As part of this investing series, I would like to talk today about setting up a brokerage account. There are many companies, for example Etrade, that offer you to set up a brokerage account online, and make it easy for the novice investor to get started in the markets. Before you start investing, remember that the markets fluctuate. They peaked back in March, but that does not mean that they will grow steadily for all the duration of your investment. You have to be ready to see your investments go down as well. This is why I recommend that you never invest money that you are not prepared to lose, as a worst case scenario. If the markets have historically always gone up, it is not unheard of to see them go down 20 or 30%. And one of the main mistakes investors make is to exit too early, instead of waiting some more for the investment to increase. People panic, sell, and lose money.
Make sure you are comfortable with the amount you invest, and that you can stay invested for the medium to long term. Over three to five years, you will likely benefit from your investment. But if you need the money next month, better keep it in your emergency fund until you can afford to invest for some time.
Anyway, now that you have your investment fund, time to look for an online brokerage account. Shop around, make sure you understand all the costs involved. There is usually no set up fee, but there is a fee for every transaction that you will make, and that fee is a bit higher if you need a broker to assist you. Those fees will reduce your profit as well.
Online brokers generally do not assist you with your trades, you will do your research by yourself, buy and sell your stocks when you decide to. Most online brokerage accounts offer the possibility to automate your trade, for example if you buy a stock at $20, you can decide to sell at $25, and place a sell order that will be filled automatically when the price is reached. You can also place what is called a stop loss, say when the stock reaches $15, all your stocks will be sold too, limiting your losses. As mentioned before, stocks bounce up and down and placing too tight a stop loss can result in you systematically getting the stop loss filled.
If you are looking for even more automation, you can fund your brokerage account automatically every month. This is a system I like as it removes most of the hassle from investing. Every month, you can send $100 to your account, and ask that some particular funds are bought. I do this with index funds, that follow th market’s main indexes. This strategy also helps to dollar cost average your investments, meaning that sometimes you will buy low, sometimes higher, but the cost of your investment will average over time.
Lastly, unless you go for day trading, try not to check your investments too often. You may be tempted to sell too early or get stressed if stocks go down. I check once a month or so and that is more than enough.