Strategic Guide to Investing in Stocks: A 5-Phase Approach

Introduction: Why Stocks Remain the Best Option

In the current financial markets context, buying stocks continues to be one of the smartest decisions any investor seeking long-term profitability can make. The democratization of access via the internet and the reduction of entry barriers have enabled people with minimal capital (from $100 or $200) to participate in global stock markets without leaving home.

Stock intermediaries have intensified their competition to attract retail investors, resulting in more favorable conditions: reduced commissions, competitive spreads, and increasingly accessible platforms. However, successful participation in the stock market requires more than just opening an account. It needs a clear methodology, a defined strategy, and rigorous discipline.

Phase 1: Build Your Investor Profile

Before knowing how to buy stocks, you need to understand yourself. Each investor has unique characteristics that will determine their path to success or failure. This self-exploration is based on three pillars:

Your Financial Goals

Why do you want to invest in the stock market? Answers vary significantly among individuals. Some seek to monetize their savings accumulated over years. Others aim to generate passive income streams through dividends. Some want to finance their present or future consumption, while many focus on building a safety cushion for retirement.

Without clarity on these goals, it is almost impossible to design a strategy that leads you toward them. Goals act as a compass: guiding each purchase decision, each risk level assumed, and each holding period.

Your Time Horizon

The time available to hold your investments is critical. Age plays a decisive role here. A 25-year-old investor has the luxury of investing capital for 30, 40 years or more; while someone nearing retirement has a limited timeframe.

Horizons are classified as: long-term (10 years or more), medium-term (5 to 10 years), and short-term (less than 5 years). This factor profoundly influences which assets you select, how much volatility you can tolerate, and what returns you can realistically expect.

Your Risk Tolerance Capacity

How much money are you genuinely willing to lose? This question separates realistic investors from naive optimists. Some may accept 100% losses in pursuit of extraordinary returns. Others cannot tolerate even small fluctuations in their savings.

Between these extremes, there are multiple intermediate levels. Your risk tolerance should reflect both your financial capabilities and your emotional balance. An investor cannot afford to make emotional decisions when facing losses.

Phase 2: Define Your Investment Strategy

Once you know your profile, you need to articulate a strategy. It is based on three binary dimensions:

Investment Versus Speculation

Investment involves allocating capital to assets over prolonged periods to capture sustained economic benefits. The most traditional approach seeks stocks that pay dividends, holding them almost permanently in the portfolio and reinvesting earnings to leverage compound interest.

Speculation, on the other hand, aims to profit from the difference between purchase and sale prices. It is oriented toward the short or medium term, seeking to capitalize on quick movements. It is more exciting but also riskier.

Both approaches are valid. The key is choosing the one that genuinely aligns with your profile.

Active Versus Passive Management

Active management requires you to select and manage your investments personally. It demands deep knowledge, dedicated time, and excellent emotional discipline. It’s not for everyone.

Alternatively, you can opt for professionally managed instruments: index funds, ETFs, Robo Advisors, or managed accounts. These options require less time and specialized knowledge, although they typically offer more modest returns.

Diversification Versus Concentration

Diversification spreads your assets across multiple stocks and asset classes, reducing risk but also limiting potential returns. It is suitable for investors with low or medium risk tolerance.

Concentration involves making significant bets on few assets. It amplifies both gains and losses. Only suitable for experienced investors with high risk tolerance.

Phase 3: Allocate Your Investment Capital

Once your strategy is defined, it’s time to decide how much capital you will allocate.

Fundamental Principles of Allocation

Invest only money you don’t need for other purposes and that you can afford to lose. Never borrow money to invest in the stock market. Do not use your emergency funds or savings for expenses.

Before committing real capital, practice your strategy on demo accounts. Only when you demonstrate consistent gains should you allocate real funds.

Capital Requirements

If you buy stocks outright, you typically need a minimum of $5,000, depending on the chosen intermediary. But this is not accessible to everyone.

Alternatively, there are instruments like Contracts for Difference (CFD) that operate with leverage. This allows trading with fractions of the required capital, though at the cost of higher risk. With leverage, you could start with significantly less capital.

Risk Management to Preserve Capital

Capital preservation is fundamental. Without money, you cannot participate in markets. Your risk management strategy must be your priority:

• Define your risk exposure per trade. For speculators, the classic rule is not to risk more than 1%-3% of total capital per trade.
• Always use stop-loss orders to limit losses.
• Implement a monthly overall management plan: set how much you are willing to lose in a month, then derive weekly, daily, and per-trade maximums.

