The rapid movement of the markets over the past four months has led to a significant increase in the number of Americans trading. This is due to the unusual amount of free time that people have available, the availability of trading apps and the extreme volatility.
One of the most common ways that people use to make money in the markets is by buying and selling assets on margin. The margin trading is a type of financial transaction that can help them achieve their goals and increase their returns. According to the experts at SoFi, “When you buy on margin, you’re purchasing assets using money that you borrow from your broker.”
Precautions New Investors Should Take Before Trading
1. Stocks Don’t Just Go Up
The markets have started to recover from the March lows, but it’s important to remember that this is a unique time for the market. A lot of credit should be given to Dave Portnoy, the CEO of Barstool, for creating the viral videos that caught the attention of the younger generation. While the videos are very entertaining, the value that he adds to the discussion by providing a variety of commentary and advice is appreciated.
One of the most important factors that investors need to consider is the possibility of a reversal in the market. This is because the past three or so months have been very volatile. Having a plan for when the markets inevitably turn negative can help minimize the risk of making mistakes.
2. Beware of Urge to “Go All In”
One of the biggest myths about investing is that it will lead to rapid wealth accumulation. This is not the case. As long as you stick with the market and participate in its returns over time, you will make gains. There are plenty of investors who have made a killing in the early stages of their careers but recognize that this is only a small portion of the total investing community.
3. Diversification is Key
One of the most important factors that investors need to consider is the concentration of their positions within a certain industry or company. While having a conviction about a certain stock or industry does not mean that you need to have a 60% stake in it, it is still important to identify a few areas of interest.
4. Know the Difference Between Investing and Day Trading
While investing is a type of financial transaction that involves taking advantage of the market’s volatility, day trading is different and compared to gambling. It involves buying and selling individual stocks to take advantage of the price swings.
While day trading is often triggered by the actions of other traders, investing is a long-term strategy that allows investors to participate in the market. It rewards long-term goals and diversification. People who day trade to get rich quickly tend to focus on short-term gains.
5. Beware of Leverage
One of the main complaints with the various trading apps is that they allow users to trade on margin easily. In margin trading, an investor uses borrowed money from a broker to purchase or sell financial assets. This type of financial transaction can be very different from what happened during the housing market crash.
While margin can help increase returns, it can also be very harmful to an investor due to its potential to cause severe losses. If a trade goes through and the broker does not have the necessary resources to support the position, the investor may be forced to either liquidate their position or add to their cash.
Although many would encourage young people to get into the investing world, it is suggested that they take their time and do not invest more than they are willing to lose. A wise investor once said that if an investor can’t explain it, they probably shouldn’t be investing in it.
