How Buying Stocks Works: A Quick Guide For Beginners

Buying stocks is just like buying fresh produce from the market – except you could make more money if you buy the good ones.

If you’re a total beginner or perhaps someone who’s interested in buying stocks for the first time, you must know several things before you dive head-on. We’re telling you, it’s not a simple barter out there. It’s all about profits.

To profit from stock investing, make sure you understand a few important concepts before buying your very first stock.

First, what is a stock?

You can’t start buying stocks without first understanding what a stock is. Yes, you know you can buy it, you can make money from it, and you can also lose money by buying it... but what really is it?

Stocks (or shares or equities) act as proof that we, as shareholders, have a stake in a company. The more shares we own, the more influence we have over a company. For example, if you buy some Netflix shares, you would be owning a fraction of the business. It, however, doesn’t mean you need to do certain tasks as a shareholder of the company.

But maybe you’ll ask how come companies want other people to become shareholders. Companies issue stocks to raise funds for their operations. When you buy shares, you’re technically investing in the business. And the money it gets from shareholders is used to further develop the company.

It’s like a win-win situation if you buy the right stocks. As the company grows, your investment will also grow.

This is why you’ll notice how the world’s billionaires also own shares in some of the top companies. After all, stocks are a decent long-term investment if bought at a low price.

Hence, it’s crucial to understand how to evaluate the best companies to invest in.

When you just blindly pick stocks to buy, you better prepare to suffer losses. The stock market is primarily characterised by volatility. This means stock prices can rise or drop at any time, as they are driven by factors that are out of your control.

You’ll know more about the stock market in the next section.

What about the stock market?

The stock market is like an online marketplace where we can buy or sell stocks for cash. Anybody who wants to buy a stock will need to go to the stock market to buy stocks that are being sold.

However, when we talk about the stock market, we always need to include the stock exchange, stock index, and of course, buying and selling stocks.

First, let’s talk about the stock exchanges. The more popular one you might have heard of is the Singapore Stock Exchange (SGX). And maybe you also know about the New York Stock Exchange and the Nasdaq.

These stock exchanges are where most of the trading takes place. Any stock you wish to buy should be listed in one of the world’s many exchanges. But a company cannot just list in any exchange, as each has its listing requirements. Hence, you would see the best companies are listed in US exchanges.

Then maybe you’ll ask: “How am I supposed to know which stocks are performing well when there are a lot of exchanges and a lot of stocks available?”

This is where the stock indices enter the equation. If you’ve heard about the S&P500 or the Dow Jones Industrial Average or the Nasdaq 100, these are the major stock indices in the world.

Stock indices measure the performance of a basket of securities (mostly stocks). For example, the S&P500 is composed of the top 500 largest companies in the stock market. 

Hence, regardless of how this index performs is often used as a benchmark of the overall stock market performance. This is why we often hear the phrases “the market is up today” or “the market is up today.” These statements are made in reference to the S&P500 performance.

If you aren’t that confident to do stock analysis, you can consider investing in exchange-traded funds or ETFs, as they track indices. For example, you can buy SPY ETF as it tracks the S&P500 or Invesco QQQ ETF which tracks the Nasdaq 100.

How can you buy stocks?

Buying stocks is done through a broker, regardless of whether you want to buy individual shares or ETFs.

Thus, to get started with buying and selling stocks, you need to have a broker account. It’s quite easy to open one in Singapore, as long as you have proper documentation, such as identification cards, and available funds to start trading.

What’s more important is for you to know how buying stocks works and what it entails for you as an investor.

So when we buy stocks, we naturally expect their value to increase. When we sell a stock, we expect the value to decrease. As a result, buying a stock is a way to bet on a company's future and the amount at which it is bought or sold is dependent on how much buyers or sellers are willing to offer.

Because the volume of stocks traded cannot be predicted, each company's stock price will fluctuate according to the number of sales made in a day and the average price per sale.

The stock price is likewise influenced when the company releases positive financial results, causing us to want to buy the shares. On the other hand, if it fails to meet expectations, its stock price would drop.

Do we smell fear? Don’t worry. Buying stocks can really be intimidating at first, especially if you lack the proper knowledge and tools.

We can help you get access to a community of investors who do investing smarter, faster, and easier. Join this FREE masterclass to find out more.