A while back, I posted about why now is the best time to be an investor. One of the points were in reference to the current trading platforms or online brokers. There are tons of brokers out there to trade through. Just to name a few, there is Options House, Ameritrade, Trade Kings, Charles Schwab, Merrill Edge, Fidelity, and E-Trade. So let’s dig a little deeper into the subject. What should you look for when selecting a platform? What makes one superior to the other? Which one is the best? How does ones broker or trading platform fit into their overall market strategy? What other questions should you be asking? In this two part article, I will talk about what questions to ask in order to form a market strategy, and how your online trading platform plays a role into that strategy.
Creating Market Strategy
First things first, an investing strategy must be made in order to be successful in the market. How involved do you want to get into your investments? Are you going to be very active checking the performance of your portfolio, and optimizing where you money is being allocated? Or are you a “set it and forget it” kind of investor? Are you going to be a day trading and seek out highs and lows for short term gains or hold positions for long term? How much risk are you willing to handle if there is market volatility? These questions will help to make a market strategy and decide what type of trading is right for you. Then stick to that strategy.
Types of trade
Once you have your strategy in place, it will help determine what you will put your money toward. Some choices include: individual stocks, bonds, options, CD, and index funds, among others. Each choice brings a certain value to your portfolio. There are multiple reasons to choose one over the other, or a combination of several.
Since they have different levels of risk due to market volatility, your risk tolerance will aid you in the decision on what to invest in. Another factor that is your age and time you will spend in the market. Lastly, what is the end game for retirement? If you are reading this, clearly you are looking to either start investing or continue to invest for your future. Are your investments going to generate passive income to be used for your expenses during retirement? Or are you going to be selling the built up capital gains and use that to live off of? While no option is better than the other as long as you are prepared for retirement, the questions are helpful to determine what types of investments will get you there.
Now after you have asked yourself all of those questions and set out a game plan, it’s time to actually make your first trade or buy. As stated above, make sure that the broker offers the types of trades you are looking for. Some companies may only allow you to trade individual stocks and other a combination of stocks and funds. But a big, tangible piece of the puzzle is price per trade.
Remember you will be charged this price every time you make a purchase or sell a stock. So plan accordingly depending on your market strategy. Most online platforms have come down in price recently and are all very competitive, which is good for the investor. At the time of writing this, the price is around $5-$7 per trade for most online platforms for individual stocks in a taxable account. Price also may fluctuate depending on if you are trading inside a tax sheltered account like an IRA or Roth IRA. There are some platforms that do not charge any fees for trading but they may charge a monthly fee to compensate.
Now that price is taken care of and understood, don’t forget there may be other fees involved. For example, if you are buying into a mutual fund there are a few other terms to understand. Expense ratio, refers to the percentage of money that a company or fund manager charges you per year to maintain that fund. They do all the buying and selling within it to try and keep it profitable and you are just charged a small fee. Usually less than one percent. This fee will just come out of the funds in the account, you don’t have to pay it separately. However, it is important to try and keep these fees low to maximize your over all yield on your investments.
Secondly, you may hear the term “Load” or load fee. This is an additional fee in a mutual fund that is taken out prior to actually making the trade. This fee seems to go right into your financial advisors pocket and can be anywhere from zero to five plus percent of that trade value. In simpler terms if you invest $100 with a 5% load fee, you are only investing $95 and already start behind. There is a time and a place where this is relevant, but I am not a fan of it. Although you heard me right, not all funds have this fee. I personally would never pay any load fees on a fund.
While those are just a few different types of fees associated with certain types of trading there could be more. Please read up on each broker carefully before investing. Let me tell you a short story about a friend of mine who was really excited to start investing but failed to do any research prior. He picked the lowest cost broker he could find and that was the only basis for his decision. After buying a few stocks he became busy with life and just let them sit. This broker charged him an inactivity fee for not making a trade in so many months which almost over drafted his bank account charging him more fees. I have never heard of any company doing or having this but apparently it happens. This story is not meant to deter anyone. Simply a lesson in due diligence so you will be smarter out of the gate and don’t use price as a sole basis for choosing a trading platform.
There are two different areas I would like to discuss pertaining to minimum balance. First, this goes along with our last point, fees. Does the account require a minimum balance amount? Will you be charged a fee if this is not met? Is there a time limit on how long you can be under the limit before you are charged? Hypothetically, what if a big expenditure or life event came up and you need to liquidate your portfolio for the money. Can you let your account sit dormant with a zero dollar balance without issue? Secondly, in order to buy into most mutual funds, they require a minimum dollar amount be invested. If this is part of your investing strategy, then make sure you can meet the necessary amount.
As I mentioned before, this is part one of a two part article. Hope you enjoyed the first five points and be on the lookout for part two coming shortly.