Investing in stocks: what is it and how do you do it?

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Investing in stocks

With stocks, you buy a piece of a company and profit when that company performs well. But what exactly are stocks? And how can you invest in stocks? In this article, you’ll discover how you can easily start with BUX.

Stocks: brief definition

Stocks are proof of ownership (securities) of a company. You are therefore part owner of that company. As a stockholder, you profit when the company grows through an increase in your stock’s value or via a dividend payment. You may also have voting rights at stockholder meetings. You buy and sell stocks through a bank or broker. They offer potentially a higher return than saving, but they also entail risks.

What are Stocks?

A stock is your proof that you own a piece of a publicly listed company that is, for example, on the Amsterdam Stock Exchange (AEX). With a stock, you share in a part of the profit a company makes. You also often have voting rights during stockholder meetings. The more stocks you have, the greater your rights and influence are.

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How do stocks work?

Companies can issue stocks to raise capital for development, growth, or innovation. Stocks let you benefit from the success of a company. You buy them, hold them, or sell them again.

Buying stocks

Stock trading takes place on the exchange, provided, of course, that it is open. It is the stock market where companies offer their stocks and (private) investors can buy and sell them. You do not have direct access to the stock exchange yourself, but you can trade via a bank or broker as BUX. You then choose which companies, and thus stocks, suit you. You can choose from diverse sectors; from tech stocks to e-mobility stocks. If you have bought one or more stocks, the stock is placed in your portfolio.

Selling stocks

In addition to buying stocks, it is possible to sell stocks. Naturally, only after you have bought them. You sell a stock when you think the moment is right. For example, to secure a good profit or because the company no longer fits your goals. You buy and sell stocks via different order types, such as a limit order or stop loss order.

What types of stocks are there?

Er bestaan verschillende soorten aandelen, elk met eigen rechten en voordelen. Je vindt ze hieronder:

• ‘Ordinary’ stocks: This is the standard variant. You get voting rights at stockholder meetings and share in the profit (dividend).
• Preferred stocks: With these stocks, you get priority over ordinary stockholders when dividend is paid out or a favourable position in the event of bankruptcy. You often have no voting rights.
• Cumulative preferred stocks: With these stocks, unpaid dividends are added up and still paid out as soon as there is a profit.
• Priority stocks (golden stock): These stocks give priority in control, for example, during important decisions within the company.
• Certificates of stocks: You have no voting rights, but you do have a right to dividend. These stocks are often used to separate control from ownership.
• Letter stocks: These are special types and are often used to distinguish certain groups of stockholders, with their own rights or restrictions.
• Non-voting stocks: You share in the profit and liquidation, and are invited to the stockholder meeting. You have no voting rights.
• Non-profit-sharing stocks: With these stocks, you do have voting rights, but you receive no or limited dividend.

How are the price and value of stocks determined?

The price of a stock is called the stock price. It is determined by the last transaction between a buyer and a seller. Supply and demand play a role in this. If many investors start buying, the price rises. If there is less interest, the price falls. The performance of the company also has an influence. Profit expectations or news can strengthen confidence or cause it to drop. But market trends and sentiment can sometimes push prices hard too.

Making profit with stocks: Capital gains and dividend

The profit or return when investing in stocks consists of two points: via capital gains (course profit) or dividend.

• Capital gains: You buy a stock for a certain price and sell it later for more. The difference between the purchase and sale price is your profit. Note: the price can also fall, meaning your investment loses value.
• Dividend: Some companies pay out (a portion of) their profit to stockholders in the form of dividend. This can be a cash amount (cash dividend) or extra stocks (stock dividend). Sometimes stockholders can choose (choice dividend).

The pros and cons of investing in stocks

Stocks are a smart way to start investing. But there are also disadvantages you need to be aware of.

The difference between stocks and ETFs

If you buy a stock? Then you invest in one company. That can work out well if the company grows, but the risk is also greater: if things go wrong, you can quickly lose value. An ETF (Exchange Traded Fund) works differently. With it, you buy a basket full of companies all at once. You don’t have to choose between company A or B – you simply get both (and often dozens or hundreds of others). This provides more diversification and stability. One stock that fluctuates a lot has much less impact on the whole. Do you want to invest in ETFs? You can do that at BUX.

Read more: ETFs or stocks: what suits you?

The difference between stocks and bonds

When you invest in stocks, you become a co-owner of a company. You often profit from capital gains or dividend and usually have voting rights. Stocks are often riskier than bonds.

When investing in bonds, you are not a co-owner, but you lend money to a company or government. Both can therefore enter into a kind of loan with you. You receive interest on your investment. The risk is generally lower than with stocks.

Investing in stocks: how do you do it?

When buying stocks, it is important to be well prepared. After all, you can lose your investment. Before you invest in stocks, it is wise to consider the following points:

• First check the financial health of the company. Look at, among other things, the revenue, profit, and growth, as well as the future expectations.
• Look at the size and value of the company via the market capitalisation (number of stocks x price per stock). This way, you know what kind of player you are dealing with.
• Analyse the historical performance of the stock using charts. This shows you how the stock has performed over the past period.
• Diversify your portfolio. Invest in different companies and markets (sectors) to reduce the risk of loss.
• Be aware of the consequences. Investing carries risks. You can lose part or all of your investment. Make sure you also have a financial buffer in addition to your investment.

Buying stocks via a stock fund

In addition to investing yourself, you can also invest in stocks via stock funds. These are investment funds that invest your money, along with that of others, in a mix of different companies. This means you don’t have to do anything yourself; the fund manager does the work for you. From investments to composing the fund. But beware: you also pay for that. The management fees of an actively managed fund are often high. In addition, a participation in an investment fund can often be traded a maximum of once a day.

Investing in stocks: you just do it yourself

Would you rather keep the reins in your own hands? Then you can participate in stock exchanges via BUX. With us, you will find a diverse range of fractional stocks. Would you prefer a hands-off approach? With the BUX Investment Plan, you can arrange it in a few steps via our app. Choose the amount you want to invest each month (starting from €10), select the stocks that suit you, and determine your goal. Investing is now automatic, every month, on the day you choose. This way, you can build your portfolio without worry.

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Investing involves risks. You can lose your investment.

All views, opinions, and analyses in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.