A complete guide to investing in the stock market

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If you want to invest in the stock market or stock indices, this guide will tell you everything you need to know about stock trading and the different online investment methods available to you. You can also consult our list of the best brokers to invest in the stock market, with up-to-date analysis of regulated brokers.

Many people, at some point in their lives, become curious about investing in the stock market, but most people quickly abandon the idea once they try to learn about the various methods of investing in the stock market.

The sheer amount of information available on this subject can be frightening, which is why we have decided to write this guide to investing in the stock market where we have compiled the basic knowledge that every investor (beginner or not) needs to have before investing money.

Different methods of stock market investment

In this guide you will find information on three ways to invest in the stock market online, as well as the best stock brokers available.

Different methods of stock market investment

In this guide you will find information on three ways to invest in the stock market online, as well as the best stock brokers available.

Investment methodWhat you need to know
Real actionsMore traditional method of investment. The investor comes to own the asset. Ideal for investors developing long-term strategies. It does not allow opening short positions.
Equity CFDsThe investor can invest in one or more companies but without owning the assets. Allows short positions to be opened and leverage to be used, making it suitable for the needs of short-term investors. High risk of capital loss.
CFDs on stock indicesThe investor can open positions in relation to the performance of a given stock index. It allows to open short positions and use leverage, so it can work in the short term. Risk of capital loss.

Main methods for investing in the stock market

Below is a full explanation of the details of each of these methods so that you can start planning your investments.

Investing in the stock market with real shares

If you want to invest in the stock market in a traditional way, then real or spot shares are the perfect choice. When a company is listed on the stock exchange, the value of its shares will vary depending on a multitude of variables. Among them we can highlight:

  • Quarterly results
  • Annual results
  • Purchases/sales of companies
  • Changes in the management team
  • News related to your sector
  • News related to the national or global economy

As a general rule, those who choose to invest in the stock market through equities are looking for long-term returns and not very high yields. Perhaps the main disadvantage of this method of stock market investment is the fact that it requires substantial capital to generate large returns. Even so, all types of investors can be found, both individuals and those with large investment portfolios.

Who wouldn’t want to invest in the next Netflix? Can you imagine what it would have been like to be one of the first to buy Amazon shares? If you think you have found the perfect candidate to dominate a booming sector in a few years time, then this option is perfect for you. If your prediction is wrong and the stocks in your portfolio don’t rise then your gains could turn into losses. Investment is like that.

For those who are interested in investing in the stock market with real shares, we recommend reading our guide to buying shares. In it you will find everything you need to know about this type of investment, but even so, below you will find a number of brokers that offer this type of instrument.

Equity CFD trading

Contracts for difference are financial instruments that allow you to trade assets without the need to purchase them. They also allow the opening of short positions, which gives us the possibility to trade in bear markets. It is also common to use leverage to trade with more capital than we have. So, are we only going to mention the advantages of investing with share CFDs? Nothing could be further from the truth.

By trading with leverage we can multiply our profits… but also our money loss. This greatly increases the risk inherent in trading, so you have to be very careful. In addition, CFDs are complex instruments and the financial authorities do not recommend their use for retail customers.

In fact, we also advise against investing in CFDs without making sure you have the necessary knowledge. We are talking about our capital, so it is better to be safe than sorry. To find out more about investing in the stock market through share CFDs you can consult our guide to buying shares.

Some brokers offering this type of investment are:

Stock index trading

Stock indices are instruments in the form of a numerical value and measure a segment of the stock market. Their values are an average of the prices of each of the stocks included in each index or “index constituents”. The performance of a stock index is determined by the change in value over a given period.

Its usefulness is related to the type of securities that make up each index. Thus, with a simple glance at a stock market index made up of the main Spanish companies such as the IBEX 35, we can get an idea of the evolution and state of the Spanish financial market or the price of the companies that form part of this index.

Investors can also use them as benchmarks to measure the performance of their equity funds and portfolios, as well as to measure changes in equity markets, economic sectors or different financial assets. In essence, indices are baskets of stocks belonging to an industry, region or economic sector.

Stock index CFD brokers

Types of stock indices

The three main categories establish the following indices:

By source of assets:

  • National indices: include assets of a country.
  • International indices: include assets from one or more countries.
  • Global indices: include assets from all over the world.

By asset type:

  • Equity indices: including equities.
  • Fixed-income indices: include bonds and notes of all types.
  • Commodity indices: oil, gold, silver, etc.

By type of companies:

  • Sectoral indices: include companies in a specific sector.
  • Cross-sectoral indices: include companies from different sectors.

Major stock market indices in the world

In the USA

  • Dow Jones Industrial Average or Dow Jones: Formed by a series of 30 US companies.
  • S&P 500: Comprising 500 of the largest companies on the NYSE and Nasdaq.
  • Nasdaq 100: Index composed of the 100 largest non-financial companies in the Nasdaq, mostly from the technology sector.

