How to get started with investing in stocks?

Investing in stocks can be a great way to appreciate your capital. But where to start? If you don’t have any experience of investing, read our guide first, which will explain the basics and explain what and how. Caution is in order.

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8 minutes of reading

Chapters of the article

What is a share and who is a shareholder?

Shares are an absolutely crucial part of the financial market. They are issued by companies and individuals can become a small part owner of a company by buying them. They then acquire rights to participate in some of its decision-making, for example by attending its general meeting. The key for shareholders is, of course, the dividend, i.e. a share of the company’s profits. This can be expected in stable companies that show growth.

Dividends tend to be paid at regular intervals – usually annually, but sometimes quarterly.

However, the key is the value of the share itself, and it is important to remember that you can not only make money on a share, but also lose money. Or both in turn. In fact, their value can be variable depending on many factors. This means that you need to choose a good product that allows you to maximize your profits. But which product is good is a question that has no certain solution.

Are you looking for an answer to a specific legal question related to shares and investing in them?

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The following five tips are the real basics, but it’s good to keep them in mind.

1. Get information on stocks

Before you start investing in stocks, you need to get as much information as possible. You should familiarise yourself with the different types of shares, know what growth and dividend shares are, where to buy shares and what to look for when you want to invest. You should also get familiar with basic terms such as share price, share fund, stock market and others. We’ll explain many of these below.

2.Set your investment goals

Before you start actually investing, it is important to define your investment goals. Do you prefer to invest for the long or short term? How much of your capital will you invest? Depending on this, your strategy may subsequently vary considerably.

3. Find a financial advisor

Investing in shares can be risky. That’s why it’s important to consult a financial advisor or trader before you start investing. A financial advisor can help you choose the right type of stock and find the right platform for investing. We have contacts for good advisors.

To start investing in stocks, you need to choose the right broker, i.e. a licensed securities dealer. They may differ, for example, in the level of fees they charge or the way they trade and place orders.

4. Invest only your spare funds and start small

You should only invest your spare funds that you do not need for important expenses such as rent, food and medicine. You should not risk your life savings by investing. You must take into account that in the extreme case when the investment does not work out, you may lose a substantial part of these savings.

If you are a beginner, start with small investments and gradually increase them.

5. Learn and don’t just put everything on one card

Investing in stocks is an ever-changing market. If you enter it, it’s important to keep learning about new trends. You can read the news, follow commentaries and discuss with other investors. Ideally, you should have a market area in your minor (telecommunications or healthcare, for example) and know which stable players are in the market, what its future holds and which company or companies offer it. Better still, if it is linked to a unique product that has the potential to change the market.

Investing all your resources in the shares of one company is considered by experts to be too big a risk. On the contrary, it is recommended to choose ten to twenty companies that you trust and expect to grow. You can help yourself with information about the financial situation of the companies, which you can obtain from their income statements, for example.

It is also very important that you know when to buy and sell shares.

Another way to spread the risk is to invest in a mutual fund. Equity funds are groups of stocks that are managed by a professional investment fund. Stock funds allow you to invest in different types of stocks without having to buy each stock separately. Stock funds can be either passive, which means the fund follows the market, or active, which means the fund can buy and sell stocks at any time.

Who to contact?

If you are already clear about your intentions, contact the securities firm directly. You can enter into a contract with them and then place an order to buy shares (via a form, by phone, email or over the internet). You specify the name of the share, the number of shares and the limit price you are willing to accept for the purchase. Once you have purchased shares, you will receive a confirmation or confirmation of what shares you have purchased and for how much.

What types of shares do we know?

There are a plethora of classifications and characteristics of shares, depending on their legal form, market behaviour or form. Let’s take a look at some of them.

Growth and dividend shares

The division is primarily based on the security it brings to its holder. While dividend stocks are generally a guarantee of moderate growth. Any downturn (which can always occur) should not be as pronounced as that of growth stocks.

In contrast, growth stocks often represent “startups” among equity companies. That is, young, predatory companies that are expected to grow rapidly. If you get it right, you can appreciate your investment by tens of percent in one year. As a rule, however, you’ll have to wait a year to see such significant appreciation. And at the same time, if your guess doesn’t work out, the downside can be as significant as the upside.

It is recommended tohave both types of stocks in your portfolio to balance the risks a bit.

Owner or registered shares

Bearer or registered shares are a type of shares that are issued as a right to own shares held by a company. Shares can be traded on an exchange or over-the-counter. They are physically transferred between the buyer and seller directly, without the need for any market participant such as a broker or broker. It must be said, however, that this variant of shares was already banned by Czech law several years ago in order to make the ownership structure of joint stock companies more transparent.

Registered shares are already issued in the name of a particular natural or legal person. The joint stock company is subsequently obliged to list the shareholders who hold these shares.

Listed and book-entry shares

Book-entry shares are shares that are listed on the stock exchange. These shares can be traded on the stock exchange and are usually available for public purchase and sale. In contrast, book-entry shares do not exist in physical form but only as a book entry with a central securities depository.

Ordinary and preference shares

Ordinary shares are the principal type of shares issued by a company. They are typically associated with the right to participate in the general meeting and the right to receive dividends. Preference shares may or may not be issued by the company. If it does so, they will take precedence over other (ordinary) shares. These shares are entitled to preferential dividends and also have a right of first access to any available capital when it is needed. Preference shares also have the right of first access to any settlement of the company’s assets in the event of its dissolution.

Tip: Employee shares are shares that are issued to employees as a form of employment benefit. However, it is not a special type or kind of stock that is any different from any other. A certain analogy, which can be applied not only in joint stock companies, is the little-known ESOP employee incentive plan, which we have discussed in our separate article.

Investments in Czech koruna or foreign currencies

Investing in “crown shares” has its advantages and disadvantages. The advantage is that you can focus only on the company as such and no longer care about the appreciation or depreciation of our currency. The disadvantage is that you are limited only to shares traded on the Prague Stock Exchange.

If you dare to invest in euro, dollar or other shares, you are exposed to so-called currency risk. In addition to the appreciation of the shares, you are also watching how the koruna is doing. A strong koruna will cut much of the profit when you sell shares in euros and then convert them into Czech currency. The solution may then be to keep the profit in the acquired currency if you have a use for it.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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