Start investing in the stock exchange
This is how stock trading works on the stock exchange - simply explained
In times of low interest rates, many investors are drawn to the stock market - because high returns can be achieved with an investment in stocks. We explain how stock trading works and what to look out for.
If you've seen The Wolf of Wall Street before, there are a few images in your head of how stocks could be traded: drug and alcohol abuse, wild sex, and most importantly, a lot of money.
But the reality is different. Away from Hollywood, stock trading is much more civilized. It's less about making quick money, which can only be made with great risks. Rather, as a private investor, you can benefit from an investment in stocks in the long term. Still, you should know exactly what the difference is, how trading works - and how you get started in stock trading.
What is stock trading anyway?
Stock trading is trading, buying and selling with stocks, i.e. shares of a company on the stock exchange. Trading stocks allows you to make money when a company's stock market value goes up or down.
For example, suppose you own the stock of a company whose value increases with the invention of a new, innovative product. In this case, the company's share price usually rises as well. You can now sell the stock at a higher price than you bought it. This results in so-called price gains for you.
In addition, you can benefit if the company gives its shareholders, known as shareholders, a share of its profits. This distribution is called a dividend, your profit is the so-called dividend profit.
Basically, there are two different types of stock trading:
- Day trading: The so-called day trading, in English daily updated share trading, means that investors observe the stock market every day. Depending on how a stock performs, they sell it - or buy new ones. Investors try to benefit from daily price gains. They are not interested in long-term investments; rather, the focus is on short-term profit opportunities. The drawback: The risks are much higher here. After all, no expert can accurately predict whether a stock will rise or fall in value.
- Long-term investment: With long-term investments, investors buy shares once or invest in a so-called equity fund. Then they hope that the value of the shares or the fund will develop positively. A stock fund is a kind of basket that holds many different stocks. This way you spread your money and reduce the risk of loss. A special equity fund is a so-called ETF or index fund. In this case, a computer algorithm simulates a stock index. This is why ETFs have a low risk compared to individual stocks - and are therefore particularly suitable for private investors.
The second variant is recommended for beginners and beginners. The reason: If you are not very familiar with trading stocks, it is easy to make mistakes and losses. It is therefore best to spread your money widely using a share or ETF savings plan and invest it over the long term over a period of more than ten years.
What are the benefits and risks of buying stocks?
When you buy stocks, you can participate in a company's performance and grow your money over the long term. Many stock corporations also distribute a so-called dividend, i.e. part of their profit, to the shareholders.
In times of low interest rates on savings books or overnight money accounts, investing in stocks or equity funds, i.e. stock bundles, can be worthwhile. Because with a long-term investment, comparatively high returns can be expected.
But be careful: The higher the possible return, the higher the risk of making losses. Keep this in mind when investing so as not to lose your money.
One popular way to invest in stocks is what is called "Stock-Picking". This means the purchase of individual shares in selected companies. However, this is less suitable for private investors. Investing your money in individual company stocks instead of spreading it widely increases your risk of losing money. In contrast, there is investment in equity funds or ETFs.
An ETF (Exchange Traded Fund) is a so-called exchange-traded index fund: In this, a computer algorithm reproduces a stock index such as the Dax. If you buy a share in an ETF, you spread your risk more broadly than if you buy individual stocks.
Plus, investing in an ETF is also easier than stock picking. Because the risk is lower, you don't have to constantly keep an eye on the company and decide whether to buy or sell a stock.
What do I need to get into stock trading?
To start trading stocks, you first need a securities account. This is a special account that contains and lists all of your securities.
The easiest way to open a stock account is with a direct bank or an online broker, i.e. a stock trader, on the Internet. However, you should compare the providers with each other.
In your custody account you can easily manage your shares, buy new ones or sell a share. Since there is money involved in all this, you need a so-called clearing account in addition to the deposit. The easiest way to do this is to open the direct bank where you also want to invest your securities account or where you have already done so. You can also link your custody account to a clearing account at another bank.
What order types are there?
The purchase of a share is known as an "order". In your securities account you can choose between different purchase options, i.e. order types.
So you can decide when or up to what price the online broker should buy a share for you. This can protect you from buying too many stocks or stocks that are too expensive for you. The most important Order types at a glance:
Market order: With market orders, the purchase or sale of a security is carried out at the next possible price, i.e. the market price. The price is therefore irrelevant, it is much more about the timely execution of a transaction.
Stop order: With such an order, you, as the buyer or seller, have at your disposal that a transaction will only take place at a certain price - unlike the market order, the price plays an important role here. As a rule, the order is dormant until this price has been reached. A distinction is made between stop-loss and stop-buy orders:
- Stop Buy:With a stop buy order, a buy occurs when the price of the security under a certain threshold, the stop price, falls. This guarantees that you, the investor, will not buy a share for too high a price. If the stop price is exceeded, the buying process is interrupted.