In Europe

  • Eurostoxx 50: The 50 companies with the largest capitalisation and trading volume in the eurozone.
  • FTSE 100: Formed by the top 100 companies on the London Stock Exchange and created at the time by the Financial Times newspaper (FTSE = Financial Times Stock Exchange).
  • DAX 30: Includes the top 30 companies on the Frankfurt Stock Exchange.
  • IBEX 35: Stock market index that includes the securities of the 35 companies with the highest capitalisation and liquidity in Spain.
  • CAC 40: Composed of the securities of the 40 most important companies on the French stock exchange.

In Asia

  • Nikkei 225: A total of 225 of the most liquid companies on the Japanese stock exchange in Tokyo.
  • SSE Composite Index: Main Chinese stock index composed of companies listed on the Shanghai Stock Exchange.
  • BSE Sensex: Comprising the top 30 companies on the Bombay Stock Exchange, India.
  • Hang Seng Index: Hong Kong stock index with a total of 33 companies.
  • KOSPI: Composed of all companies listed on the South Korean market.

In South America

  • MSCI Latin America: Stock index comprising 137 companies from Brazil, Colombia, Mexico, Chile and Peru.
  • IPC or Índice de Precios y Cotizaciones: Main Mexican index.
  • Bovespa: Brazilian stock market index comprising 50 of the companies listed on the Sao Paulo stock exchange.
  • Merval: The most important companies of the Buenos Aires Stock Exchange.
  • IGBC Bogota: Includes the 36 main companies in Colombia.
  • IBC Caracas: Stock index composed of 16 Venezuelan companies.
  • IPSA or Índice de Precio Selectivo de Acciones: Chile’s main index.
  • IGBVL: includes companies in Peru.

Global

  • S&P Global 100: Made up of 100 multinational companies from around the world.
  • MSCI World: Composed of more than 1,600 companies from 23 developed countries.
  • MSCI Emerging Markets: An index comprising more than 800 companies from developing countries.

Most traded stock indices by traders

As we have seen, there are countless stock market indices in the world, but online traders or investors have preferences and, therefore, not all of them are traded equally in terms of trading volume. Thus, it is easy to establish a ranking of the most traded stock indices:

  • Dow Jones: Also called the Dow Jones Industrial Average or simply “Dow”. As we have seen above, this is a stock market index made up of the 30 main companies in the United States of America. Its value is a combination of the prices of the stocks of these 30 companies. Its weight is considerable if we take into account that it represents about 25% of the total value of the US stock market.
  • The S&P 500: Portfolio comprising the 500 most traded stocks on the US stock market, of which the S&P 500 accounts for 80% of the total value. This is why this index is considered an ideal instrument to get an overview of the state of the US stock market at a glance. Its value depends on the capitalisation of the shares of the companies included in it.
  • Other widely traded indices are the Wilshire 5000 (made up of stocks of almost all companies listed on the US stock exchange) or the Nasdaq Composite (index of technology companies).
  • The IBEX 35: In Spain, one of the most traded indices is the “Iberian Index” or Ibex35. It includes the 35 largest companies based in Spain and Spanish-speaking traders trade this index very often. In it we can find textile companies such as Inditex, communication companies such as Telefónica or banks such as Santander or BBVA among others.
  • Also other European stock indices such as the FTSE 100, the DAX 30 or Asian indices such as the Nikkei 225 are often available on the trading platforms of leading online brokers for index trading.

Advantages of trading CFDs on stock indices

Very often, stock indices are chosen for trading CFDs or Contracts for Difference. The main advantages of trading indices with CFDs include the following:

  • By trading indices with CFDs, the online trader has the ability to trade on margin and to benefit from leverage. This means that the trader will be able to buy a number of contracts for difference with smaller accounts than would be necessary to trade each individual company included in the index.
  • Trading indices with CFDs allows traders to trade without paying commissions and clearing fees from the stock exchange of each index.
  • Online brokers that offer CFDs often also offer the ability to trade on very low spreads or even to buy and sell contracts for difference. When this is the case, traders will be able to profit regardless of how the market acts.
  • CFDs on stock indices cannot fall to zero.
  • Stock indices provide diversified exposure by reducing the risk of high volatility.
  • As it is possible to trade indices 24 hours a day, the need to use guaranteed stops is reduced.

Trading contracts for difference offers opportunities for large profits but also the possibility of losing the entire investment in the event of negative trading results. Therefore, no trader should invest more than he is prepared to lose.

Summary of methods for investing in the stock market

As we have seen in the previous points, when it comes to investing in the stock market there are various options available to us and all of them have unique characteristics that we must take into account when choosing the method that best suits our investment strategy. Investing in the stock market can generate profits but also losses and this must always be taken into account.

Stock indices are a statistical representation of particular portions of stock markets. They can be calculated in various ways and are used as indicators of market behaviour or market conditions. To trade them we will have to opt for CFDs.

It is possible to trade stock indices through these contracts, which offers the possibility of multiplying profits but also carries the risk of losing the total investment. Major stock indices are often available on the platforms of online brokers.

When it comes to investing in the stock market with shares, we can either buy real shares or choose to trade shares with CFDs. Whichever option we choose, we will have to choose a regulated broker that allows us to invest in the stock market in a safe and regulated way. Don’t forget to leave your comments below.

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