About a year ago I had to merge my previous employers 401K with the 401k at my new job. This turned out to be a complicated procedure. Warnings plastered all over the page declared that a mistake would cause your account to be hit with fines and fees. So much for deferring taxes.
Let’s say I was terrified.
When I reached out to a financial helper he took one look at my previous 401k and started laughing. That previous employer was my first real job. I knew as much about stocks as I knew about rocket science. They can go up and they can come down. Sometimes they go boom. Boom bad.
In my misguided youth, that initial employer gave me a sheet describing the different funds I could distribute my money into. After a bit of reading I divided up my deposit across the different Target retirement funds. Aka the 2040/2050/2060 etc. funds. I thought, hey I want to be careful. If I put my entire deposit in the 2050 fund and then something happens I would lose it all. Better to go with some in the safer, more conservative, 2030 fund. But if everything goes great I don’t want to miss out on all the gains, so some should also go in the 2060.
For those who don’t know, this is not how these work. It’s unnecessary.
A target date fund (TDF) – also known as a lifecycle, dynamic-risk or age-based fund – is a collective investment scheme, often a mutual fund or a collective trust fund, designed to provide a simple investment solution through a portfolio whose asset allocation mix becomes more conservative as the target date (usually retirement) approaches.
Long story long, this was when I realized I needed to learn where my money was going when contributing to the stock market. But how do all those squiggly lines work?
After some research I found a fledgling app(it was an app only platform at the time) called Robinhood(affiliate link). Unlike most other brokerages it boasted zero fee trading. Since most other reputable institutions had a $4/trade fee tacked on Robinhood was a obvious first choice.
Let’s do some math. Let’s say you wanted to start out trading Ford, like I talked about in my previous post. You just want to get your feet wet so you buy 1 share. As of close 5/3/2018 that would cost you $11.19. Plus a $4 dollar fee. 15.19! That would mean Ford would have to rise ~36% for you to break even. No profit. You are going in the hole 36% with that one trade.
Now say you go to sell that same stock. Ford had been doing well. You were holding until it reached that magic 15.19 mark. But it didn’t make it. Ford took a dive and you don’t want to lose all $11.19 of your initial investment. You sell. Let’s be charitable and say you sell for the same amount you bought in for.
Ah, ah, ah. Don’t forget the fee. Cuz you know they won’t. You’re actually selling that stock for $11.19 – $4.00 = 7.19. 36% lost again. Of your initial $11.19 you’ve now payed $8 for the very special privilege of holding Ford for a couple weeks.
Here is a simple graph that shows how much of your profit from one trade you will loose to fees depending on how much you make on that trade. Now do that over and over and its costing you a pretty penny.
OK the horse is dead. It was dead two paragraphs ago. What I’m warning you about is the same thing Benjamin Graham warned about in his book The Intelligent Investor. Unless you are very good, the only person you are making rich while day trading is your broker.
Now of course if you were to buy 100/1,000/1,000,000 Ford stocks the fee would still be $4. But if you had $11 million laying around to drop on Ford pretty sure you don’t care about the fee.
Well Jonah, I hear you say, who would choose anything other than Robinhood? Free trades? What could be the downside?
Well friendly reader, that’s a good question. Though next time could you send me an email? It’s very distracting when you blurt stuff into my brain. There are plenty of downsides. I’ll go into them more in the following blog post. This one is already getting long and I haven’t even gotten to the point.
These fees are the main reason anyone new or uncomfortable with stocks should start with Robinhood. You can literally buy/sell 1 stock and not lose it to fees. 11.19 sounds like too much to commit? Let me tell you stocks get cheap. $.0001 cheap. These are called penny stocks and most won’t be on Robinhood. $.10 though? You can find $.10 stocks on Robinhood. If you wanted you could play with ten cents all day long and have plenty to learn and do.
How to Start!
Robinhood (as of this article) is still mainly an app based platform. I can get on the webpage but you may have to wait on a list for it to be enabled for you.
Before you start grab your…
Social Security number
Bank information to fund the account
This can be your account/routing number or you Online bank login
Your phone of course!
Set up your account
The setup is pretty easy. They walk you through it. Make sure to be super accurate since this is truly a brokerage account.
Couple things to Note:
You’ll also be asked whether you, or a member of your immediate family, are employed by a member firm of a stock exchange or the Financial Industry Regulatory Authority (FINRA), or if you or a family member is a director, 10% shareholder, or senior officer of a publicly traded company. Unlikely but you never know. They are asking to make sure you don’t have inside information(not known to the public) about a company’s future.
You SSN and your address, citizenship, marital status, etc are used to make sure your not super evil/have any felonies/unpaid parking tickets.
They will verify your identity and may ask for more info
You’ll need to get them the docs/proof they need before you begin trading
Both application approval or the need for more info will result in an email in your inbox
To trade you will need to fund the account
There are no fees for Trading
You can deposit any amount
Since there is no minimum, even if you can’t spare much, just auto deposit $1-$10 a month. You’ll make headway before you know it.
That’s it! Your now ready to trade. Start small and work your way up. There is a lot to learn but there are lots of helpful, interesting people who will help. In the next post I will go over some of the negatives of Robinhood and what to be careful of when you using their platform.
If you enjoyed the post, please consider signing up with Robinhood using my affiliate link. Both you and I will get a random Stock in compensation and that helps me keep the ‘links’ on! Thanks again.