Stock Investment Method: The Complete Guide from Profit Generation to Risk Management

Many people are curious about how to invest in stocks, but at the same time, they think it’s as risky as gambling. However, if you understand and implement proper stock investment methods, it can become a powerful asset-building tool that significantly increases your capital over the long term. This guide explains step-by-step from choosing a brokerage firm to opening an account, analyzing stock prices, and managing risks for beginner investors.

What is stock, and is it right for me?

Stocks are securities that represent ownership in a company. When you buy stocks, you own a part of the company, and you can earn profits through dividends and capital gains as the company grows. For example, owning one share of Samsung Electronics means owning a small piece of that company.

Before choosing a stock investment method, it’s important to clearly understand your investment personality and financial situation. Compared to other financial products, stocks can offer higher returns. The S&P 500 index has averaged about 10% annual return since 1957, outperforming inflation over the long term.

However, stock investing is not suitable for everyone. Stock prices can be highly volatile in the short term. During the pandemic in March 2020, the S&P 500 dropped about 34% in just one month. You should consider whether you are prepared for such rapid fluctuations and the ongoing learning required.

Finding the right trading style for you

There are mainly two ways to invest in stocks: direct trading of individual stocks and indirect investment through diversified products like ETFs and funds.

Individual stock trading can yield high returns but requires time and expertise in analyzing companies. ETFs and funds are effective for risk diversification.

Recently popular methods include:

• Fractional Trading: Invest small amounts in expensive stocks. Be aware that fees might be higher.
• Dollar-Cost Averaging: Automatically invest a fixed amount every month to grow assets over time. Very suitable for beginners.
• CFD Trading: Expect large profits with small capital, but it carries high risk. For example, if you anticipate NVIDIA’s stock price will rise, you can buy a CFD contract to profit from the increase, or take a short position to profit from a decline.

Practical guide to choosing a brokerage and opening an account

The first step in stock investing is selecting a trustworthy brokerage and opening an account. Nowadays, you can open an account in just a few minutes via smartphone apps.

Account types include:

• Custodial Account: A standard account for trading domestic and international stocks and various financial products.
• ISA (Individual Savings Account): A long-term investment account with tax benefits, allowing for income deductions and advantageous for asset management.
• CMA (Cash Management Account): Pays interest on deposits and allows both stock trading and short-term fund management.

Account opening steps:

1. Choose a brokerage - consider fees, services, and app usability.
2. Install the app - download the app of your selected broker.
3. Verify identity - scan your ID and complete phone verification.
4. Enter personal info - accurately input required details and income sources.
5. Agree to terms - accept the terms of service and transaction purpose documents.
6. Finish - receive confirmation that your account is successfully opened.

Fee strategy: Trading fees vary by broker. Since you tend to stick with the same broker for a long time, starting with a low-fee broker is wise. The Korea Financial Investment Association provides a public service to compare trading fees.

Analyzing stock prices: technical vs fundamental analysis

Before making buy or sell decisions, thorough analysis of the company and stock is essential. Two common analysis techniques are:

Technical Analysis: Uses past price movements and volume patterns to predict future prices. Indicators like Moving Averages and MACD help determine entry and exit points. This method is popular among short-term traders.

Fundamental Analysis: Evaluates a company’s financial statements, management performance, and industry trends to assess intrinsic value. Key ratios include PER (Price-to-Earnings Ratio), PBR (Price-to-Book Ratio), and ROE (Return on Equity). Long-term investors prefer this approach.

Combining both methods can lead to more accurate investment decisions.

Short-term vs long-term: setting your investment strategy

There are various strategies in stock investing:

Short-term speculation: Engages in day trading or short-term buying and selling to seek quick profits. While potentially lucrative, it involves higher risks and increased transaction costs due to frequent trading.

Long-term investing: Holds quality stocks for over five years. Warren Buffett’s value investing philosophy exemplifies this. This approach benefits from compound growth over time and often receives tax advantages in many countries.

For beginners, starting with a long-term strategy is recommended.

Diversification and portfolio management to reduce losses

Risk management is one of the most important principles in stock investing. Diversification involves not putting all eggs in one basket.

For example, holding stocks of Samsung Electronics, Hyundai Motor, and Naver simultaneously reduces the risk associated with any single stock or sector decline.

Practical risk management techniques:

• Stop Loss: Automatically sell when the stock price falls below a certain level to limit losses.
• Periodic Portfolio Rebalancing: Regularly review and adjust your portfolio to match your target allocations, responding to market changes.
• Dollar-Cost Averaging: Invest a fixed amount monthly instead of a lump sum, which can lower the average purchase price.
• Long-term Holding: Maintain stocks of promising companies to minimize short-term market volatility impact.

Habits and mindset of successful investors

To succeed in stock investing, beginners should develop certain habits:

Good investment habits:

• Start Small: Begin with modest amounts to gain experience.
• Avoid Market Fads: Be cautious of themes like “hot stocks” or “double-up stocks.” Make decisions based on objective analysis.
• Continuous Learning: Spend 30 minutes daily reading economic news and weekly reviewing earnings reports and key economic indicators.
• Keep an Investment Journal: Record reasons for each trade and its outcome to analyze and improve your strategy.

Mindset importance: Investing in stocks is like a marathon. Avoid being swayed by short-term price fluctuations; approach with patience and prudence for long-term success.

Conclusion

Learning stock investment methods requires time and effort. For beginners, thorough analysis, systematic risk management, and choosing the right strategy are key to success. Build a solid foundation step by step, gain experience steadily, and aim for long-term asset growth.