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5 Things Every New Trader Should Do

By Neda Jafarzadeh, a financial analyst with NerdWallet Investing.  NerdWallet Investing helps investors select better mutual funds for their 401(k) plans, find the best 529 plan, and make smarter investment decisions overall.

By its nature, investing is an exercise in uncertainty and risk and when your hard-earned dollars are at stake, the pressure gets higher. That doesn’t mean you should avoid online investing – on the contrary, a measured and responsible approach can greatly enhance your earnings and help you reach your financial goals. As you dip your toes into the investing waters, be sure that you keep in mind the following five steps:

1. Decide what kind of investment you want to make

First, you have to decide exactly how much money you’re going to use for investing purposes – settle on a set dollar amount to begin with and don’t let yourself exceed that limit. It is important, too, that you know exactly where that money is coming from, be it a savings account or a sum you’ve received as a gift - and don’t invest more than you can afford to lose. Apart from this being a responsible approach, settling on an amount will help you choose a broker, as many have minimum balance requirements.

2. Have a safety net in place

Before investing, make sure that you really can afford to do so – even beyond making sure that you only invest what you can afford to lose, you should ensure that you have an emergency account or fund set up that is readily available should an unforeseen expense arise. Many experts recommend that your savings be able to sustain you for at least six months. Consider stashing this money in a regular savings account, or perhaps in a money market account (which will have a higher interest rate, generally).

3. Choose a broker

There are wide ranges of brokers from which to choose and picking the right one for you will depend on the amount that you’re investing and how active a trader you plan to be. Planning to make frequent trades – say, at least ten a month? Consider a lesser-known broker that offers discounted trade execution fees – even as low as $1. Looking for tons of resources and high-quality customer service? Then an account with a household name such as Schwab might be the right fit. Keep in mind that the SEC and FINRA hold all brokerage firms to the same standards - so you should be able to fully trust any certified broker.

4. Do the research

Whether you’re hands-on or more laissez-faire, you need to be making informed decisions with your money – and that means doing your own research. Peruse any research reports and don’t be afraid to choose index funds over active funds; many studies have shown that active managers don’t perform better than that the market index. In addition, always look at a fund’s expense ratio for a better idea of after-fee returns. Not only will you find better stock picks this way, you’ll feel more confident and less hesitant about your choices.

5. Stick to your principles

Now that you’re invested, don’t lose sight of your goals, or of the strategies you’ve chosen to help you reach them. Purchase a range of securities, from stocks and commodities to obscure funds, to ensure that your portfolio is fully diversified. Identify markets that you find interesting, as that will make them easier to understand and more enjoyable to research. Most importantly, pick a reasonable goal – such as a 10% profit after one year – and then choose and invest decisively, confident in your ability to make informed selections. There is no room for hesitancy or second-guessing in online investing.

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