What you need to know to trade on the stock market

The idea of trading on the stock market is often associated with clichés created by movies, where every moment is absolutely dramatic and you can make millions in a few seconds without much effort.

Indeed, trading in the stock market can be a profitable investment with thrilling fluctuations, but it is crucial to acknowledge that it operates in a regulated and supervised environment with well-defined rules. Like any investment, it demands effort and knowledge.

So, before you start investing, you need to know some basics about how the stock market works.

Companies turn to the stock market for financing. For those who invest, the shares and participations of these companies are the most common and simplest ways to seek profitability.

When you buy shares in a company, you become part of that company, which gives you rights, such as voting at general meetings or receiving dividends.

The value of shares fluctuates daily and is often dependent on external factors that you cannot control.

Imagine, for instance, that you have purchased shares in a pharmaceutical company that launches a cure for a disease. As a result, the value of your shares would rise, allowing you to make a profit upon selling. Conversely, if a product from that company leads to health issues, the shares' value will decline.

With bonds, there is a risk that the company may be unable to repay the debt, which means the investor may not receive the money they lent.

There are also other more complex financial products - such as ETF, CFF or Futures - that require a higher level of knowledge and are not advisable for those who are still trying to understand how the market works.

Trading on the stock market is not something you can start doing straight away, because as a private investor you cannot simply go to a website and buy and sell stocks.

Products listed on the stock exchange are traded through financial intermediaries, such as banks, brokers or asset managers. They are the ones who will buy or sell, fulfilling your orders.

Only intermediaries authorized by the Bank of Portugal and the Portuguese Securities Market Commission (CMVM) are permitted to engage in the activity, and anyone not registered cannot conduct such operations.

The CMVM not only supervises the securities markets but, through the Investor Relations Department (DRI), offers guidance on rights and verifies whether a person or company is authorized to operate in the realm of financial intermediation.

However, your Bank or brokerage firm has an obligation to inform you and clarify all your questions about financial products.

Trading on the stock market is not the same as having your money in a term deposit. That is, it is not guaranteed that you can withdraw the amount you have invested whenever you want.

You may gain or, in case of devaluation, lose some or all of the money you invested. Losses are greatest when investors start selling their shares for less than they bought them for, on the first sign of devaluation.

The value of shares is not fixed, and throughout the trading hours of the stock market, there are fluctuations influenced not only by the company's internal developments, such as new products or positive financial results, but also by external factors. Events like an epidemic, such as Covid-19, or fluctuations in oil prices can impact a company's rise or fall in value.

Indeed, a set of shares currently valued at €100 may see its value change in just a few hours.

Liquidity is another risk factor, referring to the ease with which these shares can be sold. To evaluate liquidity, one must refer to information on daily transactions accessible through the Lisbon Stock Exchange website or specialized media.

Trading on the stock market can be lucrative, but it does come with associated costs, such as commissions from financial intermediaries, fees charged at the exchange and other costs associated with managing your securities account.

Another aspect to consider is that you are required to inform the tax authorities about the shares you have sold by filling in Annex G in your tax return statement.

If you realize more profit than loss from the sale of shares, you may be liable to pay capital gains tax. 

Dividends paid by companies are also subject to tax, but are withheld at source, i.e. the amount is paid to the State by the company before it enters your account.

Now that you know some basic rules about how the stock market works, you might consider investing. The first step is to talk to your Bank, which will act as an intermediary.

While expert advice is paramount for success in this type of investment, there are some principles you should follow.

So, before you start, it is important to:

Keeping track of real-time events in the stock market demands time and dedication, but the MTrader App simplifies the process for investors.

This app enables easy monitoring of quotes, identifies the best buy and sell orders, and provides access to research, expert comments, and videos. In a field where information is crucial to making informed trades, this app grants you access to notes that can significantly impact your investments. 

With the MTrader App, you can stay informed and have up-to-date access to your portfolio, view the order book, and execute trades all in one place.

The app is free and simple to install on your cell phone. For any inquiries, you can reach out to the helpline.