Stocks and ETFs from scratch

This lesson explains what stocks and ETFs are, what moves their price, and how to plan a first purchase so that risk is calculated rather than felt. It is written for someone who has a brokerage account or is only choosing one.

Stocks and ETFs — what exactly you are buying

Buying a stock means acquiring a stake in a company and the rights attached to it — among others a share of profit paid as a dividend and a vote at the general meeting, where the share class provides for it. The price changes with expectations about future results, interest rates, and the market’s appetite for risk.

ETF is a fund listed on an exchange that gathers many instruments under one ticker, usually replicating an index or a selected sector — a broad market fund such as the S&P 500, a sector fund, or a commodity one. One unit gives the whole exposure at once instead of thirty companies picked one by one, and the price tracks the basket’s value minus fees. That does not make it risk-free: price and composition change, and liquidity varies greatly. The key difference from a single stock is diversification — one ETF spreads exposure over dozens or hundreds of companies, reducing the impact of any single failure.

The practical difference comes down to one thing: with a stock you decide about a specific company, with an ETF about a market or a segment. Both require the same preparation. Check what the instrument is with your broker and what entry and exit cost.

IPO and the primary market

An IPO is the first sale of a company’s shares to the public, after which they are listed on an exchange that anyone with a brokerage account can trade. The issue price comes from investor demand, but from the first day of trading the market decides, and new listings are often volatile.

Dividends and capital gains

Owning a stock or an ETF can bring two kinds of return: dividends, which are distributions of profit that some companies reinvest instead, and capital gains, the difference between the buying and the selling price before costs and tax. Both may be taxed, depending on jurisdiction, account type, and instrument.

Custody and protection

Your assets sit in custody, usually segregated from the broker’s own funds, so a broker failure does not put them into the insolvency estate, though recovery takes time. With stocks you own the security; with CFDs you hold a claim against the broker, so counterparty risk differs.

What affects the price of a stock and an ETF

The price moves for reasons often visible only after the fact, yet four groups of factors come back most often. Prices are set by supply and demand on the exchange — and unlike CFDs, the price on the chart is the price at which you trade the underlying.

The conclusion for a learner: only part of that picture is predictable. Company results and capital flows have to be read and interpreted, while liquidity has to be measured before the purchase, not after the fact. Measurement is the only part you control in full.

Liquidity and spread

Liquidity is the ability to buy or sell without moving the price: liquid instruments show a small spread between bid and ask, illiquid ones a wide spread and more slippage. Check average daily volume and typical spread before your first purchase.

The first purchase protocol in seven steps

The order matters. Every step takes a few minutes, and skipping any of them pushes the risk into the future.

1. Confirm the instrument type. The same ticker can be a stock, an ETF, or a CFD on the same instrument, and ownership, costs, and settlement differ.
2. Check the quotation currency. An instrument priced in USD or EUR in a dollar account adds currency risk to the result, whatever the security itself does.
3. Read the typical spread. Look at your broker’s order book, not at marketing material; every figure here is illustrative and changes during the session.
4. Calculate the round-trip cost. Add spread, buy commission, sell commission, and slippage; the formula is in the next section.
5. Set the thesis invalidation level. Write down the price at which your scenario is wrong and measure the distance from entry to that level; the mechanics are in the stop loss entry.
6. Calculate the position size from the risk budget. Not from available cash and not from maximum leverage — from the formula in the next section.
7. Write the plan before the order. Instrument, direction, entry, stop, target, position size, and the maximum accepted cost.

The last step sounds trivial, which is exactly why it gets skipped. A plan written after the fact is not a plan but a description of what happened.

Reading a quote and placing an order

A quote carries the bid, the ask, the volume, and the day’s high and low; the bid is the best price a buyer offers and the ask the best a seller accepts, their difference being the spread. Stocks support market, limit, and stop orders. A limit order is usually preferred because it controls the price you pay, while a market order fills at once but exposes you to slippage in illiquid names.

Position size from a risk budget — formulas

The starting point is the 1-2 per cent rule of risk per transaction. The question is not how much you want to earn, but how much you are ready to lose if the scenario does not work out.

risk in USD = capital × risk percentage per position
distance from entry to stop (per share) = entry price × stop percentage
number of shares = risk in USD ÷ distance from entry to stop
position value = number of shares × entry price

All numbers are illustrative — set your own capital, price, and stop width. The last row is a correctness check: if the number of shares times the distance to the stop does not return to the assumed risk, either a rounding error crept in or the stop moved.

If the position value exceeds available funds, reduce the number of shares. Raising leverage only to fit the plan into the account reverses the logic: the position size follows the planned risk, not the account size.

