3 Mistakes to Avoid in Your Brokerage Account
by Maurie Backman | Published on Oct. 4, 2021
It's best to steer clear of these blunders for a successful investing career.
Opening a brokerage account can help you build a strong investment portfolio -- one that helps you grow wealth over time. But it's important to use your brokerage account carefully. And that means steering clear of these mistakes.
1. Trading too frequently
Some brokerage accounts charge a fee each time you make a trade, and those fees can really cut into your profits if you trade a lot. But even if you have a brokerage account that doesn't charge a per-trade fee, it's still good to not trade too often.
Doing so could mean selling stocks too quickly and not profiting from them as you deserve to. Or, it could mean losing money -- especially if you rush to unload a stock every time its value starts to dip.
As a general rule, it's good to adopt a buy and hold strategy with stocks. That means adding quality investments to your portfolio and hanging on to them for many years, during which time they may gain a lot of value. Holding stocks for many years also gives you time to recover from temporary declines in value.
Furthermore, while a diverse portfolio is a good thing, you don't need to buy a new stock every week to make that happen. Instead, you can load up on 15 or so quality stocks that represent a range of market sectors. (If you want to own more stocks than that, go for it. But don't feel compelled to keep investing in new companies all the time.)
2. Not taking advantage of educational resources
Many brokerage accounts come with educational resources that can teach you how to become a better investor. It pays to read through them, especially if you're just getting started. Or, to put it another way, if you make investing decisions without fully understanding what you're doing, you could end up losing money.
3. Trading on margin
Some brokerage accounts offer trading on margin, which is borrowing money for investing. For example, if you have $2,000 in your brokerage account but want to purchase $4,000 worth of stocks, you may be eligible for a margin loan of $2,000 to make the investments you want.
The upside of trading on margin is the chance to score larger profits. But there's a danger to trading on margin, which is why it isn't suitable for a lot of investors. When you have an outstanding margin loan, your broker can issue a margin call that requires you to cover the money you borrowed. If you don't have the cash to pay back that margin loan, you could be forced to sell off your current investments to satisfy it. That could mean selling stocks at a loss. Worse yet, as an investor, you can't control the timing of a margin call, so trading on margin could put you in a worse financial position than when you started.
If you maintain a brokerage account, manage it with these things in mind. Avoiding these mistakes could help you steer clear of losses and grow the wealth you hope for.
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