- Stop loss:With a stop-loss order, a security is sold when the price above a certain threshold, the stop price. This order can be used to limit possible losses or, on the other hand, to secure profits.
Limit order: This order places a limit on buying or selling a security. A buyer determines the maximum price up to which he is willing to purchase a share. On the other hand, the seller sets a limit up to which he is willing to sell the stock. The transaction is executed when these limit conditions are met. For you as a buyer or seller, the limit limits the risk of either not paying too much - or of getting too little.
Stop limit order: This order is a mix of stop and limit orders. A security is only bought when the price is below the stop price. However, it is only bought until the limit is reached. This protects you as an investor from buying too many shares.
Can I buy stocks with little money?
Yes - and that is also recommended. Basically, you should only invest money in stocks that you don't need. Therefore, it is beneficial that you can buy stocks with little money.
There is no general answer to how expensive a share is. The price of a stock depends on many factors. On the one hand, it depends on the company from which this stock originates. In addition, the price is determined by supply and demand - i.e. how many shares there are to buy and how many investors want to buy the shares.
If you want to buy certain stocks in the long term, you can use a so-called stock savings plan. You can use this to buy shares or fund units for a certain amount on a monthly or quarterly basis. With some direct banks you can start investing from a monthly savings rate of 25 euros.
How can I learn to trade stocks?
By studying the stock market, valuing stocks, and the different types of trading. On the one hand, this requires a fundamental interest in the financial markets, but above all some time.
To get into stock trading, you can Learning apps help. They simulate a stock portfolio and help you to orientate yourself between the prices and possible purchase options - without having to invest real money.
You can also find out more about stocks and financial markets on the Internet - for example at t-online. There are also special websites that display many courses and figures relating to the stock market. These online portals are often confusing for beginners because they contain a large number of different indicators and diagrams. Don't let that put you off! Because many of these numbers are of no help at the beginning anyway, because they only need a fraction of the information.
If you don't have time to grapple with stock trading, you can use so-called robo-advisors. Robo-advisors are computer algorithms that help you choose stocks or funds. Often you also control which stocks you invest in.
To do this, you have to fill out a questionnaire online: This is how your willingness to take risks should be rated. You also need to indicate how much money you want to invest. This is also possible with a savings plan. But be careful: these robots often cost a certain percentage of commission, which lowers your return on investment.
Which basic rules should I observe?
When investing in stocks, keeping a few basic rules in mind can help. But be careful: These rules only give you a rough guide - and no guarantee of a successful investment.
- Invest only free money
Perhaps the most important rule of all: Only invest money that you do not need for a long period of time, that is, that is "free" (see above). Because if the price of a stock is falling and you have to sell it because you need money, you may have made a loss. Also, do not take out a loan to buy shares - this will prevent you from going into debt.
- Only buy what you understand
Put easily, guess yourself. What is meant: When buying individual stocks, only buy shares in companies that you trust and that you know exactly what they do. Because if you do not understand a company or an industry, you cannot judge whether the share is a good investment - or the symbolic "grabbing the toilet". If you have any further questions, simply stay up to date with t-online. Here you can find out the most important things about buying shares and investing.
- Never put all your eggs in one basket
A very important piece of wisdom that says: Spread your risk. Don't just buy shares in one company, but many different ones from different countries and industries. This is very easy with a so-called ETF - a basket of shares in which a computer algorithm replicates an entire index.
- Don't reach into a falling knife!
This saying means: Do not buy a share whose price is falling sharply. Of course, it is particularly cheap. But it is possible that it will continue to fall - and you will lose money. To avoid this, wait until you can see that it is not going any further downhill and that the lowest point has been reached. Then you can buy the stock cheaply. But be careful: Nobody can say whether a share might fall further - or whether it will rise again immediately after a fall.
- Buy from rumors, sell from facts
This old stock market adage means something like: If you've heard rumors about a company - for example, that an investor is about to take over - you should grab it and buy the stock. Once that rumor comes true, chances are there will be a rush on the stock: sell it now to see if you can make a profit. For beginners, however, this wisdom is hardly anything - because acting according to this maxim can cost a lot of time and nerves.
- Back and forth empties pockets
When trading stocks, you have to keep in mind: With every purchase and sale, you incur costs that reduce your return. To save on fees, think carefully about whether to buy or sell a stock - and don't do it if you're not sure.
- If you can't stand the heat, you have no business in the kitchen
A saying that can be applied to many things. In relation to stock trading, this means something like: You have to be able to stay calm. Because it can always be that the price of a share falls. But if you spread your risk broadly and only invest money that you don't absolutely need, then you can sit back and relax - and stand the heat well.
What buying strategies do I use when trading stocks?
