Starting from Zero: Essential Market Truths Every Beginner Must Know About Investing in Stocks

Many people have cognitive biases regarding stock investing. Some see it as reckless speculation, while others view it as a rational decision based on company value assessment. But the real world of stock investing is far more complex than imagined. Understanding how the stock market operates is crucial for beginners.

What Is the Essence of Stocks

Stocks are certificates of ownership in a company. When you buy shares of a company, you essentially become a shareholder, owning a proportional part of the company’s equity.

Even if you hold only 0.01% of the company’s shares, you have 0.01% voting rights (in a market with equal voting rights for all shares). This means at the shareholders’ meeting, you can express opinions on major company matters and participate in voting.

There are two sources of returns from stock investing: one is dividends paid by the company, and the other is capital gains from buying low and selling high. But earning these returns depends on a correct understanding of the market.

True Factors That Determine Stock Prices

Many people simply say “If the company profits, the stock price goes up; if it loses money, the stock price falls,” which masks the market’s true nature. Stock prices are ultimately determined by supply and demand.

Imagine this scenario: a stock’s current price is 10 yuan per share. This price is actually the last transaction price. In the five-level order book on the exchange, sellers list at 11 yuan per share for 500 shares; buyers list at 9.5 yuan per share. When you buy all 500 shares at 11 yuan, the real-time stock price becomes 11 yuan, which is an increase.

But what influences people’s willingness to buy or sell? — Expectations and psychology.

Good company performance, favorable national policies, promising industry prospects… all these can influence investors’ enthusiasm, thereby changing supply and demand. But sometimes good news and bad news conflict. For example, a company may be profitable, but if major shareholders are desperately selling shares for urgent cash needs, the stock price may still fall.

Ultimately, what truly affects stock prices are investors’ expectations, and these expectations are reflected in supply and demand.

What Does Holding Stocks Mean

Many beginners mistakenly think that once they buy stocks, they must hold forever. In reality, stocks are liquid — you can sell them on the secondary market at any time.

Stocks represent a part of the company’s ownership. For example, if a company has a total market value of 10 billion yuan, issues 1 billion shares, and the share price is 10 yuan, then if the company later earns 2 billion yuan, increasing its market value to 12 billion yuan, the share price will rise to 12 yuan.

Regarding dividends, an important understanding is: Whether the company pays dividends or not has little impact on the investor’s account value. Dividends are essentially converting part of the company’s profits from stock form into cash. If you need to realize gains, you can simply sell your shares; there’s no need to wait for dividends.

The True Value of the Stock Market

The stock market was not established to satisfy speculators’ enthusiasm but to serve the real economy. Companies raise funds by issuing stocks to expand production and promote innovation. Investors profit through buying and selling stocks. This is a form of direct financing, more efficient than indirect financing, and does not increase the company’s debt burden.

The more developed a country’s stock market, the more dynamic its economy usually is. This is a fundamental principle in economics.

How Should Beginners Start Investing in Stocks

Understand Trading Rules

Different regions have different rules for their stock markets. For example, a T+2 trading system means stocks bought today can only be sold after two days; daily price limits are usually 10% to prevent sharp fluctuations. Also, understand minimum trading units and trading hours in advance.

Recognize Important Market Indices

• Regional Blue-Chip Index (e.g., Taiwan 50 Index): selects 50 high-quality listed companies representing overall market performance
• S&P 500 Index: a collection of 500 large US companies, with relatively moderate volatility
• Nasdaq Index: mainly technology companies, higher risk but greater growth potential
• Dow Jones Industrial Average: representing 30 of the most well-known US companies, the most historic US stock index

Choose an Investment Approach That Suits You

Option 1: Passive Investment — Buying ETFs

Suitable for complete beginners. ETF companies select and bundle stocks for you; you buy fund shares rather than direct stock holdings. Advantages include risk diversification and ease; disadvantages include management fees.

Option 2: Long-term Value Investing

Research companies’ financial statements, operational capabilities, industry position, and other fundamentals to select undervalued quality companies for long-term holding. This requires some financial analysis skills and patience. Metrics like P/E ratio and P/B ratio can help assess whether a company is undervalued.

Option 3: Swing Trading

Buy at the stage of stock price lows and sell at peaks to profit from price fluctuations. This method requires keen trend analysis and a deeper understanding of market volatility.

Option 4: Leverage Trading

For beginners with limited capital, derivatives like contracts for difference (CFDs) offer opportunities to amplify gains. This approach is flexible, with T+0 trading allowing entry and exit at any time, but also involves higher risks.

Continuous Learning Is Essential

The stock market is not just a “zero-sum game.” In the long run, as long as companies continue to profit, their market value and stock prices will increase. But in the short term, the market is filled with emotions and expectations.

As a beginner, you need to learn:

• Basic financial knowledge (how to read financial statements)
• Trading psychology (how to control greed and fear)
• Trend analysis (when to enter and exit)
• Risk management (how to allocate funds reasonably)

A classic analogy: the stock market is like a “poker game” with many experts, where institutions and experienced traders are the opponents. To win as a novice, you must continuously learn to improve your competitiveness.

Risks of Investing in Stocks

• Technical analysis is not a magic bullet; many popular technical analysis books overhype its effectiveness
• Short-term irrational market fluctuations are normal; emotions can overwhelm fundamentals
• Leverage trading can lead to rapid losses; beginners should be cautious
• Overtrading increases transaction costs and reduces actual returns
• Concentrating holdings in a single stock carries higher risk than diversified investments

Summary

Investing in stocks requires understanding some basic facts: stocks are certificates of ownership in a company, stock prices are determined by supply and demand, and the stock market serves the financing needs of the real economy. Beginners can start with passive investment (buying ETFs) to lower the difficulty, and as knowledge accumulates, try long-term value investing or swing trading. Regardless of the approach, continuous learning and risk awareness are the keys to success.

Remember: in the stock market, those who truly make money are always those who are prepared, disciplined, and patient investors.