Opening a brokerage account can help you build a strong investment portfolio, which helps you grow your wealth over time. But it is important to use your brokerage account with caution. And that means avoiding these mistakes.
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1. Negotiate too frequently
Some brokerage accounts charge a fee every time you trade, and those fees can really reduce your profits if you trade a lot. But even if you have a brokerage account that doesn’t charge a per-trade fee, it’s still good not to trade too often.
It could mean selling stocks too quickly and not profiting the way you deserve. Or, it could mean losing money – especially if you rush to unload a stock every time its value starts to drop.
As a general rule, it is good to adopt a buy and hold strategy with stocks. This means adding quality investments to your portfolio and holding them for many years, during which time they can gain a lot of value. Holding stocks for many years also gives you time to recover from temporary declines in value.
Plus, while a diversified portfolio is a good thing, you don’t have to buy a new stock every week to achieve it. Instead, you can load up to fifteen quality stocks that represent a range of market sectors. (If you want to own more stocks than that, go for it. But don’t feel like you have to keep investing in new companies all the time.)
2. Do not take advantage of educational resources
Many brokerage accounts come with educational resources that can teach you how to become a better investor. It is worth reading them, especially if you are just starting out. Or, to put it another way, if you make investment decisions without fully understanding what you are doing, you could end up losing money.
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3. Trading on margin
Some brokerage accounts offer margin trading, which involves borrowing money to invest. For example, if you have $ 2,000 in your brokerage account but want to buy stocks for $ 4,000, you may be eligible for a $ 2,000 margin loan to make the investments you want.
The advantage of margin trading is the possibility of making larger profits. But there is a danger in margin trading, which is why it is not suitable for many investors. When you have an outstanding margin loan, your broker may issue a margin call that requires you to cover the money you borrowed. If you don’t have the cash flow to pay off that margin loan, you might be forced to sell your current investments to satisfy it. It could mean selling stocks at a loss. Worse yet, as an investor, you cannot control when a margin call is made, so trading on margin could put you in a worse financial position than when you started out.
If you maintain a brokerage account, manage it with these elements in mind. Avoiding these mistakes could help you avoid losses and grow the wealth you hope for.