Trading and Brokers

If you want to trade stocks you can do that through brokers. These come in full service and discount. Most people use discount online brokers as they don’t need advice and want to keep costs down. These let you trade mutual funds, stocks, bonds, options etc. If you want to call and broker then it’s going to cost you. That’s what people did back in the day. With the advent of the online realm and all everyone uses the online kind except for maybe Grandpa. Trading fees are normally in the $8-$10 range per trade.

Online discount brokers

  • TD Ameritrade: I use this one for example
  • E trade
  • Merrill
  • Charles Schwab
  • Fidelity: Also has own mutual funds, others don’t
  • Interactive Brokers
  • Ally
  • Trade Station
  • Robinhood

A note on stocks: Don’t trade individual stocks until you know what you are doing!

Some Advice for Beginners

That hot tip from your neighbor or uncle is usually wrong. Read analyst reports that brokers provide and do your own research.

The smaller the company more risky.

Stay away from penny stocks and thinly traded stocks. You can easily get burned. Watch The Wolf of Wall Street movie on these. The name of the game is pump and dump.

If you want to play you can paper trade (fake trade) to get a feel for it. This is sort of like fantasy football.

If you are buying stick to big names with growing revenues and profits like Google, Microsoft, Procter and Gamble, Nike, Starbucks, Disney, Facebook etc.

Remember you are buying a very small part of the company. If the company earns more money your shares in general go up. If the earnings come in poor you lose value.

You could lose it all! Those folks who bought stock in Toys R us, Sears K-Mart got wiped out. Their shares were worthless post bankruptcy. But I own a share of the company! Yes you did but in a liquidation bond holders and debt holder get first claim to the assets of the firm as they are higher in the pecking order of seniority. Stock holders are junior so they go last. That means usually there is no value left once the bond holders have been paid so you shares become worthless. Moral of the story is don’t buy risky stocks.

Another rule of thumb is don’t panic based on short term volatility. Look at the longer term trend.

Beware of overpriced shares. The company could be great but shares over priced relative to actual worth. Look at P/E ratio and PEG ratio.

Beware of companies that don’t make money, meaning they are unprofitable (no P/E ratio). You are hoping the company eventually becomes profitable but it may not. It’s like drafting a college player into the NFL. They could pan out as the next Tom Brady with multiple super bowl rings or be a worthless draft bust that wasted your money. Many companies known as unicorns fit this category. Think Uber, Roku, Lyft, WeWork. None are profitable and the business model may not be sustainable at current price levels but they are great for customers when they buy your business. : ) Their prices have risen tremendously as investors hope hope for profitability down the line but since they don’t make money the price can drop quickly if expectations change.

Consider stocks that kick out a dividend meaning cash payment each quarter. These are usually in the range of 1-2% per and could go all the way up to 6%. Even if the stock doesn’t go up you get the dividend which is akin to interest. Alas there are many stocks that pay no dividend at all such as Google even though they make tons of money.

Don’t use leverage (margin) as a beginner. You will quickly lose your money as your losses are magnified.

Stay clear of falling knives. A falling knife is something you don’t want to catch. That is the term for a falling stock that is falling and will keep falling. If you try to catch it you will bleed (money that is). A current example is GE. Look at the five year chart on that one. Ouch. Deep cuts.

I also want to call a out subtle difference between trading and investing while we are at it. Investing is for long-term as in buy and hold. Trading is shorter in duration and can be opportunistic as in the case of a market pull back.

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