For many, the stock market is a secret world where fortunes are made and lost by modern financial alchemists. But in reality, investing in stocks is an activity that is accessible to almost anyone. Here's what the stock market is and how to get started investing in the stock market.
In this guide, we’ll walk you through the steps you need to take to become a stock market investor. We’re assuming you’ve already made the decision. You know you want to start investing, but you’re not sure how to go about it yet. We also hope you’re aware of the risk of losing money that’s inherent to stock market speculation.
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Stock market game for beginners
The very concept of “playing the stock market” is very unfair to the capital market and distorts its essence. The stock market is not a casino . When we enter a casino, we play against its owner, and the probability of winning (with some exceptions) is lower than the probability of losing. On the other hand, new capital is constantly flowing into the stock market: not only from new investors, but primarily in the form of dividends paid by listed companies.
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In this text, we will only deal with technical issues related to how to invest in the stock market. We have described the personality traits that an investor should have and the choice of strategy in the guides ” How to invest in the stock market ” and ” 5 tips for a beginner investor “. We also invite you to read a comprehensive article on investing: How to invest money? Stocks, bonds, deposits, gold, currencies and much more.
The topic of “stock market investing for beginners” should start with basic definitions and how the stock market works. The stock exchange is a place where people and institutions meet to buy or sell shares, bonds, certificates and other securities. Investors are those who buy and sell securities. An investor buys financial instruments, counting on profit in the form of interest, dividends or an increase in the price of the purchased asset. One invests only for profit.
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How are stock prices determined on the WSE?
To buy shares on the stock exchange, you need to open an investment account with a brokerage house licensed by the Polish Financial Supervision Authority. A brokerage house is a necessary (you can't buy shares directly on the Warsaw Stock Exchange) intermediary between investors. The brokerage house buys and sells shares on the stock exchange on behalf of its clients, recording the number of purchased shares in an individual brokerage account. Read about how to choose a brokerage house.
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Step 1. Setting up an investment account
A novice investor first goes to a brokerage house (other names are brokerage office or broker) to conclude an investment account agreement. It is used to store and trade securities and other financial instruments. The brokerage account agreement can be signed directly at the customer service point or an application can be submitted online – then the agreement for signing will be delivered by a courier. All you need is an identity card or passport.
The brokerage house agreement itself is not too complicated and is a bit like a bank account agreement. To open an investment account and start investing on the stock market, you must be at least 18 years old. Before signing the agreement, you will be forced to fill out an EU MIFID form, which is supposed to check your level of knowledge about investing. In addition, since December 2016, you will receive an American FACTA form to sign, in which you must declare whether you are a tax resident of the United States.
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We are setting up our first brokerage account. What to look for?
There are almost 50 brokerage houses licensed by the Polish Financial Supervision Authority in Poland, but not all of them serve individual clients. In the spring of 2022, brokerage houses maintained almost 1.5 million accounts, of which the 10 largest brokers had over 86% of clients. The offer of brokerage houses is quite similar: maintaining an account is either free of charge or costs around PLN 60 per year. In addition, the investor pays a commission for each executed order – for many years, the standard rate has been around 0.39% of the transaction value.
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How to choose a brokerage house?
The brokerage agreement can be terminated at any time, observing the notice period specified in the agreement. There are no limits to the number of accounts held with different brokers. Therefore, depending on your needs, you can simultaneously use the services of several or even a dozen brokerage houses.
Step 2. Deposit money into your brokerage account
Once we have set up an account, we can deposit money into it. The amount we will be trading is an individual decision for each investor. It is recommended not to allocate too much money to buying shares in the first period of investment. Of course, “a small amount” means something different to everyone. However, it is better to treat the first payment as money that we can lose and it will not have a significant impact on our finances and well-being. Unfortunately, it is impossible to learn how to make money on the stock market without experiencing losses. Losses themselves are an essential element of the investment process and every investor experiences them. It is only important that the sum of losses and costs does not exceed the sum of profits.
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Typically, deposits to an investment account are made by bank transfer to an account number defined by the brokerage house. Only some brokers allow cash deposits. Cash can also be brought to the bank and the transfer can be made there. In addition, some banks integrate the investment account with the current account, so you can buy shares using the funds in the bank account directly.
Step 3. Placing orders, or how to buy and sell shares
To buy shares, you need to place an order. In the past, this involved coming to the customer service point (CSP) of a brokerage house and submitting an oral or written instruction to the broker. The broker would issue an appropriate receipt and send your order to the GPW transaction system. Over the years, the way the stock exchange works has changed significantly. Now, most orders are placed via the Internet and brokerage house applications. The order still first goes to the DM system, from which it travels to the stock exchange. This makes it cheaper (commissions for online orders are much lower than telephone or in person), faster and more convenient.
