Investing 101: Beginner's Guide to Shares and Trading
For new investors, the first step to start investing could feel very daunting. There are many terms thrown around, and so many options as well. This post goes through the basics of how shares, pricing and trading works. Hopefully this smoothens the learning curve and encourages more people to take charge of investing as another personal finance tool!
If you're an experienced investor, feel free to look through. If you feel like the content would be suitable for friends and family who are less experienced, please share it with them :)
Shares
So first up, what are shares anyway? In essence, shares are fragments of a company. Hypothetically, let's say you were to co-found a company "A" with your long-time friend, and want to split the ownership 60-40 in your favor. The company can be represented by 100 shares, and then you can hold 60 of them in your name!
If you end up being less confident about the business, or if you require cash for other reasons, you could sell part of your stake in the future - let's say 23 shares, to a willing party (eg. external investor) at an agreeable price. This transaction would leave you with a lowered stake in the business, while your co-founder retains his stake.
Typically as a retail investor, your percentage ownership of a company would likely be in the <1% range, but the fundamental concept is still intact. Buying shares in a company equates to owning part of the company.
Prices
Just like your regular items that you buy at a restaurant, talking about buying/selling shares isn't complete without talking about the price!
Both restaurant food prices as well as stock prices obey the laws of demand and supply. However, unlike prices at the restaurant which generally do not change day to day, stock prices fluctuate more freely. The value of each share changes often in a matter of seconds or minutes, during trading hours. Over time, the daily chart can be formed by tracking the price changes over days.
But what determines the price? To understand the mechanism, we'll have to look at how queueing works.
This picture here shows "Market Depth", which is sometimes a paid feature. You don't necessarily need to use the MD information in your investments, but I'm bringing it up to show the pricing mechanism/concept.
To break things down into easier chunks, let's assume the role of a buyer. Let's say you're interested in owning part of Company A, 25 units for example.
The Ask column shows what prices and how many shares the sellers are willing to sell at. For example, [$111, 20] means that there are sellers (eg. shops) with 20 units in stock, selling at $111 per piece. There are other "shops" selling at $112 per piece, with a total of 15 units in stock.
As a buyer, you go shopping with your homework done. You're looking to buy 25 units, and you deem $111 as a decent price to buy. Thus, you approach the $111 store first. Since they only have 20 units in stock, you buy over all the available units, paying up $2,220.
However, you're still looking to get 5 more to reach your 25 units target. But you're not willing to pay more than $111! So what do you do? You stand in front of the $111 store, and wait for the shop to restock. Basically, you are waiting for more sellers to sell at your target price, to fulfill your request. This is what the MD looks like now.
Notice how the $111 entry is now on the left side? It now shows your 5 units of demand, instead of the 20 units of supply previously. The Last Done field has also been updated to $111, to reflect the last transaction.
Now let's reverse the situation, and assume the role of a seller. Maybe after spending the $2,220, you immediately got hit by a bicycle, and need to go for surgery :( So what do you do? First thing first, you remove your "buy" listing of 5 at $111.
Then, with the aim of getting rid of your 20 units of Company A as soon as possible, you go around looking for buyers. Hence, you go down the Bid queue, selling away 10 units at $109, 8 at $108 and another 2 at $107.
The buyers who were willing to pay $109 and $108 have now left the market, having bought the units over from you, and the $107 buyers are now reduced to 13. The Last Done has also dropped to $107, as a result of your latest transaction.
So this basically sums up how the basics of how share prices (Last Done) moves! You ended up buying 20 units at $111, and selling them all at a lower price, incurring a loss of $52. If you weren't so rushed for time, you could have joined the sell queue at $111 or higher and waited for people to buy them from you at a better price.
Where to Trade?
So now that you've learnt the basics of how shares work, and the way they're priced, the next question would naturally be... where you can go and buy some yourself?
Remember the shopping, stores and sellers analogy that we used earlier? To continue with that story, these stores will be located in shopping centres, which facilitate the flow of customers/suppliers, along with making sure that everyone's civilized and go by the rules!
These "shopping centres" are your trading platforms. They are electronic applications/websites that serve to facilitate the trading of shares and other financial products. As they are providing a "matchmaking" service, any transaction that you make through them will incur a platform/trading fee.
Traditionally, these fees can be prohibitively expensive to anyone investing in small amounts. $25 fees per trade was the standard, meaning that trading a value of $1,000 would already set you back by 2.5%.
Thankfully, with the entrance of new players into the investment/trading platform market, cheaper options have emerged. On top of lowered fees, these new players are looking to cement a position and grab market share by giving out incentives that are hard to ignore!
One such platform is moomoo, an investment platform powered by FUTU.
On top of low costs (compared to traditional brokers), setting up and funding the account takes less than a day (with DBS DDA). It also allows you to trade US, HK and SG markets immediately.
The platform is MAS licensed and is backed by Tencent.
More seasoned investors can utilize level 2 market data, options analysis, in-app charting tools and the margin account for their personal strategies as well!
The current promotion event ends 30th June, so why not sign up for free to give it a try, and get freebies in the process? Use my affiliate link now and complete these steps for rewards:
- Deposit $2,700 to get 1 free AAPL share (no trading required)
- Complete 5 trades to get 1 free NIO share
From my experience (funding with DBS account), cash withdrawal is typically processed by the next working day, so there's little to no lock in time!
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Anyway, I hope you enjoyed this post and found it informative! Feel free to share it with anyone who might be new to/or just started out with investing if you think it can be of help. If there's particular topics that you'd like me to cover, do drop me an email and I'll see if I can "fast track" it.
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Cheers,
InvestingNugget
