UNITED STATES—If you are new to buying and selling securities, it’s important to learn about some of the common warnings for inexperienced traders. While the stock market can be an exciting and profitable field of endeavor, it also carries a few inherent risks for those who put their hard-earned money at risk. In addition to losing large sums to unscrupulous brokerage platforms, it’s possible to become too enthusiastic and place too much money into a single position. There’s more to it than that, so here’s a brief list of the most common things that new traders should watch out for.
Beware of High Fees and Commissions
When you begin shopping for a brokerage platform, read all the fine print. It might seem like a chore, but it’s worth your time to pick through the list of fees, charges, potential penalties and commissions. Many first timers think only to check commission rates. That’s a mistake because most online brokers have many different types of monetary fees based on account activity, the types of trades you make and more.
Avoid the Pattern Day Trader Rule
Be very careful to keep track of any buying and selling of a single stock within a single session. Most people have heard of day trading but are not aware of a strict SEC rule about so-called pattern trades. The short of it is if you buy and then sell the same stock within one day, the SEC classifies that action as a day trade. When you do that more than four times within a five-day period, your account can be locked for up to 90 days, or until you bring your account balance up to $25,000.
Don’t Be Tempted to Take Large Positions
It’s tempting to want to purchase a large number of shares of a stock that you think is poised to take off. Whether your guess is right or wrong, be careful not to put more than about 2 percent of your total trading capital into the trade. The two percent rule has been around a long time and many experienced market denizens swear by it. The point is to establish some fixed parameters for buying into any attractive stock.
Stick with Your Set of Rules
After a while, you’ll likely establish a set of rules that dictate most of your activity, like “Never buy a stock priced at more than $100 per share,” “Only purchase blue chips,” or “Don’t acquire shares priced under $20.” Write down your rules and stick to them. If you freelance on every deal, you’ll end up letting your emotions rule your actions, and that’s a dangerous way to behave in the securities markets.
Do Some Paper Trading Before the Real Thing
Whatever platform you end up using, take advantage of one of the free simulated robo-advisors for at least a few weeks. After you know how to place orders, get into and out of positions, and figure out how commissions affect your bottom line, stick to this safe form of practice to hone your skills and temper your emotions.