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Educational Tips

How to Develop a Market Strategy and Choose an Online Trading Platform – Part 1

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.

 

 

Price
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.

 

Fees
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.

 

Minimum balance
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. Click here to see part two!

 

10 Comments

  1. Very useful Dividend Daze. I think beginner investors should definitely take the time to learn the basics and not rush in.

    Although I personally think that investing doesn’t have to be an all or nothing approach, I do think that education is key before taking the plunge.

    Great write-up. Looking forward to part 2.

    1. Thank you. I agree, investing doesn’t have to be all or nothing and that is what is so great about it. Everyone’s strategy is slightly different and they have different criteria for their risk tolerance or how to achieve their goals. But if everyone sticks to their own strategy they should be fine. Thanks for your comment.

  2. I think what’s right for you depends on A) your skill set and B) your personality.
    Some people are just the really giddy types who can’t sit tight. Trying to be a medium-long term investor will end in disaster.

    1. That is true. That is why there is so many different kinds of investing you can do. What is right for one person may not be right for others. There is no right or wrong way to invest. Just have to learn from your mistakes and pursue your own strategy. Thanks for your comment.

  3. Looking forward to part 2! Some things I hope you cover include trading platform ease-of-use and record keeping (i.e. support at tax time!).

    Thanks!

    1. Yeah part two will have a few more of the intangibles. Ease of use is big and doesn’t hurt if a platform can make your tax time easier with their 1099 forms. As always, I appreciate the comment.

  4. Good introduction! It’s scary that the majority of people probably don’t know any of this and are living paycheck to paycheck (regardless of income). People that write, read, and comment on investing blogs are definitely in the minority. The best advice, I think, is spend less than you make and save as much as you can. The details on the types of investing instruments can come later. Looking forward to part 2.

    Scott

    1. That is so true. It’s difficult to even hold a conversation about the market, investing, or even retirement for that matter with most people. There is no best practice because there are so many different ways for success. If someone wants to just stockpile money in savings that will still put them in a better position than someone who has done nothing living paycheck to paycheck and spending it all. I appreciate your comment.

  5. In addition to the factors that you mentioned, I would also add that the convenience of managing all your accounts in one place is also a good thing to look for when you are evaluating a potential broker. For my broker, I am able to manage multiple accounts for myself and also able to manage for others in my family. Because of the benefits of managing multiple accounts, all the accounts that I manage gets the best offer in terms of fees.

    1. I completely agree. Think I added simplicity in part 2. I do use a few different brokers depending on the type of account to minimize fees. But if fees are no issue, I try to keep it all in one place for simplicity sake as well.

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