Initially, investing in the stock market might seem like a financial expert's game. However, when you understand a little more about how the markets work, and following these basic tips, anyone with even a little capital can start to invest in the stock market.

What is the stock market and how does it work?

The stock market is a market on which marketable securities, such as shares, currencies, bonds and other more complex products are traded. The stock market is structured around the principle of supply and demand: if there is significant demand for a share, its price increases; if everybody wants to sell their shares in a company and not many buyers are interested, the share price falls. Companies raise funding on the stock market and, in turn, investors can become shareholders in a company.

Before investing

To get started, you need to bear in mind that investing is not the same as saving: investing involves assuming a certain level of risk, in the hope that your money generates a return. Therefore, our first tip would be to discover what your investor profile is before you start investing. To find out your profile, you need to:

  • Set your financial targets. Investing in the stock market is not just about buying shares; first of all, you need to decide what your investment goal is. Do you want to earn a little extra regular income? Buy a house or car? Pay for your children's education? Create a nest egg for your retirement? Everybody's financial goals are different and they will vary depending on your circumstances. So now is the time to define your goals and establish a realistic time frame for achieving them.
  • Calculate your financial availability. What is your income? How much do you have saved? How much of this can you put towards an investment without compromising your economic stability? To this end, simply calculate how much of your income you need to cover your day-to-day expenses and set aside a percentage for contingencies; you can dedicate whatever is left over to your investment. And if you have any outstanding debts that accrue a high rate of interest, you should pay these off before starting to invest.
  • Define your risk tolerance. Are you conservative or willing to take a risk with your money? To find out, you need to take two perspectives into consideration: one goal is associated with your financial ability to assume losses generated on an investment; another is psychological, which entails thinking about how you will be personally affected by having to assume these losses.

Choose a broker you can trust

Having defined all these factors (goals, available capital, risk profile), it's time to look for a broker who will be responsible for investing in the stock market for you, with your authorisation. They must be authorised by the National Securities Market Commission to offer investment services. To make sure they are authorised, you can consult the public registers of the CNMV, where you can also find out whether the company in question has been issued a warning by the supervisory authorities.

To process investment orders on behalf of a customer, the broker provides investment services consisting of the reception and transmission or execution of orders. An advisory investment service may or not be provided (advised or non-advised sale). To this end, assessing a customer's suitability is mandatory (performing a suitability test or via any other means).

  • Your knowledge and experience of types of services, transactions and financial instruments available, your education and your profession
  • Your financial situation: your income, your assets, the recurring financial commitments you have to meet, etc.
  • Your investment goals: the time horizon of your investment, the reason for investing and the risk and maximum losses you are willing to assume.

Based on this information, the broker can recommend the investment product that is best suited to you.

What should you invest in?

You might already have a good idea of the product you want to invest your money in, for example, shares in a company that periodically distributes dividends. When it comes to non-complex products, i.e. products that can be understood by the average investor, the broker may simply execute the purchase order without having to check whether the product is suited to you.

If you are a newcomer to investing, you should ask your broker for the information in writing, so you can analyse the characteristics of the product offered in depth before contracting it and making sure that it adapts to your needs. Limiting your investments exclusively to the products that are suited to the risk level you are willing to assume (the greater the complexity, the greater the risk) is recommended.

Monitor and diversify

Having invested your money in the stock market, you must keep track of how your investment is performing, seeing how the company you have purchased shares in is performing, whether the expected returns are being met, whether the risks have increased and even whether the agreed fees are being charged. Furthermore, you should keep up to date via specialist media, the company's website, or the relevant information section on the CNMV website.

One basic tip, which is valid for everybody investing in the stock market, is diversifying your portfolio and making investments with a different time horizon.

In summary, when you start to invest in the stock market you should bear in mind that this is not a game of chance. The decisions you make must be well thought out, not influenced by what is fashionable or your impulses and bearing in mind that there are no returns without a little risk.

This information is provided solely for informational purposes and its content should not be considered an investment recommendation or any form of advice.

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