The stock market can be challenging for beginners. There are so many details that many people give up on learning more about stocks and how this type of investment can change lives. Let’s change that with simple and accessible language for everyone starting to invest their money.

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How to Invest in Stocks - Starting with the Basics

Often, when we’re with friends we haven’t seen in a long time, whether at a barbecue or a birthday party, we inevitably end up talking about finances. There’s always that one person who wants to brag about the fortune they made by investing in the "hottest" stocks on the market. When that happens, we ask ourselves, "Why can they make money with this type of investment and I can’t?"

The market can have various traps and tricks that unsuspecting investors might fall into, so the idea of this post is to present concepts and debunk myths about how to truly invest in stocks and start understanding a bit more about the stock market.

What is a Stock?

A stock is nothing more than the smallest fraction of a company, so as soon as you acquire this small piece of the company, you automatically become a shareholder of that company. If you buy VALE3, you become a shareholder of the mining company Vale; if you buy PETR4, you become a shareholder of Petrobras. “So, does that mean with just one stock I can control a big company?” No! That’s where we need to understand the different types of stocks and their characteristics.

Types of Stocks

Common Stock (Ordinária) - As the name suggests, these stocks bring ‘order’, meaning they give the shareholder the right to vote. But it’s not enough to own a few shares; you need to have a significant portion of the company to exercise this right. Common stocks are easy to recognize because they end in 3.

Preferred Stock (Preferencial) - These stocks give you a preference. "But preference for what?" - you might be wondering. Preference in receiving dividends and in payments if the company is bought by another or decides to "go private." These stocks typically end in 4, 5, or 6.

Units - These are actually a "package" of stocks, a composition, or if you prefer, a basket of assets – as the market usually calls them.

If you want to invest in the energy sector, for example, you can buy TAEE11, which is the unit of Taesa. Right away, you’ll notice that the price of a unit is much higher than that of common or preferred stock. This is because TAEE11 is a composition of two TAEE4 and one TAEE3, meaning when you buy one TAEE11, you actually get two preferred shares and one common share. Units generally have higher liquidity compared to individual common and preferred stocks.

Oh, and if you’re not familiar with the term “liquidity,” it usually refers to how easy it is to buy and sell an asset. So, in simple terms, if there are many buyers and sellers trading, you’re looking at a highly liquid asset.

How to Choose the Ideal Type of Stock?

Like many things in the financial market, the answer is: It depends! If you intend to have some control over the company by acquiring a lot of shares (a lot of them), common stocks are the perfect choice. On the other hand, if your goal is to receive dividends and be covered in case of liquidation or sale of the company, preferred stocks are a better fit. Finally, if you want more liquidity, units are often the best choice.

Understanding this, it makes perfect sense to consider how your investment strategy impacts the choice of stock type. For example, if you want to make short-term trades like day trading, liquidity is a key aspect. If you prefer to make longer-term trades focused on dividends, preferred stocks might give you some advantage in receiving these distributions.

Therefore, once you understand which strategy makes the most sense for you, you’ll be able to choose the type of stock that matches the requirements of each one.

I’ll already say that short-term trades require more liquidity and a solid knowledge base in technical analysis, while longer-term trades may need consistent fundamentals to be sustained for months or years.

If you want to dive deeper into the types of analysis, I’ll leave a link to two books that talk very well about technical analysis and fundamental analysis, both in Portuguese and with simple and accessible language.

Technical Analysis of the Financial Markets

Warren Buffett and the Interpretation of Financial Statements

How Does Stock Investment Work?

We understand what a stock is and its types. But how do we start investing?

Just as you go to your local supermarket to buy tomato sauce, we have to go to the “market” to buy stocks. These markets are the Stock Exchanges. In Brazil, B3 (formerly Bovespa) is responsible for hosting operations in the stock market.

“So, can I buy stocks directly on B3?” Actually, no. To buy or sell a stock, you need a brokerage firm. There are several in the country, and you’ve probably heard of some, like XP, Rico, BTG, Clear, Safra, etc. Brokerages are your gateway to the stock market since they mediate investor trades with the stock exchange (B3).

The differences between them are few but significant, mainly distinguished by whether they have investment advisory services or not, differences in brokerage fees, and investor support. On second thought, we can talk more about brokerages and their differences in another article. What do you think?

Well, back to the topic, after creating your account at a brokerage of your choice, you’ll need to access the home broker. This is the tool through which you send your buy and sell orders to the stock exchange.

The operation of the home broker is simple, but for those just starting to invest in the stock market, it can be intimidating.

So I’ll write a step-by-step post on how to operate the home broker and invest money in a safe and secure way.

Look for the article here on the blog: Homebroker in Practice

I hope I’ve helped you, the beginner investor, to better understand the world of finance and stocks, so you can reap the rewards of your investments in the future.

Remember, never invest your money in something you don’t understand! Knowledge is essential; question, seek, learn how stock investment works before entering the world of variable income investments.

Best regards and good deals!

This content is a translation of one of our articles into English.