Better Ways to Trade Stocks for Teens and Young Adults

Stock-picking has long been glorified by the media. Even after the financial crisis and Occupy Wall Street, analysts such as Jim Cramer still have television shows where they go on the air and dispense ‘expert advice’ for an hour at a time. Stock-traders are paid very high salaries, and people are understandably captivated by them.

Of course, most people cannot successfully emulate these traders--nor should they attempt to. In a recent article, I explained why most investors should just put their money in low-cost index funds and let it sit for a while. I stand by that advice. Still, I know that stock-picking can be tempting, and some readers will surely try it—I, too, held some stock for a bit of time this year. Because some readers will try stock-trading, it is important to understand how to trade wisely without throwing away your hard-earned money.

If you are going to trade stocks, there are a few rules that you should follow to get the most out of your investments:


Find the lowest fees and commissions possible for stock trades. As I described in the index fund article, high fees can quickly eat away your investment. You are not just losing the upfront cost of the fee, but that loss can also compound over time. Stock-trading commissions operate similarly: High costs will cause slower investment growth because less of your actual money will be converted to stock.

Featured Resource

In particular, I recommend using a service like TradeKing to find low-cost trades. TradeKing offers trades at roughly half the price of larger firms; for six years in a row, it had been recognized as the Top Rated Broker by SmartMoney magazine, a branch of the Wall Street Journal. If you are going to trade stocks, I definitely recommend applying there and at least seeing what the service is all about.

Check your portfolio less often. Investors who check their portfolio less frequently tend to outperform frequent checkers. This fact might surprise you; frequent checkers presumably have more information about the market and can thus make better decisions. Quite the opposite is true, however: Frequent checkers tend to be scared off by periods of volatility in the market and often pull their money at the exact wrong time.

Here’s an example, as illustrated by a recent study of investor behavior: Although the S&P500 posted annual returns of over 8% from 1989 to 2009, the average stock investor only made returns of 1.9%. Some of that discrepancy is attributable to fees, but it’s largely because of poor emotional timing. People are far more prone to purchase stock at the height of the market, when everyone is bubbling over with enthusiasm, and far more likely to sell their stock at the bottom of the market, when things look their bleakest. The problem? Investors are paying top-dollar for stocks, but cashing out for mere pennies.

Over the past century, stocks (or rather, index funds composed of stocks) have far outperformed more ‘conservative’ options, such as bonds, which offer lower risk but also lower reward. (picture to illustrate) Despite that overwhelming trend, many investors prefer bonds because they offer more consistent, shallow returns (illustrated by the lesser slope of their graph). Investors get scared off by the sharp jumps of stock returns, despite the general positive direction. If investors, however, were to check their portfolio less frequently, they could eliminate a lot of the day-to-day jumps on the chart and instead see the overwhelming growth that exists.

Diversify your choices. I think that the low-cost index funds mentioned previously are a great option to achieve diversification without requiring expert knowledge or intensive research. If you are going to pick stocks, though, you should try to avoid picking too many options in the same sector or whose fates are interlinked. For example, betting too heavily on both Facebook and Zynga could be problematic because if one takes a downturn, the other is likely to as well. Of course, it is also possible that great news for one could bring great returns for the other, but in general your money is far less safe when it is not spread widely.

Featured Resource

Another goal here should be to own stock in a relatively large number of companies, rather than investing heavily in two or three. When your money is spread across more companies, it is much harder for any one aberration or collapse to be catastrophic because it would be offset by a larger number of stable investments.

For example, consider what might have happened had you owned a large amount of stock—say, 30% of your portfolio—in Enron, a Houston-based oil company that went bankrupt in 2001 after a huge corporate scandal: Your net worth would have been decimated, whereas you would not have been that badly off had Enron only been 3% of your portfolio. (Unfortunately, many of Enron’s lower-down employees were in the former situation because they had been talked into buying large amounts of Enron’s stock.)

What's the conclusion here? I still recommend investing in index funds over stocks, but I recognize that some people will trade stocks regardless. If you are going to trade stocks, make sure to seek out low fees, give yourself fewer opportunities to jump ship, and diversify your holdings. By following these guidelines, you will be in a good position to outperform the average stockholder.

Looking for ways to find money to invest? Concerned about budgeting your remaining income? Check out our newest FREE resource, Mint, to easily analyze and improve your finances! It works with credit cards, debit cards, bank accounts, and more! Sign-up for Mint today!


Photo from above is available here.