Online Investing – 5 Key Things Everyone Should Know
With the increasing number of online brokerages that are available, investing has never been easier.
However, those who are just starting out can find themselves overwhelmed by all of these options. Here are five considerations that novice investors should remember before starting to invest.
Do Not Ignore Traditional Brokerages
There are several new brokerages that have online origins. These tend to offer low commissions on trades and a basic research component that allows investors to figure out the current price, dividend payouts and earnings per share of a given company, among other data.
The very fact that these newer brokerages offer quite a bit of important information with low transaction costs has made more traditional brokerages like Charles Schwab up their game and provide similar benefits.
Now, investors can access just about any brokerage online and make trades with relatively low costs. At a minimum, you should look for brokers that have the SIPC an FINRA designations. These are regulatory bodies that protect your investments. Brokerages that are members of these organizations tend to be much safer places to put your money.
Watch Out For Fees
There are many fees that brokerages will charge to those who invest through them. The first is the transaction fee. There are a few online brokerages like RobinHood that offer fee-free transactions. Still others offer trades for as little as $4.99. There is no need to pay more than $10 a trade in today’s environment.
Also, making larger purchases will ensure that you pay less in transaction fees over time and help your overall returns. For example, a purchase of $50 with a $4.95 fee equates to nearly 10 percent of the cost going toward fees. A $1,000 purchase with the same fee equates to the fee eating up only 0.5 percent of the purchase. This is a huge difference.
Additionally, if you decide to invest in mutual funds or exchange traded funds, you’ll have management fees. Passively managed funds that follow an index will usually charge less than 0.5 percent. Actively managed funds that frequently trade positions will charge higher management fees.
Sometimes, these will exceed 1 percent annually. While this might not seem like much, this small percentage will compound over time and wind up costing quite a bit and eating into your returns. Most actively managed funds fail to beat the performance of index funds so this extra cost is usually not worth it.
Brokerages with lower fees might offer fewer services, so each investor should weigh the relative benefits for him or herself.
It’s tempting to invest in the latest fad. There are stories of people making millions off of a single purchase in an Apple or a Google. The biggest problem with investing like this is the fact that no one knows what the next hot stock will be with any certainty. This is why it’s important for beginners to be pretty conservative in their investments.
Long-term blue chip companies will tend to grow fairly slowly, but they also tend to have solid cash flows and profits. These characteristics can actually help investors protect their capital and lessen risk. It’s possible that you could lose your investment in a blue chip, but it’s less likely than if you invest in the newest company that no one has heard of.
Additionally, many of these blue chips pay back a portion of profits to shareholders in the form of dividends. This helps mitigate some of the risk as well. Once you get $1 million or so, extra capital could go toward riskier investments.
Kodak was once king of the camera landscape. Those who invested in Kodak did quite well for decades, but the digital photography revolution basically killed this once-strong company. You’re likely to have a few losers over an investing career. This is what makes diversification key.
Buying an index fund provides instant diversification. Vanguard’s S&P 500 ETF (VOO) holds shares in each of the 500 largest companies in the US market. If one goes belly-up, most investors will not notice much.
It’s also possible to diversify with individual stocks, albeit a bit more difficult and time consuming. Regardless of which method you decide upon, be sure that one collapsed company will not kill your entire portfolio.
Invest For The Long Term
Warren Buffett, one of the most successful investors of all time, once quipped that if you did not plan to hold a stock for 10 years, you shouldn’t own it for 10 minutes. Those who buy and sell stocks frequently will incur transaction fees and tax bills on short-term gains. These will undoubtedly impact an investor’s overall return.
Whether you decide to invest in index funds or in individual stocks, it’s best to invest in companies or funds that you’d plan to hold forever.
Of course, changing circumstances like those experienced by Kodak can make this less attractive, but many times, holding onto investments for years or decades can allow your money to compound without having to pay taxes or transaction fees.
Additionally, having a long-term focus can keep you from selling in a panic when everyone else does. People lose money when they sell at the bottom. The goal is to buy at the bottom and hold on for the top.
When looking into investing for the first time, the mass of information can seem daunting. It doesn’t have to be. Having a plan, and paying attention to these recommendations can help you avoid some of the common pitfalls that cause people to lose money.
Andrew Altman is the editor-in-chief of a site SlickBucks.com which aspires to help people on their road to better financial wealth. For that, SlickBucks features informative articles about investing so everyone could achieve the type of wealth they desire.