Beginner's Guide to Stock Investment: Understanding the Market from Scratch

Many people are both curious and skeptical about stock investing. Some see it as speculation or gambling, while others view it as a means of rational asset allocation. Neither perspective is entirely accurate. To truly profit from stock investing, you must first discard stereotypes and establish a correct cognitive framework.

What Is the Essence of Stock Investing

To understand stock investing, you first need to clarify the definition of stocks themselves.

Stocks are certificates of company shares. When a company needs financing, it divides itself into several shares for sale; each certificate represents one share of stock. Holding stocks means you become a shareholder of the company, owning a proportional part of the company’s ownership.

This ownership is reflected in two aspects: voting rights and dividend rights. For example, if you hold 2% of a listed company’s stock, legally, you own 2% of the company’s assets and have 2% of the voting rights. Even if your share is tiny (like 0.01%), this right still exists.

However, it is important to note that stocks themselves have no intrinsic utility value. They represent an option on the company’s future earnings. When the company performs well and profits grow, the stock’s value increases; conversely, it decreases if performance declines.

The returns from stock investing come from two channels: one is dividends paid by the company, and the other is the capital gains from price appreciation.

Do Dividends Really Make Investors Profitable

Many beginners fantasize about dividends, believing that more dividends mean better returns. But the reality is different.

For example: a company with a market value of 10 billion yuan issues 10 billion shares at 1 yuan each. The company earns 2 billion yuan profit this year, and its market value rises to 12 billion yuan, with the stock price automatically increasing to 1.2 yuan.

If the company decides to distribute the 2 billion profit as dividends, paying 0.2 yuan per share, the market value returns to 10 billion yuan, and the stock price drops back to 1 yuan. From your account, the increase in value on paper is simply converted from stock form to cash form. Essentially, whether or not dividends are paid has little impact on investment returns.

What truly makes stock investors profitable is the company’s long-term operational results reflected in the growth of the stock price.

What Truly Determines Stock Prices

Many say, “Company profits lead to rises, scandals lead to falls,” but this is a one-sided understanding.

Stock prices are determined by supply and demand, which is the most fundamental market law.

When a stock price is quoted at 10 yuan, that is the latest transaction price. The trading platform displays buy and sell orders at various prices. If someone places a large buy order at 10.5 yuan, the price will be pushed up to 10.5 yuan. Conversely, if there are more sell orders, the price will fall.

However, supply and demand are influenced by many factors:

• Company fundamentals (profitability, growth potential)
• Macroeconomic conditions
• Industry outlook
• Investor sentiment and expectations
• Capital flows (major shareholders reducing holdings, institutional investors entering, etc.)

For example, a company with excellent performance should rise, but if major shareholders sell large amounts of stock due to urgent need for funds, the stock price may fall. This is a mismatch between expectations and reality.

Therefore, what truly drives stock prices is the collective expectation of market participants, which ultimately reflects in supply and demand through trading behavior.

Different Types of Stocks and Trading Markets

Stock investing is not limited to just one method.

By stock type:

• Common stocks: The most common type, holders have full shareholder rights—participate in voting and receive dividends.
• Preferred stocks: Higher yields but riskier, do not participate in voting rights, and are akin to having fixed or floating income commitments.

By market:

• Primary market: The market for unlisted company shares, with very high entry barriers, mainly involving venture capital institutions.
• Secondary market: The market for listed company stocks, which is the main arena for ordinary investors.

Essential Trading Rules for Beginners

Before entering stock investing, understanding basic trading rules is crucial.

Different markets have vastly different rules. Some adopt T+2 settlement (you buy today, you can sell only after two days), others adopt T+0 (you can sell on the same day). Some markets impose daily price limits (e.g., 10%), others have none. Trading hours, minimum trading units, transaction costs, and other details vary widely.

Investors must clarify these details before entering, or they risk losing money.

Three Different Approaches to Stock Investing

Different investors should choose strategies suited to their circumstances and market understanding.

Strategy 1: Long-term value investing

This is the most stable approach. Investors thoroughly research a company’s financial data, competitiveness, industry position, etc., and select companies with strong long-term profitability and growth potential, then buy and hold for the long term.

This approach requires sufficient capital and patience. But in the long run, as long as you pick the right companies, returns can be substantial. Because a company’s profitability ultimately boosts its market value, and growth in market value is directly reflected in stock prices.

Strategy 2: Swing trading

Swing trading involves seeking buy and sell opportunities during different phases of stock price movements. Buy when the stock is at a cyclical low, sell at a high, and profit from the swing.

This requires strong trend analysis skills. The stock market always has ups and downs; the key is to grasp the rhythm and follow the trend. Usually, traders focus on stocks in an upward channel, avoiding chasing after stocks that have already surged significantly.

Strategy 3: Leverage trading

For investors with limited capital who want to accumulate wealth quickly, long-term investing may be inefficient. They can consider using derivatives like contracts for difference (CFDs) to leverage their positions.

Leverage trading allows investors to control larger positions with small amounts of capital. Compared to traditional stock trading, tools like CFDs offer greater flexibility—both long and short positions, T+0 trading (multiple entries and exits within the same day), and coverage of various assets (stock indices, commodities, cryptocurrencies, etc.).

But leverage is a double-edged sword; it amplifies gains but also risks. If your prediction is wrong, losses can be rapid. Beginners must exercise caution.

How Beginners Can Start Stock Investing

If you decide to enter the stock market, here are the essential steps:

Step 1: Learn the basics

Financial knowledge, trading psychology, market analysis methods—all need to be studied. But one point to emphasize: do not overly rely on technical analysis. Many popular technical analysis books oversimplify. The true value of technical analysis lies in personal practice and research, not blindly copying others’ methods.

The reason is simple: if the stock market is a zero-sum game (market value remains unchanged in the short term), and everyone reads the same technical analysis classics, who will be the one to profit?

Step 2: Gain experience through simulation

Do not jump straight into real money trading. First, practice on simulation platforms to familiarize yourself with trading interfaces, understand price fluctuations, and test your psychological resilience. This is the fastest way to learn.

Step 3: Start small with real trading

When you feel prepared, begin with small amounts of real capital. Every real trade will teach you things that cannot be conveyed through books.

Step 4: Constantly review and optimize

Keep records of every trade, analyze successes and failures. Stock investing is like “playing cards”; your opponents are institutional investors with large capital and experienced traders. Only through continuous learning and evolution can you survive in this market.

Key Takeaways on Stock Investing

For beginners, remember these points:

1. Stocks are certificates of company ownership and dividend rights, but have no intrinsic utility value.
2. Investment returns come from dividends and stock price appreciation.
3. Stock prices are determined by supply and demand, which are influenced by many factors.
4. Long-term value investing, swing trading, and leverage trading each have pros and cons; choosing the right approach is most important.
5. Successful stock investors must be lifelong learners, with good vision, judgment, and psychological resilience.

The world of stock investing is full of opportunities and pitfalls. Ultimately, those who make money are not necessarily those taking the greatest risks, but those with patience and a willingness to learn.