STOCKS

The stock market and shares are among the most well-known and widely used investment instruments globally. However, behind that apparent “market” lie concepts, risks, and strategies you should master if you want to use stocks as part of your wealth. In this article, you will find a clear, practical, and comprehensive explanation: what stocks and the stock market are, how they work, how to invest step by step, which metrics to watch, common strategies, advantages and disadvantages, and best practices for managing risk.

Note: This text is for informational purposes only and does not constitute personalized financial advice. Tax and regulatory implications vary by country; consult a professional or local regulations before making decisions.

What is a stock and what is the stock market?

Stock (share): is a unit of ownership in a company. If you buy a stock, you acquire a proportional share of the company’s equity. As a shareholder, you may have economic rights (dividends) and, in many cases, political rights (voting at shareholder meetings).

Stock market / exchange: is the system—physical or electronic—where stocks and other financial instruments (bonds, ETFs, derivatives) are bought and sold. Examples include NYSE, Nasdaq, Madrid Stock Exchange, BME. The stock market facilitates liquidity and price formation through the interaction of supply and demand.

How the stock market works (overview)

1. Primary issuance (IPO / private placements): when a company wants to raise capital, it issues shares for the first time (IPO) and sells them to the public or institutional investors.
2. Secondary market: where most daily trading takes place: transactions between investors. The company does not receive money directly from these operations (except in private rounds or capital increases).
3. Participants: individual investors, funds, banks, market makers, high-frequency traders, etc.
4. Price formation: the price agreed by the market (buyers and sellers); influenced by public information, expectations, financial results, macro news, and sentiment.
5. Settlement and custody: after a trade, shares and cash are transferred and recorded; timelines and procedures (e.g., “T+2”) may vary by jurisdiction.

Types of stocks and classifications

• Common shares: grant voting rights and dividends (if the company distributes them).
• Preferred shares: usually grant priority in dividends and assets in case of bankruptcy but with fewer or no voting rights.
• By market cap: large caps, mid caps, small caps.
• By style: growth stocks vs. value stocks.
• By sector: technology, healthcare, consumer, energy, etc.
• ADRs / GDRs: certificates that allow investing in foreign stocks through local markets.

Main metrics and ratios you should know

To evaluate a stock, it’s important to master some basic metrics (summary and use):

• Market capitalization (market cap): price × number of shares outstanding. Indicates company size.
• Earnings per share (EPS): net income / number of shares. Measures profitability per share.
• P/E ratio (price-to-earnings): share price / EPS. Shows how many times the market pays for current earnings.
• Dividend yield: annual dividend / share price. Indicates return from dividends.
• P/B ratio (price-to-book): price / book value per share. Useful for spotting undervalued assets.
• ROE (Return on Equity): net income / equity. Measures efficiency in generating profits from equity.
• Beta: measures a stock’s volatility relative to the market. Beta >1: more volatile.
• Debt/EBITDA ratio: financial health and leverage.

How to invest in stocks: step-by-step guide to get started

1. Define your goals and time horizon. Are you seeking long-term growth (10+ years), dividend income, or short-term trading?
2. Assess your risk profile. Conservative, moderate, or aggressive will shape your portfolio.
3. Learn the basics. Read financial statements (income statement, balance sheet, cash flow) and understand sector KPIs.
4. Choose a broker/platform. Look for security, fees, market access, tools, and support. Compare costs and conditions.
5. Open the account and fund it. Set up security options (2FA).
6. Decide your strategy. Indexing (ETFs), stock picking, dividends, trading, etc.
7. Buy your first stock or ETF. Use appropriate orders (market, limit, stop).
8. Control costs and taxes. Commissions, spreads, and tax obligations on sales or dividends.
9. Monitor and rebalance. Review your portfolio regularly and adjust according to goals.
10. Continuous learning. Markets evolve; stay updated with reliable sources.

Order types (practical tools)

• Market order: executes at the best available price. Fast but with no price control.
• Limit order: buy/sell at a maximum/minimum price — you control price but execution is not guaranteed.
• Stop loss: triggers once a set price is reached to limit losses.
• Stop limit: combination: once the stop is hit, a limit order is placed.
• Trailing stop: stop that follows the price at a fixed distance/percentage to protect gains.
• OCO order (one cancels the other): two orders placed; if one executes, the other is canceled.

