What are stocks and how to make money on them: a guide for a novice investor

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

For many of us, the securities market is an inhumanly complex mechanism, which can only be understood by Warren Buffet and the stock market tycoons from the cinema. In reality, everything is much simpler. Promotions are a convenient and effective tool for making money, and absolutely everyone can learn how to use it. We have prepared a short guide to the world of investments that will help you understand how you can generate income by buying securities.

This material is a kind of introductory lecture for those who want to start investing, but do not know where to start. If after reading it you want to go deeper into the topic, you can take the full training course on the Investment 101 portal. The course materials were prepared jointly with professional traders and analysts from BCS Broker and combine theoretical blocks with practical exercises. So what are stocks?

Stock is a security that gives its owner the right to participate in the management of the company and receive a part of its profits.

In a simplified form, everything looks like this: an enterprise needs money for development, so it turns to investors for help, who give the necessary amount. In return, they receive ownership of a certain share of the company, expressed in shares.

The total par value of shares must be equal to the authorized capital of the joint stock company. Investors can be both individuals and legal entities, and their share in the share capital is determined by the ratio of the number of the company's securities in its ownership to the total volume of its shares. The company returns part of the annual profit to shareholders as dividends - a kind of gratitude for financial support.

Types of shares

There are common and preferred shares. The company can produce both of these types, or be limited to only the usual ones. The volume of preferred securities should not exceed 25% of their total number. The difference between the two categories is the order of profit and the ability to influence the decisions that are important to the company.

Ordinary sharesgive the investor the right to participate in the general meeting of shareholders - the highest governing body of the joint-stock company. Payment of dividends on such shares is not guaranteed and is carried out only after the distribution of premiums between the holders of preferred shares.

Owners preferred sharesthey do not participate in the management of the company (except for making decisions on the reorganization or liquidation of the enterprise), but the amount of their dividends is greater than that of the holders of ordinary securities. The ratio of premiums on common and preferred shares is fixed in the charter of the joint-stock company. In addition, it is the preferred shares that have the primary right to receive payments at the end of the year.

Additional advantages are provided by the total number of securities owned by one shareholder:

1% of shares makes it possible to get acquainted with the list of other shareholders.
2% of shares allow to introduce issues into the agenda of the general meeting of shareholders and propose candidates to the board of directors and the audit commission.
10% of the shares give the right to convene an extraordinary meeting of shareholders and conduct an audit.
25% + 1 share - blocking stake. It allows you to reject decisions at the general meeting that require 75% of shareholders to agree to (amendments and additions to the charter, reorganization and liquidation of the company, as well as other issues related to announced shares and buyback of already placed shares).
50% + 1 share - a controlling stake, which gives the owner the right to independently make decisions on all other issues discussed at the general meeting of shareholders.
75% + 1 share give the holder the opportunity to make any decisions on the management of the company.

How to make money with stocks

It is clear that the average market participant does not have enough securities to directly or indirectly influence the fate of a company. However, he does not need this, because the main purpose of buying shares is to make a profit. You can earn here in two ways: by receiving dividends or income from the difference between the purchase and sale prices of shares.

Dividends

The source of payment of dividends is the company's net profit, that is, the amount remaining after tax. The amount of dividends is determined based on the results of the fiscal year (in some cases - a quarter, half a year or nine months) by the board of directors, and then the decision is submitted for consideration to the meeting of shareholders. Shareholders can approve the proposed payments or reduce them if they deem that the company needs more funds for successful development. Investors registered in the register of shareholders as of the reporting date have the right to receive dividends. This date cannot be set earlier than 10 or later than 25 days from the date of the decision on payment.

The procedure and term for the payment of dividends are determined by the charter of the company or by a decision of the meeting of shareholders. For ordinary shareholders, this period is no more than 25 working days from the date of determining the circle of persons entitled to receive dividends.

The person representing the interests of the investor - the nominee holder and trustee registered in the register of shareholders - will receive his funds no later than 10 days from the same moment. During this period, cash dividends are sent to the recipient by postal order or transferred to his bank account.

Exchange difference

You can also get additional income through trading in securities. You earn here on the difference between the cost of buying and selling - you bought it cheaper and sold it more expensive. It makes sense to choose common stocks for trading: their liquidity (the ability to easily buy and sell) is higher than that of preferred stocks. It is worth remembering that after the register is closed, the value of securities falls by about the amount of dividends paid. If you want to buy shares, this is a good time, but for a sale it is better to wait from a couple of months to six months: the share price, as a rule, returns to the previous level or even exceeds it.

Theory is theory, but it is still exciting to plunge into trading right away. It is better to take the first steps in the simulator on the Investment 101 portal. The situation here is close to real, so you can calmly settle down without risking losing all your savings. When you acquire the necessary skills and feel confident in your abilities, you can proceed to real exchange trading.

Advantages of shares over bank deposits

It would seem, why study the financial performance of large market players and form an investment portfolio, if you can just take your money to the bank and after a while pick up the already slightly increased amount? You can, we don't argue. But stocks have their own advantages, which make them a very attractive investment tool.

The funds that you have deposited with the bank cannot be withdrawn until a certain period of time. You can buy and sell shares at any convenient moment - at least several times a day.
The maximum amount of the deposit subject to insurance is 1.4 million rubles. If you had more money on your account, then in the event of bankruptcy or revocation of the license, you have to rely only on a partial reimbursement of the lost funds. Stocks that are falling in price can usually be sold - and even then, you compensate some of the funds if you bought stocks at an even lower price.
The potential profitability of shares is many times higher than the rates of bank deposits. Dividends are taxed at 13%, but taking this into account, annual payments may be higher than on time deposits.
In the case of stocks, you have more opportunities to personally influence the increase in your savings. The final profit is formed not only from dividends, but also from the price of securities.

As you can see, there is nothing terrible and incomprehensible in working with securities. Study the theory, apply it in practice, and you will see that the world's largest investors are not in vain investing their billions in stocks.