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No one starts out as an investing expert. Keep reading for a few common errors you might make when you open a brokerage account — and how to avoid them.
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Investing money in an account with a brokerage firm can help you build wealth. You could invest in an IRA with a broker, or could open a taxable account if you’re investing for something other than retirement.
No matter what kind of investment account you have, though, there are three big mistakes you’ll want to avoid. Here’s what they are.
1. Trading too often
Being an active trader can actually be one of the biggest investing mistakes that you could make. That’s because it can be too hard to try to time when to buy and when to sell. Many people overreact to both bad and good news, or jump on bandwagons too late when they hear about a “hot stock.” This can lead to buying at high prices and selling at low ones, which is the exact opposite of what you want.
Trying to time the market can actually cost you a whole lot more than you might think. For example, if you had $10,000 invested in the S&P 500 index from Jan. 1, 1980 to March 31, 2021, that $10,000 would have turned into $1.09 million if you left the money invested the whole time. But here’s what it would be worth if you missed just a few key days, according to Fidelity:
$676,395 if you missed the five best days in the market.$487,185 if you missed the 10 best days$176,591 if you missed the 30 best days$77,930 if you missed the 50 best days
You can’t know when the best day will be. So, rather than trading frequently and risking missing out, you should invest your money in assets that you’re happy to hold for the long term and leave it alone. Not doing so could be a costly mistake.
2. Trading on margin without understanding the risks
If you trade on margin, you borrow money from your brokerage firm against the value of your stocks and you invest those borrowed funds. This gives you more leverage since you have more money to trade with. But you have to pay interest. And, if your investments perform poorly and your balance drops too much, you could be forced to sell your assets at a bad time or the broker could sell them for you.
Trading on margin is really risky because you have to earn pretty good returns to end up better off after paying interest. Plus, you could face a “margin call” and be forced to sell at a bad time if your balance drops too much. Taking on this risk isn’t something you should do unless you’re a pretty advanced investor, even if it might seem like an attractive option.
3. Not taking advantage of educational materials
Finally, the last big mistake you’ll want to avoid is not taking full advantage of the educational materials your broker offers. Most brokerage firms provide free tools to consumers. You should use them to increase your investment knowledge and make selecting investments easier. Everyone has to start somewhere, and leaning on tools like these can make you a better investor.
By avoiding these three mistakes, you may be able to grow your brokerage account balance and avoid unnecessary losses that could come from simple errors.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