Investment strategies in stocks

• Buy & Hold (long-term): buy and hold, leveraging compound growth and dividends.
• Dollar-Cost Averaging (DCA): invest a fixed amount regularly to mitigate volatility.
• Index Investing / ETFs: replicate indexes (S&P 500, MSCI) for diversification and low cost.
• Value Investing: seek undervalued stocks based on fundamentals.
• Growth Investing: invest in companies with high expansion potential.
• Dividend Investing: focus on companies that pay stable dividends.
• Trading (swing/day trading): short-term moves; requires time, skills, and discipline.
• Hedging and derivatives: options and futures to protect or speculate (complex and high risk).

Advantages of investing in stocks

• High potential returns (long-term).
• Liquidity: many stocks are frequently traded.
• Access to company and sector growth.
• Dividend income (if the company pays them).
• Transparency and regulation: listed companies publish regular information.
• Sector and geographic diversification.
• Accessibility: stock investing is now possible with small amounts.

Main disadvantages and risks

• Volatility: prices can swing strongly in short periods.
• Business risk: poor management or loss of market can lead to bankruptcy.
• Market/macro risk: economic crises, wars, pandemics, interest rate hikes, etc.
• Liquidity risk: in small-cap stocks or emerging markets.
• Leverage: trading on margin amplifies gains and losses; may cause liquidations.
• Fees and hidden costs: spreads, commissions, custody, taxes.
• Emotions and biases: decisions driven by fear or greed lead to mistakes.
• Regulatory and tax risks: changes in laws or taxes affect results.

Best practices for managing risk

• Diversify: don’t concentrate in just a few stocks.
• Asset allocation: balance between equities, bonds, cash, and other classes according to your profile.
• Prudent position sizing: don’t risk too much on a single trade.
• Clear horizon and discipline: avoid reacting to every piece of news.
• Periodic rebalancing: return to target allocation to manage risk.
• Stop-losses: to prevent emotional collapses.
• Emergency fund: don’t invest money you’ll need short-term.
• Training and due diligence: understand the company and sector before investing.

Common mistakes to avoid

• Trying to perfectly “time” the market.
• Overtrading and generating unnecessary commissions.
• Chasing stocks that have already surged.
• Not having a clear plan or goal.
• Ignoring costs and taxes.
• Putting all your money into a trendy stock or “favorite company.”
• Using leverage without understanding the consequences.

Illustrative examples of portfolio allocation (for guidance only)

• Conservative profile: 20% stocks — 60% bonds — 20% cash/real estate.
• Moderate profile: 50% stocks — 40% bonds — 10% cash.
• Aggressive profile: 80–90% stocks — 10–20% bonds/cash.

How to measure your performance

• Absolute return: profit / initial investment.
• CAGR (compound annual growth rate): measures annualized growth.
• Total return: includes reinvested dividends.
• Risk-adjusted ratios: Sharpe ratio, alpha, beta.

Tax and regulatory aspects (key considerations)

• Capital gains and dividend taxes vary by country and account type.
• Withholding taxes on foreign dividends.
• Reporting obligations for international operations.
• Consult local laws or a tax advisor for exact figures and procedures.

Quick checklist to get started (10 practical steps)

1. Define your goal and horizon.
2. Assess your risk tolerance.
3. Open a secure broker and compare fees.
4. Start with an amount you can afford to lose.
5. Consider ETFs for immediate diversification if you’re starting.
6. Use DCA if you fear volatility.
7. Learn to read a balance sheet and income statement.
8. Track commissions and expenses.
9. Keep a log of trades and results.
10. Review your strategy annually and rebalance.

Conclusion

Investing in stocks is one of the most powerful tools to build long-term wealth, but it is neither “easy” nor automatic. It requires education, discipline, risk management, and above all, consistency between your strategy and your personal goals. Stocks offer access to company growth and innovation, but they also expose you to volatility and business/market risks.

Our strategy

As investors, we seek high returns on our investments, and since the stock market/stocks are high-risk products due to their volatility, we focus on long-term investments in different listed companies. In some of these, we expect high price volatility, while in others we look for dividends that provide us with stable income.