Stock Basics: Trading Vs. Investing

Before you start pouring money into the stock market there are a few basic things that you should become familiar with. For starters, knowing the difference between the two stock market disciplines: trading and investing.

Stock Trading

Stock trading is a term generally used if you frequently buy and sell stocks within a certain time period (usually a year). Stock trading can be a good way to make fast money if you play your cards right and study market fluctuations. Although I have benefited from short term trading, my first mistake in trading in my stock was thinking that I got to keep all of my profits. There are fees charged by the US Security and Exchange Commission ($21.80 per $1,000,000) and FIRNA ($0.000119 per share) on all sells. Then, depending on your tax bracket, you have to pay a percentage on all of your profits. Profits are what you have earned after all fees have been taken out.

Paying fees and taxes can cut into your overall return. On top of that, your broker can also charge their own fees and commission. Using a low commission or no commission broker like Robinhood for trading can help greatly with your earnings. Robinhood does not charge commission on buying or trading stock as shown here.

An example of how broker fees can affect your profits is if you bought 22 shares of Twitter at its opening IPO of $45/share and sold them at its peak of $70/share, your gross profit is $550. Your broker can charge a flat rate, a percentage or a combination of both on your trade. Let’s say your broker charges a flat rate of $10 and 2% of your assets (the total amount of the trade, not your gross profit) just to get the trade done. That is a fee of about $40. Then the broker may charge another $25 fee to transfer your money to your bank. So the $550 you initially had is now $480 from brokerage fees. Couple that with the taxes you have to pay on your profit and you have less money than you initially anticipated. Every penny counts when it comes to trading so save money by using a budget broker.

Stock Investments

Stock investments are long term. The goal of investments are to gradually build wealth over a period of time. While traders mostly look at market fluctuations over a short period of time, stock investors look at the company as a whole. Stock investors see the potential in a company or product early on and invest while the company is in its beginning stages. For example, if you purchased stock in Tesla in 2013 then you would have paid around $36/ share. Now in 2017, Tesla is worth around $300+ per share.

For stock investments you would need to shop around for a broker that fits your needs. Robinhood may be good for stock trading but they have no options for mutual funds or for IRA accounts. Both of which come with added benefits to your investments. TD Ameritrade charges commission fees for buying and selling stocks. However, if you are investing then those fees should not scare you as you will not be trading stocks frequently.

Some brokers also allow you to use your retirement accounts such as a Roth IRA to invest. Using a retirement account to invest means that the profits from your stocks are tax free, even when you withdraw them for retirement. Brokers such as Schwab and TD Ameritrade are banks so you can set up a retirement account with them as well. Long term investments also have lower tax rates for those not using their retirement account to invest.

After my first year of investing I realized how much taxes suck when you are tallying up your profits. But, I am in a relatively low tax bracket right now so I will keep trading while I am in school. Once I start working full time and have entered another tax bracket then I will focus more on long term investments.

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