Beginner's Guide: What Exactly Are Stocks, and How Can You Make Money Investing in Stocks?

Most people’s understanding of stocks remains superficial. Some think trading stocks is just speculation, while others believe it is a rational investment based on fundamental analysis. The question “What is a stock” seems simple, but in reality, it determines whether you can become a successful investor. Today, we will delve into the essence of stocks and how beginners can start learning to invest in stocks from zero.

The Essence of Stocks: What Are You Really Buying?

The core definition of a stock is: a certificate of ownership in a company. When you hold shares of a listed company, you are essentially a shareholder of that company.

Many people misunderstand this. They think buying stocks is like buying commodities, but that’s not the case. Stocks represent your ownership stake in a company. Suppose a company issues a total of 1 million shares, and you hold 10,000 shares, then you own 1% of the company—that includes 1% of the assets, 1% of the voting rights, and 1% of the dividends.

Holding stocks means you have shareholder rights. In theory, you are entitled to participate in the company’s general meetings and vote on major decisions. However, in practice, retail investors usually hold a very small proportion of shares, making these rights largely symbolic.

It’s important to note that stocks themselves have no intrinsic utility. They are not like houses you can live in or cars you can drive. The value of stocks comes entirely from people’s expectations of the company’s future profitability.

Who Decides Stock Prices?

This is the most confusing part for beginners. Many hear that “if a company makes money, its stock goes up; if there’s a scandal, it goes down,” but that’s far from the whole truth.

The ultimate determinant of stock prices is supply and demand. This is not a complicated theory; it’s the most basic principle of economics.

Imagine a stock currently priced at 10 yuan. This price is actually the most recent transaction price. The trading system displays bid and ask prices—the prices sellers are willing to accept and buyers are willing to pay. If suddenly a large number of buyers rush to purchase at higher prices, the stock price will naturally rise. Conversely, if many sellers are eager to sell off, the price will fall.

So, what determines supply and demand? The answer is: people’s expectations.

When a company releases good performance news, investors anticipate higher future earnings and are more willing to buy the stock, increasing demand and pushing the price up. But sometimes, the situation is complex—say a company is profitable (good news), but major shareholders urgently need cash and sell off stocks aggressively (bad news), which can cause the stock price to fall instead.

Therefore, when evaluating a company’s value, you shouldn’t look at just one factor. You need to consider:

• The company’s profitability
• Industry development prospects
• Market sentiment and expectations
• Competitive landscape
• Quality of management

The Two Main Sources of Stock Returns

To make money from investing in stocks, there are mainly two ways.

First is capital gains—buy low, sell high. This is the most direct way to profit but also the most demanding on your judgment.

Second is dividend income—holding shares of quality listed companies, which pay dividends when profitable. However, it’s important to note that dividends are essentially just converting stock value into cash. For example, a company with a market cap of 5 billion yuan, issuing 50 billion shares at 1 yuan each. If the company earns 1 billion yuan, its market cap increases to 6 billion, and the share price rises to 1.2 yuan. If the company distributes all 1 billion yuan as dividends, the stock price will “drop” back to 1 yuan—your total assets haven’t changed; it’s just the form that’s different: from stocks to cash.

So, don’t obsess over whether a company pays dividends; a company that can make money will have its stock price rise in the long run.

Three Investment Strategies for Stocks

Different investors suit different strategies. Knowing your style is very important.

Strategy 1: Value Investing—Being a Friend of Time

If you have some capital and can hold long-term, value investing is the most stable choice. The core of this approach is fundamental analysis—finding undervalued quality companies and holding them long-term until their value reverts.

You can refer to metrics like the Price-to-Earnings (P/E) ratio. P/E ratio = Market value per share ÷ Net earnings per share. If a company’s P/E is 10, it means that assuming the company maintains its current profit rate, you need 10 years to recover your investment through earnings. Generally, the lower the P/E, the cheaper the stock; the higher the P/E, the more expensive.

In the long run, as long as the company can earn steadily, its market value should keep increasing, and your stocks will gradually appreciate.

