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Guide to becoming a trader: why buying stocks and the difference between investing and trading

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Guide to becoming a trader: why buying stocks and the difference between investing and trading

When it comes to trading and investing, it can be tricky to know where to start. In this regard, the analysts of BG Saxo have created a comprehensive guide on how to start trading stocks.

Which companies can you buy shares of?

Not all large companies issue their shares on the market to make them available to the public. This is reserved only for companies listed on a stock exchange, such as the Milan, London or New York Stock Exchange. In order to be listed, a company must first make ainitial public offering (IPO)after which it becomes, in fact, a listed company.
As a trader, you will normally only be able to buy shares of very large companies in terms of capitalization that meet the prerequisites for a public listing.

Why do people buy and sell stocks?

There are many reasons why millions of people around the world buy and sell stocks on the market every day, such as:

Increase wealth in the long run
By buying shares and holding them for months or years, investors aim to achieve long-term growth in the value of their assets and their wealth and therefore their assets.
Historically, this goal has proved achievable. You can observe the trend of the market as a whole by checking the main stock indices, which then measure the performance of particular stocks grouped by market capitalization or a specific sector.
A widely followed index is it S&P 500, which tracks the share performance of the 500 largest listed companies in the United States. In the last 30 yearsthe S&P 500 registered atcompound average annual growth ace of 10.7%. Of course, this doesn’t mean that the S&P 500 has grown steadily over the decades. As we see in the S&P 500 chart below, there have been many major collapses and dips in this index since 1990.

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For example, in the 2008 crash following the financial crisis and the collapse of 2020 following the global COVID-19 pandemic, the S&P 500 index lost more than 25% of its value in a few days, highlighting how even the most popular indices are not immune to starlings. These spikes remind us that while stocks can form a crucial part of any portfolio, they are also a riskier asset class than many others such as some bonds.

Earn money from rising stock prices
Some people (speculators) buy and sell stocks with targets a short term. You could buy shares in a company hoping to sell them later and in a short time horizon at a profit, provided it is clear that the price of those shares increases in the meantime.
For example, suppose you bought 10 Tesla shares at $ 900 per share on December 20, 2021 and then sold those shares on December 27, 2021, at which point the Tesla share price had reached $ 1,093 per share. With a 21.4% price increase of $ 193 x 10, you would have made a gross profit of $ 1,930.

Receive periodic dividend income
An investor can also make money without selling the shares. Some companies do indeed offer dividends to its shareholders, in which a certain periodic payment is provided for each share held. The dividend amount is usually decided on a quarterly or annual basis and this depending on the performance of the company in the previous period. For example, Apple paid a dividend in Q3 2021 of 22 cents per share. This means that a shareholder who owns 100 shares of Apple would have received a $ 22 dividend from the company at 0.22 x 100, without any effort.

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Enjoy compounded returns over time
The more a company’s stock price appreciates over time, the higher the cumulative returns for investors can be. Let’s say you invest $ 10,000 in a particular company. In the first 12 months, the value of the shares increases by 10%, which means that your shares are now worth $ 11,000, as 10,000 x 0.1 = $ 1000.
If you hold these stocks and they appreciate 10% again the following year, that $ 10,000 investment is now worth $ 12,100, since 11,000 x 0.1 = $ 1,100. This growing appreciation is known as compound returns, as the increase in value increases with each subsequent price increase. This is one of the main reasons for buying shares.

What is the difference between investing and trading?

You will often hear the terms “investing” and “trading” used interchangeably, but there are some important differences you should be aware of. The investment involves the purchase and holding of shares with the aim of making them appreciate over time, usually in the long term. A common saying among investors is that “time in the market beats the timekeeping of the market.” This means that it is better to buy an asset and hold it longer, rather than trying to “beat the market” by buying a stock at its lowest price and selling it at its maximum, which is virtually impossible to calculate.

On the contrary, when trading, one usually thinks of the short term. Stock trading is the act of speculating on the price of the asset, with the intention of timing the market and making a profit in a short amount of time. You are “taking a position” on an asset in hopes of buying or selling to make a profit when the price moves. While buying the tool you are not doing it with the intention of holding it for a long time and owning it but rather to sell it for profit. Therefore, trading potentially requires much more time to identify the instruments on which you expect a faster and higher return, while in this scenario the investment takes less time as the investments are held longer.

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