Stocks

The first thing I discussed is how you don't have to trade with your savings, but rather, that you should invest them. "But how is this possible - you're a trader yet you are telling us we don't have to trade? " Exactly! Not that trading is wrong, but it does require a lot of experience and knowledge of the market you are working with (stocks, bonds, currencies, commodities), as well as a lot of discipline, and this is something that you don’t have right now, it would only lead you to lose money.

If you like or are curious about trading, then nobody is forbidding you from studying, reading books (even better if they’re mine), consulting websites, following capable traders and analysts and beginning to learn about the markets you are interested in. Trading on demo platforms (many brokers allow you to open a demo account) and making operations with virtual money. In this way you will begin to build the experience necessary to perform this activity without having to risk losing money. But definitely do not do it with your own savings, not to begin with. If you are a beginner, you will not be able to trade successfully, not for a long time.

So, from now on, when I talk about buying a particular financial instrument I will always be referring to investing.

When you think of the stock market, generally, you are probably thinking about stocks. Buying a stock (such as Amazon) and then selling it at a higher price seems very easy, but in reality, for those of you who have little knowledge of this, it almost always leads you into losing part of your savings.

This is because investing in stocks requires a lot of experience in financial analysis. You have to make a deep analysis of the balance sheets and future prospects of the company you are going to invest in. What's more, this may not be enough to avoid losses.

Every year, Warren Buffett spends tens of thousands of dollars in reports on the companies he is interested in investing in and yet he is not exempt from making mistakes. Think now of yourself, with none (or little) experience, and without reports that give you the kind of information Buffett has – how likely are you to earn from your investments? (not including classic beginner's luck, which does not count).

When you invest, you should rightly look at the gains you could make, but you should not forget the risk you will incur to get that gain either. Investing on one stock means putting all your savings into one company. But what if that company has problems that you aren’t aware of, and that shortly thereafter cause it to fail? What would happen to your savings? They would vanish like mist in the sun.

History is full of famous cases of important companies that, for one reason or another, have failed: Enron, Lehman Brothers and these days, Evergrande (just to name a few). Think if you had invested your savings on one of those companies, you would have lost all or almost all your money.

So, investing on one company, even if it is famous and important, like Amazon, is not a good choice. The right way to go about investing is to diversify. Invest on multiple companies so that if even one has a problem, it will no longer affect 100% of your investment but only a small percentage. You will soon see how you can go about doing this.

After this long introduction and explanation of why you shouldn't invest on individual stocks, let's now take a look at what a stock is.

A stock is the smallest part into which the capital of a corporation is divided. The holder of the share (shareholder), therefore, owns a "little piece" of the company, with all the rights and obligations that this entails. The joint-stock company, on the other hand, finances its business by issuing and placing shares.

It is not necessarily that a corporation is listed on the stock exchange. So, while it will be easy to buy and sell shares of listed companies (just go to the bank or open an account with one of the many online brokers), it is more difficult to do so with companies not listed on the stock exchange. You will have to agree privately with the shareholders of the company on the price at which to buy and sell them.

Stock has two prices:

• nominal price, the value of the share when it is issued;
• market price, once issued at par, a share can be traded and the price will be determined by the meeting of supply and demand.

Among the rights conferred on the purchaser of shares is that of participating in the division of profits in the form of dividends. It may happen, however, that one year the company does not distribute profits, in order to reinvest them in the company itself. In this case, the undistributed profits is reflected in the value of the stock.

On the day of the ex-dividend, the share price opens with a lower price than the day before because it is lowered by the value of the dividend. If the company does not distribute profits (i.e., dividends), the share price will not change (in practice, the dividend remains embedded in the share price).

In order to receive dividends, it is sufficient to be in possession of the company's shares at the time of payment, i.e., when the dividend is detached. In order to be entitled to a share of the profits, it is necessary to buy the stock a certain number of days before the actual payment: for example, Italian shares must be bought at least 3 days before.

So, there are two ways to make money by buying stocks:

• Through the collection of dividends
• Through the return generated by the shares

There are several types of action, the main ones being:

Ordinary shares: These are the classic publicly traded shares that represent a company's share of capital and make up the majority of shares issued.

Preferred shares: These usually do not carry voting rights, and holders of these types of shares are generally repaid a fixed, or higher, dividend than holders of common stock.

Savings shares: These are shares that can only be issued by companies that have listed common stock and have the following characteristics:

1. are preferred in the distribution of profits, which is generally 5% of the nominal value of the shares;
2. shall take precedence over the capital in the event of liquidation of the company;
3. it is not possible to exercise voting rights at ordinary and extraordinary shareholders' meetings;

The only cost you have when you buy stocks is the commission charged by the bank or broker when you buy and sell.

• the price, the price at which the stock closed the last session (i.e., stock exchange day);
• the variation today in a number of points, i.e. the variation in the price of the share compared to the closing of the previous day;
• today's variation in percentage terms, i.e. the variation in percentage terms that the share has recorded, compared to the close of the previous day;
• the price range of the last 52 weeks, represents the price range (minimum/maximum) in which the share has moved over the last year;
• the daily exchanged volume indicates the number of shares exchanged during the last session.

As we have seen, there are two ways to earn with stocks, through dividend income and through the yield generated by the stock. As for the latter, you can earn by buying a stock and then reselling it once the price has increased or through short selling.

Short selling consists in selling shares without being in possession of them (thanks to the loan of the securities by banks or brokers), and then buying them back later when the price has fallen.

It must be said, however, that this strategy is not suitable for a long-term investment as a company tends to improve and grow over time. Short selling is used exclusively by traders who speculate on the fall of stock in the short term.