Beginner's Guide to Investing in Stocks? First, Clarify These Five Questions

Many people feel intimidated when they hear “investing in stocks,” thinking it’s only for gamblers. But in reality, stocks are just a certificate of rights; the key is how you use it.

What exactly are stocks?

Imagine you and your friends open a restaurant together. Business is good, and you want to expand. One way is to get a loan from the bank (indirect financing), another is to divide the restaurant into 100 shares and sell them to 50 people, each buying 2 shares (direct financing—stocks). Buyers of stocks become shareholders, owning a part of the restaurant, with the right to attend shareholder meetings and share profits.

Essentially, investing in stocks means purchasing a part of a company’s ownership.

Owning 1% of a company means you own 1% of its assets and have 1% of the voting rights. Sounds good, right? The problem is, this right is only truly realized if the company goes bankrupt and liquidates. If the company fails, creditors get paid first, employees receive severance, and only then do shareholders get a share. In most cases, common shareholders can recover only a small fraction.

So don’t expect to get rich overnight. There are mainly two ways to make money from stocks:

First, profit from price differences—buy low, sell high; second, dividends—when the company profits, it periodically distributes a portion to shareholders. But in reality, many profitable companies do not pay dividends. Why? Because for shareholders, it’s not very meaningful—if a company earns 100 million, the stock value in your account rises; whether dividends are paid or not just turns this virtual gain into cash, with no change in total.

What exactly determines stock prices?

Ask a retail investor “why do stock prices go up or down,” and most will say “company profits increase the price, losses decrease it.” This answer sounds reasonable but misses the point.

The real determinant of stock prices is supply and demand.

The $10 per share you see on your trading app is actually the last transaction price. Below is the buy order zone (people wanting to buy and quantities), above is the sell order zone (people wanting to sell and quantities). Every buy or sell pushes the price to change.

For example: Someone places an order to sell 500 shares at $10.5. If you buy all at once, the transaction price becomes $10.5. The stock price rises. Conversely, if you sell aggressively, it can lower the price.

Why do we say “company profits lead to rising stock prices”? Because good news makes investors optimistic about the company, expectations become more positive, more buyers want to buy, and their buy orders’ prices go higher. The opposite is also true. But sometimes, it backfires—if a company is profitable but major shareholders need cash, they sell off shares rapidly, and the stock price drops.

In summary: regardless of news or expectations, ultimately, stock prices are determined by the balance of buying and selling forces, which then change the price.

How can ordinary people invest in stocks?

Currently, there are a few paths:

First: Buy mutual funds (the laziest choice)

Don’t want to pick stocks yourself? Have professionals do it for you. Invest your money in a fund, and you only need to buy fund units. The benefit is risk diversification; the downside is management fees, and returns are average. Suitable for those who don’t want to understand anything.

Second: Direct stock purchase

Two categories. One is stocks of companies not yet listed, which are high risk and high reward, difficult for retail investors to access. The other is stocks already listed and traded, which is the majority choice. For example, Taiwan has 944 listed companies, most of which are well-managed.

Stocks are also divided into common and preferred shares. Common shares give you rights as a shareholder—dividends and voting. Preferred shares are more like bonds—fixed income, no voting rights, lower risk but also lower returns.

Third: Leveraged trading (high risk, high reward)

If you don’t want to buy stocks directly, you can trade derivatives like CFDs. Use less money to control more assets, potentially doubling your assets in a day, but losses can also double. Requires strong risk tolerance.

Game rules you need to know before trading

Each market has different rules. Take Taiwan’s stock market as an example:

• T+2 trading rule: Stocks bought today can only be sold after two more trading days
• Price fluctuation limit: Daily price change cannot exceed 10%
• Trading hours: 9:00 AM to 1:30 PM
• Minimum unit: 1,000 shares per lot; cannot trade in fractions
• Index reference: Taiwan 50 Index is a barometer of the overall market trend

The US stock market rules are different—no daily fluctuation limit, T+0 trading, more flexible. To invest in any market, you must first understand these rules.

Common pitfalls for beginners investing in stocks

Pitfall 1: Superstitious belief in technical analysis

There are countless best-selling books on “certain technical analysis secrets.” But 90% of these are nonsense. Why? Imagine four people playing mahjong; the total money on the table is fixed (market value doesn’t change). If everyone reads the same technical analysis book and believes they will always win, who loses? Only when new funds enter and company value increases does market value truly grow. In the short term, technical analysis may help, but relying on it as a lifeline is naive.

Pitfall 2: Insufficient capital and rushing to get rich quick

Many young people want to accumulate their first pot of gold through stocks, but long-term efficiency is low. The result is a mindset shift—from investing to speculating—and ending up losing everything. You need either patience for long-term investing or enough capital; if neither, then keep saving or consider high leverage (with greater risk).

Pitfall 3: Following the crowd blindly

“Some company is going public,” “Some project is about to take off”—such news is everywhere. But once the news is public, smart money has already moved in; you’re just catching the last wave. Making money by chasing rumors is a dead end.

How exactly should you invest in stocks?

Strategy 1: Value investing (long-term, requires capital)

Study a company’s financial data, calculate its intrinsic value, and only buy undervalued companies for long-term holding. This method is effective but requires: 1) sufficient capital; 2) patience; 3) knowledge.

The Price-to-Earnings ratio (PE) is an important indicator—if a company’s PE is 10, it means the market value is 10 billion, with annual net profit of 1 billion; it would take 10 years to recover the investment through profits. The lower the PE, the cheaper the stock.

Strategy 2: Swing trading (mid-term, requires insight)

Instead of long-term holding, buy at low points and sell at high points to profit from swings. This requires a good sense of industry and market rhythm. Identify stocks in an upward trend, get in early, and exit at the top. Sounds easy, but in practice, most people get caught or chase highs.

Strategy 3: Leverage trading (short-term, requires mental toughness)

Use small capital to control large positions, aiming for short-term gains from volatility. But the cost is risk multiplied. Your assets could double in a day or lose everything in a day. Unless you can truly manage risks, avoid it.

Essential knowledge areas for beginners

Investing in stocks is not luck; it requires systematic learning:

• Financial knowledge: Learn to read financial statements, understand profitability, cash flow, debt ratios, etc.
• Trading psychology: The biggest enemy in the stock market is not the market but yourself. Greed and fear can ruin all plans.
• Trend analysis: Understand economic cycles, industry cycles, and recognize when opportunities arise.
• Risk management: No matter how good the strategy, always set stop-losses. Never go all-in.

Final advice: Investing in stocks is like playing mahjong—you’re up against the house with deep pockets and experienced players. As a beginner, the only way out is continuous learning and improvement, using knowledge to compensate for lack of capital and experience.