Entry and exit cost (round-trip)

The cost does not end at the commission — only the sum of all components of one complete turn gives the full picture.

round-trip cost ≈ spread × number of shares + buy commission + sell commission + slippage
cost in R = round-trip cost ÷ (distance from entry to stop × number of shares)

The rates are illustrative — check them with your broker, because they change with the instrument and the session — but the conclusion is durable: ten per cent of 1R is eaten by cost before tax. In a Polish brokerage account the net result is additionally settled in the context of the Belka tax; the mechanics are in the lesson Belka tax and brokerage costs. That is fiscal information, not tax advice.

Taxation: stocks, ETFs, and accounts

Tax treatment varies by country, account type, and instrument. In Poland, gains on stocks and ETFs in a brokerage account are subject to capital gains tax, while accounts such as IKE and IKZE reduce or defer it. Abroad-domiciled ETFs may count as securities or as collective investment schemes, with dividend withholding tax applied at fund level. This is Polish local context and educational material, not tax advice for any other country.

Table for your own notes

Fill it in for the instruments you are considering. Empty columns are not missing data but a list of things to check with your broker.

Review checklist

Before buying your first stock or ETF, check:

• Liquidity: average daily volume and typical spread
• Instrument type: stock, ETF, or CFD
• Counterparty and custody structure
• Tax treatment for your account type and jurisdiction
• Sector concentration and top holdings, if relevant

Skipping any item turns investing into speculation.

When the plan says do not trade

1. When you do not know whether you are buying a security or a contract for difference. Ownership, supervision, and settlement rules all differ, and until you establish that you have no basis for comparing costs.
2. When the position size exceeds available funds. If the plan fits only thanks to leverage, it was fitted to the limit instead of to the risk.
3. When you cannot state the round-trip cost in dollars. Without that number you do not know how much the position must gain to break even after costs.
4. When you do not know the settlement currency of the account. The result in dollars can differ from the result in the instrument currency, and that is part of the decision.

Mistakes that cost the most

• Buying because it is cheap in dollars. A low nominal price says nothing about value or quality; two companies with very different prices can describe an identical situation.
• Confusing a CFD with a stock or an ETF. A CFD is price exposure at the broker without ownership, so overnight holding cost, dividend settlement, and counterparty risk all differ.
• Ignoring the quotation currency. A purchase in USD or EUR in a dollar account always adds currency risk to the result.
• No risk limit per position. Even without leverage, too much concentration in one ticker hurts in a weak quarter.
• Mixing horizons in one position. A long-term investment and a swing position have different exit rules, and holding one position under two plans ends in an emotional decision.

To start, one liquid ETF and one large company is enough; better to master costs, issuer announcements, and position sizing in dollars than to collect tickers. Order execution, other asset classes, and CFD mechanics are developed in their own lessons. Choosing between a brokerage account and foreign markets is developed in Local exchange and foreign markets, and ETF practice in ETFs in practice.

Sector rotation and concentration risk

Even a diversified portfolio suffers if one sector dominates: hold only technology stocks and a rate shift or regulatory change hits all of them at once. Broad-index ETFs reduce sector concentration, while sector ETFs reintroduce it. Check top holdings before buying — if the top five exceed 30 per cent of the ETF, one company’s problem moves it significantly.

Measurable exercise

1. Choose one ETF and one company from a large-cap index.
2. For each, write down the ticker, type, quotation currency, typical spread, and round-trip commission from your broker.
3. Assume illustrative capital of $10,000 and 1% risk per position, then calculate the number of shares and the position value for a stop 3% from entry.
4. Divide the round-trip cost by the value of 1R and write the result as a percentage.
5. Compare both in one table — liquidity, cost, diversification, tax — and write down which is cheaper relative to risk and which matches your horizon.

The goal is a table instead of a hunch. If you cannot point to which instrument is cheaper in relation to risk, what you are missing is not an opinion but data.

Check yourself

Common questions

Is it better to start with stocks or with an ETF?

For most people starting out, a liquid ETF on a broad index is simpler, because it does not require choosing a single company. One large company from the main index can be a second instrument for practice — with a risk limit and without leverage.

How does a CFD on a stock differ from a stock on the local exchange?

A CFD is price exposure at the broker without classic ownership: overnight holding cost, dividend settlement, and counterparty risk all differ. Before buying, read the instrument specification, not just its name.

How much capital do I need to start?

There is no single right amount, but one rule: position size follows from the risk budget, not from available cash. With illustrative capital of $10,000 and 1% risk per position you risk $100 per trade, which with a 3% stop gives a position worth a few thousand dollars, not the whole account.

Why measure costs and position size at all, if the market direction decides the result anyway?

Because measurement turns the assessment of a strategy from an impression into a number. The same signal at a cost of 10% of 1R and at 40% is two different systems, though they look identical on a chart. Without those numbers you cannot tell whether you are improving the result or only the frequency of trading.