Phase 4: Choose a Reliable Intermediary

The platform you select will be your gateway to the markets. This decision requires careful analysis.

Selection Criteria

First, verify that the intermediary operates in your country. Second, examine five key aspects:

Regulation and reputation: Look for platforms registered in recognized jurisdictions. Review specialized reviews and awards received.

Commission structure: Commissions are your main direct costs. Minimize them to avoid reducing potential gains. Seek options with competitive spreads.

Product variety: Ensure the intermediary offers the assets your strategy contemplates.

Platform quality: If you speculate short-term, you need robust, intuitive, and fast charting tools. For long-term investors, requirements are lower.

Deposit and withdrawal methods: Prefer intermediaries offering multiple options: cards, transfers, digital platforms. Verify that withdrawal methods are equivalent to deposit ones.

Phase 5: Build and Manage Your Portfolio

With your strategy clear and an intermediary selected, it’s time to build your stock portfolio.

Analysis Tools

Two fundamental disciplines guide stock selection:

Fundamental analysis examines companies’ financial health, aiming to identify intrinsic values versus market prices. It seeks undervalued assets trading significantly below their true value.

Technical analysis studies historical charts to anticipate future trends. It looks for assets at the start of significant bullish or bearish movements.

Most successful investors combine both approaches: fundamental analysis answers “what to buy,” while technical analysis answers “when to do it.”

Current Sectors and Opportunities

Stock markets are organized into 11 main economic sectors subdivided into multiple industries and sub-industries. This offers enormous opportunities.

In 2023, certain sectors have shown particular dynamism. The technology sector has experienced notable recoveries. The Information Technology S&P 500 index grew 22.7% until the end of April. Within this sector, companies like Microsoft experienced spectacular increases of 35.8% in just four months.

In European markets like the Spanish IBEX-35, growth has been respectable (12.7% since January), mainly driven by banking stocks like Santander and BBVA.

Keys to Selecting the Best Stocks

• Identify which phase of the economic cycle the markets where the target company operates are in. Then determine how its sector correlates with that phase. The Beta coefficient can provide valuable clues.

• Consider how movements in interest rates will affect valuation. Rising rates especially pressure growth and tech stocks. Falling rates have the opposite effect.

• Monitor earnings per share trend. This metric reveals whether a company generates surpluses for shareholders. Growing earnings typically drive prices upward.

Trading Systems for Active Operators

For those who trade actively, especially short-term speculators, developing a well-defined trading system is essential. This system establishes specific rules: when to open positions, how to manage them, and when to close.

A good system must generate a positive expected value: over a series of trades, your gains should exceed your losses.

This expectation depends mainly on two factors: your win percentage (how many winning trades you have) and your Risk/Reward ratio (how much you gain versus how much you risk).

For example, with a Risk/Reward ratio of 0.82 (gain $0.82 for every $1 you risk), you need at least 54.89% accuracy to be profitable. But with a 4:1 ratio, you could be profitable with just 20% accuracy.

However, high ratios are less probable than low ratios. The reality of markets is that the shorter the expected price move, the more likely to hit. That’s why designing a system aligned with your psychological profile is crucial.

Leverage: Amplifier of Gains and Losses

CFDs are often traded with leverage, meaning you deposit only a fraction (initial margin) of the capital required to control a larger position. This amplifies both gains and losses.

For example, with $3,500 and 10x leverage, you could control positions worth $35,000. This exponentially increases your return potential but also your risk of loss.

Leverage must be used with extreme caution. Many novice traders overuse it and quickly lose their capital.

Final Reflections for 2023 and Beyond

After going through these five phases, you already have a robust methodology to know how to buy stocks in the stock exchange professionally. The key is to follow this process systematically rather than acting on intuition or emotion.

The current market landscape presents a mixed outlook. Analysts from major institutions estimate that certain indices like the S&P 500 may be overvalued and face significant corrections. Others anticipate bullish movements toward levels near 4,600 points.

The reality is that as a retail investor, you should not try to predict the market. Instead, you should capitalize on significant movements, whether bullish or bearish. This requires discipline, patience, and strict adherence to your system.

With the methodology presented here, you have all the tools to start your journey in the stock markets with higher probabilities of success.