October 18, 2018 By James L. Weaver
To the outside world, the stock market is viewed as both dangerous and alluring. The age-old pictures of traders practicing their craft on the crowded stock exchange of New York always comes to mind when the topic is brought up. While the stock exchanges are still as chaotic as ever, a large majority is done electronically via computer systems and the internet. These advances in technology have made it easier than ever to get involved personally in the stock market, but the question that stands at the forefront of these opportunities is “just because you can get involved in the stock market, should you?”
Online brokerages have made great strides in the retail trading field. They advertise on television and online, and tout their commission rates as the lowest around. Setting up an account with any of these brokerages can take as little as 15 minutes and once funds have settled you can begin trading. The idea that most people have, at least initially, is that they want to have a more direct influence on their financial future. Maybe they feel that they can manage their money better than a financial professional, or maybe they just have the best idea about a company or the stock market as a whole and they plan to get rich with minimal effort.
The sad truth of the matter is that the stock market should not be approached as a “get rich quick” opportunity. The most successful traders have spent an enormous amount of time learning the ins and outs of the field. Strict plans are made and adhered to in an effort to minimize emotional decision making. There are numerous print and online resources available to teach the basics of the stock market, but the basics will only take you so far.
I have spent a good deal of time day trading, and learned from the great many pitfalls of the stock market, and while I am far from a master of all things finance I am far more educated now than when I started. When I inform friends, co-workers, or others of my experiences I am always asked the same questions.
– How much money did you make?
– What did you trade?
– How much do I need to start?
– If I gave you X amount, what could you make me?
While these are all valid questions, if you have to ask them, I can’t answer them in a brief five minute conversation. The most common questions received involved startup costs, with “How much do I need to start” being the most frequent question. There are numerous types of securities to buy and sell, be it stocks, bonds, foreign exchange, and more, and each of these types of securities requires different amounts of capital. One constant that many people forget about however is the cost of commissions. Those “low commission rates” seen on advertisements are not as low as they initially seem. As an example let’s say I wanted to make a $1000 investment in a stock, and my brokerage will charge me a 5 dollar commission fee. That commission is charged when I place my buy order, and it is also charged when I place my sell order. This means that I am already 10 dollars in the red, and to recoup that cost I would need to make at least a 1% return. Now this percentage may not seem like much, but the commission costs add up over time, and eat away a good chunk of the few profits you have.
The second most frequent remark I tend to see is when friends ask me if they provide me with funds will I trade it for them. Whenever I received this question I would always refer friends to a professional financial advisor, whose entire career is built on investing your capital. Just because you have a friend who day-trades, does not necessarily mean they are willing to risk your money as well as their own. The subject of financial advisors raises another very important point, which is to say unless you have a finance background it is highly recommended that you have a professional handle your investments. These professionals understand the necessities of certain concepts such as diversification, portfolio management, and they will always have access to more market information than you will.
The question is again raised: “If you have access to the tools to day trade, should you?” Unless you are willing to put forth time and effort into learning all that makes the market tick, you will in all likelihood fail. It’s a cold hard truth that something you approach as a potential hobby is practiced by professionals on a daily basis all out to make profit. The analogy is often made of unwitting traders are often just as lucky going to a casino and playing roulette, however I would argue that the reality of the matter is more harsh. It would be the same as sitting down at a poker table with professionals and having no knowledge of how the game is played. In a game of poker you are just as likely to be defeated by bad luck as you are by people out-playing you, and you have sat at the table with your life savings, or your retirement, or some other such fund you’ve built through hard work. If this warning has not dissuaded you from making the leap into this field, I will begin to explain more of the complexities of trading in future articles to give you a proper footing in this highly competitive world. Visit our website to learn more on trading using out dvd.