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All about brokerage orders
Types of brokerage orders are a topic for a separate guide. To start with, it is enough to know that there are two basic types of orders: buy orders and sell orders. In the first, we offer cash in exchange for shares, and in sell orders, we offer shares in exchange for cash. The second important criterion is the issue of our priorities.
To buy or sell shares, we can use a limit order or an order “at any price” (PKC). In the case of limit orders, we declare the number of shares being bought/sold and the unit price at which we agree to buy/sell the shares. If we place a buy order, e.g. for 100 KGHM shares with a limit of PLN 125 per share, we are certain that we will pay no more than PLN 12.5 thousand plus commission (this may be less if market prices are lower than PLN 125). PKC orders have priority over limit orders, but they do not provide certainty as to how much money we will actually spend on buying shares or how much money we will receive for selling them.
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Are you interested in investing? Sign up for the Investing Academy II
On the Warsaw Stock Exchange, dematerialized shares are traded. They are accounting records kept by the National Depository for Securities. So let's forget about scenes from American movies, where brokers crowded into a trading room shouted over each other and exchanged bundles of paper representing a certain number of shares. Now everything is done electronically and stored in computer memory.
On the WSE, you can trade not only shares. On the cash market, subscription rights, rights to shares, ETF units, certificates, structured products (ETP) are also available, and on the Catalyst market, bonds. In addition, the WSE offers a fairly rich range of derivative instruments (futures market): futures contracts and options – but this is a higher school of driving and a topic for a separate guide.
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10 Things a Stock Market Investor Should Avoid
Always remember that you invest on the stock exchange independently and at your own risk . No recommendation, advice or analysis releases you from the consequences of your decisions. The brokerage house is only an intermediary here and is not responsible for whether your transaction will bring a profit. Importantly, the brokerage house is not the other party to the transaction – you buy and sell shares from other investors.
Step 4. Fees and commissions, or how much it costs to buy and sell shares
Individual investment in shares of listed companies is not a particularly expensive activity. Basic versions of investment accounts are often offered and maintained free of charge or for a sum of several dozen zlotys per year. You have to pay more for additional options: e.g. access to information services or deeper insight into the order book. As a standard, we see only one best purchase/sale offer and have access to quotes without delays. And such a simplest package in 95% of cases should be enough for a beginner investor.
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Cheapest brokerage accounts [RANKING]
The brokerage house earns on commissions charged from us for each completed purchase and sale transaction. For several years, the standard on the Polish stock market has been a commission of 0.3-0.4% for orders placed via the Internet. However, some brokers can go as low as 0.20%. There is also a minimum commission – usually PLN 3-5 for an completed order.
Step 5. Counting profits and realizing losses
From the moment an order is placed, the investor gives the market control over his money. It is up to all market participants to decide whether the prices of purchased shares will rise or fall. Why the prices of some shares rise and others fall is a topic for another time – it is the essence of the art called investing.
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How an investor loses on the stock market
However, the principle of calculating profits and losses remains unchanged. If we sold shares for more than we bought them (taking into account the commissions paid!), we “made money”. If we sold shares for less than we bought them, we suffered a loss. If we hold shares whose current market price is much lower than their purchase price, we have just been “invested long-term”. Capital gains achieved over a calendar year are subject to a 19% tax ( the so-called Belka tax ).
Step 6. Cash withdrawal
You can withdraw funds in a cash account at a brokerage house at any time. Usually, withdrawals are made by transfer to a bank account previously defined by the investor. You submit a transfer order and you should have the money in your account the following day at the latest.
Some brokerage houses also allow cash withdrawals in their own branches. However, this operation may involve an additional commission and, in the case of larger amounts, must be notified in advance.
Step 7. Leaving the WSE
Investing in stocks listed on the Warsaw Stock Exchange is usually the first step on the investment path. It is a solid school before entering foreign markets, futures markets or the currency market (Forex).
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The Unofficial Dictionary of Stock Market Slang
From the perspective of an individual investor, the main drawback of the Warsaw Stock Exchange is the lack of the possibility of appropriate portfolio diversification. The problem is both the concentration of risk in one country (i.e. Poland) and one currency (Polish złoty). The WSE also lacks diversity: there are few technology companies, there are no global corporations, and some industries are represented by one or two companies.
Summary
Investing in the stock market is nothing to be afraid of, but it is not worth taking on without preparation. You can learn how to operate in the stock market – for starters, reading the above guide and the materials included in the links is enough. However, when becoming an investor, you have to take into account that you have to constantly gain knowledge and new information about the market situation. It is not without reason that Bankier.pl has been the number one portal among Polish individual investors for years.
