8 Basic Questions About Trading & Investing

I don’t know very much about personal finance except for the mistakes I’ve made. Blogging about it has forced me to learn more and to understand more.

I recently asked a friend of mine to give me his two cents on trading and investing.

What questions do you have? What expertise can you share?

1. Are there certain basics you think people should know before they even start investing or trading? 

Yes. I think they should know certain concepts like the differences between a growth and value investor. They should know how to place a call order for stocks and how to automate it. They should know how to read a stock chart and what the numbers mean. Those are just a few things that come to mind.

[See also: Stock Market Basics: What Beginner Investors Should Know]
[See also: Stock Trading: How to Begin, How to Survive

2. What can you tell me about day trading & penny stocks?

You’ll need at least $40,000 if you want to become a day trader right now ($20,000 is the SEC legal limit, but a good rule of thumb is to have double that amount to account for losses).

If you’re going to try penny stocks, then you have to be very careful with scams. If you trade penny stocks, there’s a whole different way to trade them than conventional stocks if you’re trying to make bigger gains.

Overall, they’re not easy methods to learn if you don’t have any basic training experience previously.

However, if you’re interested in day trading, the better method would be to swing trade. It allows you to trade with a little bit less money and not have the $20,000 needed by the SEC. You’d just need to be careful not to go over the five trades a week limit. You can still trade penny stocks, it’s just very risky if you don’t know what you’re doing or if the information from the company isn’t legitimate.

One common scam with these types of stocks is a “pump and dump” where a lot of people put a lot of money into the stock, and once the stock reaches peak performance, the few people who own the majority will dump the stock and take all the money.

3. Are there any good websites that let you practice trading—for free?

Yes. I’d recommend the Market Watch Game and Investopedia.

4. If you don’t want to day trade is there a minimum required in your account by the SEC? Is it right to assume that if you’re not day trading, you’re swing trading? Or are there multiple other kinds of trading?

Yes, if you want to make 5 or more trades within a week, you’ll need at least $20,000. This is considered day trading.

There are different types of trades, but a swing trade is when you buy or sell a stock when it dips or rises. The best way to make your money would be through volatile stocks that have a tendency to go up and down.

The nice thing about swing trading is that it can circumvent the five or more trades because you’re not trading within the day. You’re trading within the trend, which can be a few days. You can let the trend go up or down and trade accordingly, so you make fewer traders than you would as a day trader.

[See also: How to Day Trade]

5. Do you have to actually meet a broker in person?

You don’t have to meet the broker, but you usually you do when you set up your account for the first time. You can think of it like opening a bank account at a big bank like Chase, Bank of America, or Citibank. Usually you meet with someone to talk about the bank’s services, and then you open up your account.

The process will be similar if you use a full-service brokerage account.
If you’re using a discount brokerage account, then you don’t need to meet anyone. You’d just set up your account online, similar to opening an email account.

6. What counts as a discount brokerage account? Does it matter which one you use, or is it just personal preference? 

Discount brokerage accounts are websites that let you trade online. It doesn’t necessarily matter which one you use, but you should look for one with the services and fees that work best for you. You should also make sure that it’s a reputable company.

7. Would you ever recommend a discount brokerage account? 

I think it’s the best method for having total control over your account and for minimizing fees.

8. Do you trust brokers? Do they help make recommendations for investing, or do they serve a more administrative or sales function? 

I would have caution with brokers because they usually work like a car salesman might, advising you to buy certain stock that actually provides a greater benefit to them than to you.

Usually brokers in these big firms are working for the company, and the company makes relationships with other partners. The big firm tells their brokers to push certain stocks to their clients.

That’s why fiduciary laws are really important to ensure that stock brokers are required to let clients know if they receive a commission for the stocks they’re selling.

Personally, I would rather use a discount brokerage account because they provide tools to help you make better choices rather than just letting you blindly trust in someone else to make the choices for you.

[See also: Day Trading, An Introduction]
[See also: What is the Stock Market?] 

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