Strategy 2: Swing Trading—Grasp the Rhythm to Earn the Spread

If you are interested in technical analysis, swing trading might suit you better. This method involves entering during the early stages of an upward trend, exiting at the peak, and earning the price difference within the wave.

The key is to master the timing of entry and exit. Usually, you should choose stocks that are in an upward channel. Many beginners make the mistake of chasing stocks that have already risen sharply, but at that point, the risk is greatest.

The stock market always cycles through rises and falls. The important thing is to follow the trend, not to predict the top or bottom.

Strategy 3: Index Investing—Stable and Low-Maintenance

The simplest way is to invest directly in stock indices. For example, Taiwanese investors can focus on the Taiwan 50 Index, which includes 50 large, high-quality companies representing the overall Taiwan stock market. U.S. investors can consider the S&P 500 Index (tracking 500 US listed companies) or the NASDAQ Index (focused on tech stocks).

Index investing offers diversification, saves time, and is very suitable for working professionals who don’t have time to analyze individual stocks.

Core Rules Every Beginner Must Know

Trading rules: Taiwan uses a T+2 settlement system, meaning you can buy today and sell only after three days. There is also a 10% daily limit on price movements to prevent excessive volatility. Trading hours are from 9:00 am to 1:30 pm, with a minimum trading unit of 1,000 shares (also called one lot).

Important indices:

• Taiwan 50 Index: includes 50 large, high-quality companies, representing Taiwan’s main board market
• S&P 500 Index: 500 large U.S. companies, relatively stable, representing the overall U.S. market
• NASDAQ Index: over 5,000 tech companies listed in the U.S., more volatile
• Dow Jones Industrial Average: 30 of the largest and most well-known U.S. companies, representing blue-chip stocks

Common Pitfalls for Beginners

Misconception 1: Blindly trusting technical analysis

Most popular technical analysis books are actually unreliable. Why? Because the stock market is a zero-sum game in the short term—your gains come from others’ losses. If everyone learns the same technical analysis methods, who will be losing money?

Technical analysis can be useful, but only if it’s a method you develop yourself through research, not blindly copying others’ theories.

Misconception 2: Expectting quick wealth

Many young people lack capital and hope to get rich fast through stocks. But in reality, proper long-term investing makes it hard to accumulate wealth quickly. If you aim to double your money in a short period, it often turns into speculation.

The difference between investing and speculating lies in mindset. Investing is based on assessing a company’s value; speculation is betting on market sentiment swings. The former has a higher success rate; the latter carries huge risks.

Misconception 3: Overtrading

Beginners often can’t resist the urge to buy and sell frequently. But frequent trading incurs transaction costs and taxes, and can lead to emotional decision-making and mistakes.

Preparations Before Starting to Invest

Step 1: Learn the basics

Read books on financial knowledge and investment psychology. But be careful not to get overly immersed in technical analysis theories.

Step 2: Practice with simulation

Most trading platforms offer demo accounts. Use virtual funds to practice for a while, find your rhythm and style—this is the fastest way to learn.

Step 3: Establish correct understanding

Understand the essence of stocks, what determines prices, and the risks involved. Enter the market with the right mindset to avoid many pitfalls.

Step 4: Manage risk

No matter which strategy you choose, risk management is paramount. Don’t put all your funds into a single stock or sector. Maintain diversified positions.

Summary: The Key to Success in Stock Investing

What is a stock? Essentially, a stock is a certificate of ownership, representing your share of ownership in a company.

What determines stock prices? Supply and demand, which in turn are driven by people’s expectations of the company’s future.

How can you make money from stocks? There are no shortcuts. You need to:

• Continuously learn financial knowledge
• Cultivate market sensitivity
• Develop an investment strategy that suits your style
• Strictly implement risk management
• Stay rational and patient

The stock market is like a long-term competition against institutional investors with informational advantages and capital strength. As a retail investor, your advantages are ample time and a flexible mindset. Keep learning and improving, choose a path that fits you, and eventually, you have the chance to succeed.