Free-quent Flyer
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There's a hoary old Wall Street cliche that "if you don't know who you are, this is an expensive place to find out."
One of half of this statement is true: you can find out who you are trading stocks. The other half is false: the stock market is, in fact, a very cheap place to learn that lesson.
As I've mentioned elsewhere, I've been using the Robinhood iPhone app to do commission-free trading for the last 9 months or so, and while I've made a killing (a bull market makes everybody a genius), the lessons trading has taught me about myself are much more valuable than the money I've made.
So I frankly think every investor should start by trading a small amount of money on a free platform like Robinhood, so they can learn their own answers to these interesting questions.
The reason this is such a valuable learning experience is that even if you're a passive, indexed investor like me (I only have one mutual fund, the Vanguard 500, in my retirement account), you are likely to respond exactly the same way to changes in the value of your passive, indexed mutual fund investments as you do to changes to your day trading portfolio. If you buy more GE stock when GE is going up, you're also the kind of person who will pile into US equities when US equities are in a protracted bull market (*cough* now *cough*). If you sell at the first downward tick in your Wal-Mart shares, you're also the kind of person who will sell at the first downward ticket in the Vanguard 500 — and miss the next bull market.
What this experience has taught me is that I'm basically the person I hoped I'd be: when my stocks go down, I buy more, and when they go up, I sell them and pocket the profit. When they stay flat, I collect the dividends.
But it might teach you something else! As I joked to @Matt last weekend, the only other place you can learn so much about yourself is the craps table, and craps is a hell of a lot more expensive than commission-free stock trading.
One of half of this statement is true: you can find out who you are trading stocks. The other half is false: the stock market is, in fact, a very cheap place to learn that lesson.
As I've mentioned elsewhere, I've been using the Robinhood iPhone app to do commission-free trading for the last 9 months or so, and while I've made a killing (a bull market makes everybody a genius), the lessons trading has taught me about myself are much more valuable than the money I've made.
So I frankly think every investor should start by trading a small amount of money on a free platform like Robinhood, so they can learn their own answers to these interesting questions.
- What will you do when a stock goes down? There are two approaches you can take to a stock going down after you've bought it. If you think it was a good stock at a good price at its earlier value, then it's an even better value at its new, lower price, and you'll buy more. If you think it was a good stock guaranteed to go up, but instead it goes down, then you'll think you made a mistake and sell at a loss. These are both perfectly reasonable reactions, but as an individual its essential to know which kind of person you are.
- What will you do when a stock goes up? If you bought a stock because you thought it would go up, and it does, you might congratulate yourself on your correct prediction of the stock's future movement and sell it for a profit. Alternatively, if you thought it would go up and it did, you might find the fact that it went up reinforces everything you previously thought about it, and buy more. Again, both reactions are perfectly reasonable, but learning which kind of person you are is extremely valuable.
- What will you do when a stock stays flat? If you buy a stock because you think it's promising, or because of its higher-than-average dividend yield, and it stays flat, you might decide that you were wrong, and it's not promising, or that other market participants don't believe it will keep its elevated dividend, and you might sell. Alternatively, you might hold the stock forever, expecting that it will continue to spin off profits that will allow you to increase your investments. Both are perfectly reasonable reactions, but if you don't know which one you will have, you're guaranteeing trouble for yourself.
The reason this is such a valuable learning experience is that even if you're a passive, indexed investor like me (I only have one mutual fund, the Vanguard 500, in my retirement account), you are likely to respond exactly the same way to changes in the value of your passive, indexed mutual fund investments as you do to changes to your day trading portfolio. If you buy more GE stock when GE is going up, you're also the kind of person who will pile into US equities when US equities are in a protracted bull market (*cough* now *cough*). If you sell at the first downward tick in your Wal-Mart shares, you're also the kind of person who will sell at the first downward ticket in the Vanguard 500 — and miss the next bull market.
What this experience has taught me is that I'm basically the person I hoped I'd be: when my stocks go down, I buy more, and when they go up, I sell them and pocket the profit. When they stay flat, I collect the dividends.
But it might teach you something else! As I joked to @Matt last weekend, the only other place you can learn so much about yourself is the craps table, and craps is a hell of a lot more expensive than commission-free stock trading.