“The difference between playing the stock market and the horses is that one of the horses must win,” said comedian Joey Adams. While it is true that there is risk associated with investing, there is also great opportunity, especially in the 21st century world of online trading that has opened up the market to common people. By following some simple dos and don’ts the risks of such investing can be reduced and the returns improved.
Do: Read and Research
With many good and sound websites available today just a click away, the novice online trading should begin investing without spending a dollar. Instead, he/she should begin by taking time to read and research the market overall, and then the particular companies or sectors of the market being considered as potential investments. While stock market experts are knowledgeable, a person needs to be careful in depending only on the “pros” counsel. As Norman Ralph Augustine wrote, “If stock market experts were so expert, they would be buying stock, not selling advice.”
Don’t: Try to Time the Market
With the ease and speed allowed by online trading, a person may be tempted to try to time the market. A wise person, whether a rookie or veteran investor, will resist this temptation. As Peter Lynch says, “I can’t recall ever once having seen the name of a market timer on Forbes’ annual list of the richest people in the world.”
Do: Choose an online brokerage carefully
There is no free lunch and there is no free trading even in the online world. While fees may seem low for a single trade, when added up over a long time they can take a large chunk out of your earnings, sometimes reaching 40% depending on the services you access in trading. For this reason alone a prudent investor will research the fees and services of online brokerage services. Another aspect to review is the company’s online platform. If you plan to conduct any of your trading from a smartphone, you will want to investigate how well the company’s mobile app works.
Don’t: Buy on Margin
When you begin to make a profit from your first attempts at online trading, the temptation will be to increase your investments beyond your available capital. Online brokerages will allow this, loaning you money. This is called “buying on margin.” This simply increases your risk, as you may owe money you don’t have if your stock picks go south. As Albert Hettinger warned, “Don’t use margin. If you’re smart, you don’t have to borrow money to make money. If you’re dumb, you may go broke”
Do: Follow Security Measures
Once you begin the exciting world of online trading, don’t throw all your conventional wisdom out the window. Still remember that there are financial predators in the cyber world who would love to steal your precious earnings. For that reason, follow traditional security measures when online: use complex passwords and log ins, don’t trade with unregistered brokers, check out reviews of companies you plan to use, and change your passwords regularly.
While not complicated, online trading should be entered into with thought and planning. Only then may an investor avoid the pitfalls associated with online trading, reduce his risk, and enjoy a good return.