When trading stocks, many investors follow a certain strategy that gives them security even in times of falling prices. The three most popular strategies include:
- Value strategy: With this strategy you assess stocks according to their "intrinsic value". This means that stocks are selected that are undervalued according to their ratios (see below). The hope is: In the long term, a share should develop upwards - and thus ensure high price gains.
- Buy and hold strategy: This strategy means that you as an investor buy stocks and just keep them. So you don't sell the securities again too quickly, but simply wait for price gains to materialize. But be careful: this strategy is only for you if you own many different stocks - and not just one company. Otherwise the risk of losing your money is too high.
- Dividend strategy: With this strategy, investors choose stocks based on the size of their dividends. The dividend is the part of the profit that a listed company pays out to its shareholders - that is, the investors. Do not buy shares in companies that recently paid no or only a small dividend.
Important: None of these strategies is wisdom par excellence. You can also combine several strategies with each other or deviate from one strategy.
How do I find the right security for me?
As a general rule, you should only buy shares in companies that you know and whose products you may also use yourself.
You should also be aware of the maximum risk you should have. The principle is simple: the higher the possible return, the higher your risk of making losses through trading.
A Secret formula for choosing the right stocks does not exist. Stock trading strategies can provide a clue (see above), and a number of key figures can also help you to evaluate stocks (see below).
Be sure to find out enough information before making an investment, spread your risk and - very importantly - don't let yourself be disturbed.
How do I assess stocks correctly?
Various key figures can help you correctly assess the value of a share. The most important are the following:
- P / E ratio: The price-earnings ratio (P / E ratio) indicates how high or low the market values a company's stock compared to the company's annual profit. If the P / E ratio is relatively high, this can indicate that the price of the share is (too) high. Basically, it's better if a stock has a low P / E ratio. But be careful: companies can use tricks here. So you should make sure that taxes and interest have already been deducted from the profit with the P / E ratio.
- Dividend yield: A dividend is that part of the profit that a corporation pays out to its investors. The so-called dividend yield is the ratio of the dividend to the price of a share. The following rule applies: the higher this figure, the more it can be worthwhile for you as an investor to buy the share. However, you should note that the dividend yield is not principally dependent on the share price.Even if a stock goes up, a low dividend can be paid - and vice versa.
- Price to Cash Flow Ratio (KCV): Unlike the P / E ratio, the KCV sets the share price in relation to the so-called cash flow. The cash flow, in English cash flow, offsets deposits and withdrawals of a company against each other. The same applies to KCV: the lower the value, the cheaper the share. In principle, a KCV below one indicates that a share is undervalued, i.e. that it can be had relatively cheaply.
- Price-to-book value ratio (KBV): The book value of a company indicates how much equity a company has. In mathematical terms, the book value is the entire assets of a company minus its liabilities. The KBV shows how the equity of a stock corporation is valued on a stock exchange. If the value of all shares in a company is traded below its book value, which is P / B less than 1.0, it can either mean that the company is losing equity - or that it is being undervalued. Then the shares would be comparatively cheap, the profit prospects tend to be high.
- Price-to-sales ratio (KUV): The KUV sets the share price in relation to sales. The good thing: When it comes to sales, companies can cheat less than when it comes to profit. The KUV can especially help with the evaluation of start-ups. Because they often make losses. When comparing two company shares, the following applies: the higher the price / sales ratio, the more expensive a share - the lower, the cheaper.
- Return on equity: The return on equity indicates how much equity a company needs to generate a profit. For example, a return on equity of 20 percent indicates that a company earns a profit of EUR 200 when investing EUR 1,000 of equity. This indicator shows how efficiently a company works. The higher the return on equity, the better.
Basically: Do not rely on just one code number, but always pay attention to several at the same time.
How do I buy stocks and ETFs in direct trading?
To buy stocks or ETFs from a so-called direct trader, you also need a securities account (see above). A direct trader holds stocks and sells them to you as an investor.
This allows you to avoid fees that are charged by the exchange. As a rule, you do not decide whether to buy or sell shares on the stock exchange until shortly before the conclusion of trading in your online depot: By selecting the trading venue, you can usually also select a direct trader as your trading partner.
The advantage of direct trading: You are flexible in terms of time. Because direct traders often have longer opening times than an exchange. With a direct dealer, you can usually buy a share until 10 p.m. in the evening. However, it is advisable to trade stocks and ETFs during the opening hours of the stock exchange. The reason: Only then can you check live whether the direct trader actually charges a better price than the traders on the stock exchange.
Can I also buy shares on the stock exchange myself?
No, you cannot do that as a private investor. The so-called broker, i.e. a stock trader, does this for you. For this you also need a so-called securities account (see above).
To do this, you have to decide on a share, find and select it using the search mask of your portfolio. Only now is it decided where you can buy the share - from a direct trader or on the stock exchange.
When buying on the stock exchange, so-called trading platform fees are incurred. These vary from exchange to exchange. You can save the costs if you buy from a direct dealer (see above).
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