BBB: Stock trading apps—what to know before you trade
The GameStop stock saga inspired many would-be investors to try their hand at trading stocks through an app. In fact, MarketWatch reported that mobile trading apps downloads climbed in February—a trend that is likely to continue.
Stock trading apps, such as Robinhood, E*Trade, TD Ameritrade, and Webull, have made playing the stock market easier than ever. However, no matter the platform, buying stocks always carries the potential for both financial gain and loss. Before you invest with a stock trading app, be sure to follow these tips.
What to know before investing in the stock market:
Educate yourself about stock markets. The only way to succeed at mobile stock trading is to do your homework before you begin. Get to know the basics of investing. Familiarize yourself with concepts like expense ratios, trading commissions, asset allocations, individual stocks, exchange-traded funds, and more. Learn more about how stock markets work at Investor.gov.
Choose a reputable stock trading app. The trading app you choose is more than just a platform for trading; it is the company that will serve as your broker. Be sure that any company you are considering has a good reputation and is legally licensed and registered with the appropriate government authorities.
Compare several trading apps. NerdWallet recommends that new investors “look for a broker who can teach them the tools of the trade via educational articles, online tutorials and in-person seminars.” Examine and compare each app closely, taking note of their fees, trading minimums, stock analysis tools, and educational offerings to choose the one that best fits your needs.
Set a budget. Make sure you are in a good financial position to start trading. Before allocating funds for trading, you should already have money set aside as an emergency fund—and money going towards your retirement on a regular basis. Since trading carries risks, you should never invest money you can’t afford to lose. Keep in mind that it is unwise to put more than 10 percent of your portfolio towards individual stocks, as this can expose your savings to too much volatility, advises CNN. If you don’t have much money to invest, you can look for a “micro-investing” platform. These services allow you to buy a share in a larger fund.
Understand trading rules. SEC regulations dictate how and when trades can take place. Get to know the rules so you don’t get penalized for breaking them. For example, according to the SEC, “In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding, which violates the credit extension provisions of the Federal Reserve Board.” If you are caught freeriding, your account will be frozen for 90 days.
Know how trading will affect your taxes. Capital gains taxes are taxes you’ll pay on stock profits. Generally, these taxes are higher if you’ve held the stocks for less than a year. Find out how to report capital gains at IRS.gov or Canada.ca.
Be wary of “hot tips.” Sponsored ads and online forums promoting “fail-safe” stocks that are “guaranteed” to get you a huge profit for a small investment (if you act now!) are likely fake, or part of a racket designed to drive up the price of a stock temporarily. Don’t fall for this kind of “insider’s advice.” The Balance reminds traders that real profits come only after thorough research: “If you decide to invest in individual stocks, make sure to use some financial analysis ratios to compare a company’s performance to its competitors. Successfully choosing individual stocks is difficult, but extensive comparative analysis can help ensure you’re adding the best stocks to your portfolio.”
Watch out for scams. Keep an eye out for investment scams. Stick to brokers that are registered with the SEC and avoid anyone who uses high-pressure sales tactics or pyramid schemes. Understand that some scammers go as far as sending you regular reports showing excellent returns on your investment, when, in fact, it never even existed.
Keep learning. Once you are familiar with the basics of trading, you may choose to move on to more advanced trading strategies, such as trading options, trading on margin and short stocks. Keep in mind though, these strategies are very risky. Don’t try them out until you’ve built up some experience with trading and, again, never trade with money you can’t afford to lose.
Practice by trading virtually. If you want to try the stock market, but aren’t ready to risk real money, try “virtual trading” first. Many online stockbrokers offer platforms where you can learn the ropes by buying and selling virtual stocks.