5 Lessons from Opening a Robinhood Stock Trading Account
Jumping into the world of investing requires a willingness to learn
This year, the Covid-19 pandemic and an ever-burning desire to make more money led me to do something I have often thought about but never ventured; trading stocks. With a variety of online and phone application platforms to choose from, I decided to start with Robinhood, which is known for its basic and user-friendly design while also being commission-free. It wasn’t long before I got hooked and rapidly learned five important lessons.
Before delving into my journey to fiscal evolution, I can’t stress enough that I am not a financial expert. I don’t even play one on tv. My primary qualifications are that I like money; I have had a little money from time to time; and I would like a lot more of it.
It can be difficult to make any money you already have on hand work for you. Bank interest is sparse at best, while many investment opportunities require more capital than an average person might possess. Robinhood not only allows users to buy partial shares of stocks (i.e. if you want to own some of Facebook, which currently trades at more than $275 per share, you can buy a fractional share depending on how much money you want to spend) but you literally need $1 to start. My kind of investing!
Now, a little more than a month after opening my account, I can reflect on these important things that I have already learned:
Never invest money you can’t afford to lose: This may seem obvious but from what I have gathered from connecting with fellow investors around the world, it’s a hard rule for many to live by. Investing holds many similarities to gambling. No matter how sure you may feel about a particular stock, there are literally no guarantees. Things can change on a dime with little warning. That being said, it’s very possible to get some nice returns if you give mix time and hard work with a little luck.
I set myself a specific limit that I was willing to contribute to my account each paycheck. I also determined a good way to add some additional funds was by selling a few items through Facebook Marketplace that were lying around and of no meaningful use to me. In these ways, I have been able to gradually build a reasonable portfolio and give myself a foundation to try and build wealth.
Do your own research and due diligence. Don’t rely on the advice of strangers: There are many places online to engage with and ask questions of fellow traders. No matter how sincere a person may seem, at the end of the day, any decision you make should be based primarily on what you have personally researched and believe to be true.
The stock landscape is littered with investors who cannonballed into a stock only to see the price tumble and leave them holding a proverbial bag. Talking up that stock and touting its attributes might possibly influence others to invest, which in turn can help drive the price up. Even if such an increase was small, you can’t underestimate the motivations of people wanting to mitigate their own personal financial loss to any degree.
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Educate yourself. It’s not easy but there are plenty of resources out there to teach you more about how to invest and assess trends and viability. Even having a cursory understanding about what drives prices and what makes a stock promising or not means a world of difference. Established “experts” from publications and television can be helpful but aren’t right 100% of the time. Always keep that in mind.
Diversify is the name of the game: It’s easy to fall in love with a particular stock or even a specific sector (a market genre like the auto industry or pharmaceuticals). However, diversifying a portfolio, not only between different stocks and sectors, but also stocks that are established versus those that are lesser known, and by definition volatile, help increase your chances of success.
A good way to build a base is making sure that your portfolio has some presence in blue chip stocks. These are the big boys; the companies everyone has heard of and are in little trouble of abject financial failure. Think Facebook, Apple and Coca Cola. There is no guarantee they will make you gobs of money, but they are much more stable and also typically offer better annual dividend returns, which allows you to make passive income no matter how well the stock performs. It’s also important to note that fractional shares still earn a shareholder fractional dividends.
Another way to offer yourself stability is by getting some money into index investing funds. These are essentially stock portfolios built by experts that can be invested in. There are no guarantees, and while they are not likely to double in value over a week, they typically offer a very solid return (think 10–15% annually).
The power of patience: In a perfect world, a person could invest in a stock and see a meaningful return in a matter of days. That’s simply not the reality. Stocks that may sputter or even dramatically go down after you have invested have the possibility of changing course, even if it is months or years after your entry point.
One of the first stocks I bought looked great on paper and promptly tanked a couple of days after I added it to my portfolio. Even though it wasn’t a large amount of money, seeing it sitting 20% below what I paid for it really ground my gears. Several weeks later, it was disclosed that said company made a coveted acquisition of another company and the stock soared, allowing me to double to initial investment. By nature, I am not a patient person, so this felt especially good.
Keep the tax man in mind: Anything you make from investing is income and will be taxed. If you profit off a stock you have held for less than a year, your profits are considered short-term capital gains, while anything owned for more than a year before taking a profit are long-term capital gains. The short-term gains are taxed at the higher rate but if you build some success with your portfolio, you want to make sure to keep your obligations in mind and plan accordingly. Many sites have concise and helpful information regarding tax implications.
Finally, time for a shameless plug. As mentioned previously, there are a number of trading platforms that each have their own pluses and minuses. For the time being, I am still with Robinhood, which works just fine for me given the amount of time I am able to put into the venture. A benefit they offer is that every person who opens a newly funded account receives a free stock in their portfolio, including the possibility of receiving ones like Apple or Microsoft. Additional free stocks are earned by referring the platform to someone else who opens an account, and so on. If Robinhood sounds like something you’d like to explore, you can open an account, see what you think and earn both you and I a free stock. Happy investing and good luck!
DISCLAIMER: The opinions expressed in this article are intended for general informational purposes only and are not intended in any way to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education and opinion about the financial industry.
If you sign up for a Robinhood account using the link provided in this article, you will receive a free stock, as will the author.