re tradable and they may also contain commodities and bonds, apart from stocks. JSE lists various Equity ETFs that you can trade through JSE brokers.

3) Buying shares of Foreign Companies

You may also invest in stocks of Apple, Tesla, Microsoft, Google and the like.

But, these stocks aren’t listed on the JSE. So the only way they can be traded is through foreign stock exchange brokers where the company is listed or you can also invest in these companies through forex brokers in South Africa that are authorized by FSCA for OTC derivative/CFD instruments.

A CFD is a contract between a broker and an investor to exchange the difference in opening and closing prices of an underlying asset within the period of the contract.

According to Forex Brokers SA, “There are various leading FSCA forex brokers offering Stock CFDs like Exness South Africa, Hotforex SA, Avatrade, ForexTime and IG Markets”

“But, Investors must be beware before trading CFDs as it is a risky investment medium which is suited to more experienced investors. And you don’t own any assets or actual shares for your investment through CFD.”

Things to consider before investing in the Stock Market

Before you invest in stocks, you must learn and understand a few things like:

1) The risks involved and using Risk Management strategies

Stocks are exposed to a variety of risks, including:

• Market risk – based on the daily fluctuations of stock prices.
• Liquidity risk – based on the solvency of the company.
• Inflationary risk – based on the increased cost of production or manufacturing due to inflation.

So, as an investor, you should pay extra attention to:

• Diversifying your portfolio – Invest in a number of uncorrelated assets, instead of buying shares of just one company with all your money.
• Being unemotional – Emotions shouldn’t sway your judgement when it comes to trading. Holding on to a losing stock or expecting unrealistic return rates are just two examples of biased trading.
• Forming a strategy – planning is crucial to trading successfully. You must form a plan based on your risk and return preferences before you start trading.

2) Investing with adequate knowledge

A lot of investors lose their money on stocks every year. This is because the market can be unpredictable & returns are not guaranteed and investors have be able to analyze and track lot of things including important news and company financials. It is risky especially for those who are not adequately educated.

As an investor, you may often be forced to make quick decisions. You also need to be able to foresee major fluctuations, all to avoid incurring heavy losses. In both these scenarios, only ample knowledge can be your savior.

3) Practice with Virtual or Demo account

Demo accounts simulate real-world trading conditions with virtual money. Some JSE brokers like Standard Bank, and almost all CFD brokers offer a Free demo account.

Remember, investing in stocks can bring returns, but only if you know what you’re doing. So, first, you should learn, do full research on stocks that you want to buy, then practice with small amounts and only after you have gained experience should you invest real capital.