Lately everyone is talking about how independent stock traders drove up the price of GameStop shares. Some people even made significant money doing it. So is stock trading a smart way to make money as an individual amateur?
The answer, of course, is yes and no. It’s possible to make good returns on stock trading, but it’s just as easy to lose everything you put in. Here are a few beginner tips to make sure you’re handling stock trades like the experts do.
1. Don’t Invest What You Can’t Afford to Lose
Stock trading is a gamble, and like a gambler, you may find yourself tempted to buy stocks with the grocery money. Don’t give in to that temptation. Set a budget for what you will invest, and keep most of those investments in long-term, safe products like mutual funds.
With today’s zero-fee apps, you can start trading stock with your spare spending money. Different stocks can cost from a couple of dollars to thousands, so it’s easy to invest in something in your price range.
2. Keep It Diverse
Throwing all your money into a single company’s stock is a massive gamble. For everyone who makes a fortune that way, many others watch that company founder and their stock devalue.
Spreading out your investments into many different companies, in various sectors, protects you from risk. While one company or sector has a hard quarter, another might prosper, so you still make money.
Mutual funds are a great way to keep your portfolio diverse. This way, you don’t have to balance your investments yourself, but you take on much less risk.
That said, you can still invest a portion in trading individual stocks. But try to keep them to a minority of your portfolio—0 to 15%. That leaves room to take advantage of the volatility in individual stocks without risking your whole investment.
3. Think Long-Term
Over five years, most investments will turn a profit. Even a whole-market downturn will correct itself, given enough time. So don’t constantly buy and sell stocks and funds; hold them and they will grow.
This takes self-control. It’s wise to limit how often you check on your investments so you aren’t tempted to mess with them. Day traders move stock around throughout the day in the hopes of profiting off tiny variations, but as an amateur, you don’t have that kind of expertise. By leaving your stocks alone for months or years, you’ll profit much more—with less stress too.
4. Be Careful Who You Listen To
The internet is rife with stock trading advice, but not all of it is good. Some investors buy low, then start buzz about a stock to drive up the price. Once enough people are buying it, they dump their stock and leave everyone else high and dry. Obviously, listening to “tips” like this will make someone money, but it won’t be you.
One inexpensive option is a robo-advisor. This is a computer program that manages your investments for you—from balancing your portfolio to adjusting it to your risk tolerance. You complete a questionnaire at the outset about your preferences and needs, and it handles the rest.
More complete investment management comes from a human being or company. You can hire an investment manager or open an account at a brokerage firm that comes with investment management. Many financial advisors can help manage investments.
5. Don’t Forget Taxes
When you invest money as part of your retirement fund, your investments are subject to tax benefits. But if you’re trading stock to make regular income, it’s subject to more taxes.
If you hold a stock for at least a year before selling, the profit you make on it is subject to capital gains tax, which is less than the tax on regular income. But if you didn’t hold it at least a year, your profit counts as regular income. Yet another reason to hold onto those stocks for a while!
Get Expert Help With Stock Trading
From deciding on your stock trading budget to helping you diversify your portfolio, it always helps to have an expert to guide you. A financial advisor can help you get started in the most profitable and responsible way. Contact us to be connected with someone who can help you invest wisely.