Three online stock trading pitfalls to avoid
If you think聽聽is a ticket to early retirement, you should know that it鈥檚 hard for even professional investors to beat the market: Over the 10-year period ending in 2014, 82% of large-cap fund managers underperformed the S&P 500,聽.
Even so, about half of U.S. retail investors trade at least once per month, according to State Street. Frequent trading can leave investors susceptible to costly landmines. To safely allocate a small portion of a diversified portfolio to stock trading, you鈥檒l want to avoid the most common pitfalls.
1. High commissions
Commissions can add up if you trade frequently.
If you鈥檙e just dabbling in the market, consider using聽, which offers聽聽for a large selection of U.S. stocks and ETFs. One drawback: The company currently supports only taxable brokerage accounts. Retirement investors should fully fund a聽聽before contributing to a taxable account.
If you鈥檙e trading more seriously, consider your needs, then select the聽聽that meets them. In general, you鈥檒l pay more for an online broker that offers a premium trading platform and top-tier research and tools, such as聽, which charges $9.99 per stock or ETF trade. If you don鈥檛 need or want those features, a discount broker such as聽听辞谤听, both of which charge only $4.95 per trade, might suit your needs.
2. Emotional reactions
Many experts advise separating emotions from investment decisions, one reason why聽is a good strategy for many long-term investors. But聽聽that even seasoned traders make emotional decisions.
The best way to keep your emotions in check is to make a plan and stick to it: Decide how much you want to invest, how much you鈥檙e willing to lose, and at what price you鈥檒l get in and out.
Setting such a strategy can help you avoid chasing hot stocks. A rapid rise can mean other investors are moving out, and you risk buying at a premium before the stock falls.
3. Incorrect order entry
When it comes to trading, you can鈥檛 play the game unless you understand the lingo 鈥� and there鈥檚 a lot of lingo. If you don鈥檛 understand, you might place the wrong kind of trade.
The default option is a market order, which places a trade 鈥� to buy or sell 鈥� for the best price available. In most cases, though, it would be better to cap risk by using stop-loss orders and stop-limit orders, which set the prices at which you want to buy or sell a stock, then trigger orders when the stock hits that price.
Before you dive in, take advantage of聽. If you鈥檙e confused during the order process, reach out to a customer service representative at your online broker; many are registered investment advisors or former traders. (If you have the order placed for you, beware of broker-assisted trade fees).
The bottom line
Most investors do best with a diversified portfolio of low-cost聽聽and little to no trading of individual stocks. But dabbling in the stock market with a small percentage of your investable assets can be fun and 鈥� in some cases 鈥� lucrative, provided you understand the risks involved, minimize commissions and plan to invest for the long term.
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