When you have your own trading account, you can make your own stock-buying decisions. While this can be an exhilarating experience, it also has a number of pitfalls. You may find it useful to look at some of the pitfalls you face with an individual stock account or trading account in addition to planning ahead to take advantage of some of the benefits.
No Management Fees
Mutual funds have management funds that individual trading accounts typically do not. The fund’s management fees go to pay for the expertise of a money manager as well as the costs of operations. Because investors manage their own trading account, they don’t have to pay management fees. If they get an account that doesn’t charge inactivity fees, they can expect to pay only when they actually made trades.
Fees for Excessive Trading
Because an individual trading account makes it easy to buy and sell stocks, an investor may have a tendency to sell too often. This can rack up trading fees and eat into profits. Investors need to track the number of trades they make each month to ensure they’re not spending more on trading fees than they're making on their stock.
No Minimum Investment
Unless investors go with a full-service broker, they typically won’t have to put a minimum amount in a trading account. It’s possible to begin trading with $100 or less. The beginning investor may find this attractive because it allows her to get into the stock market for very little money and start learning the ins and outs of how stocks work. By contrast, mutual funds have minimum investments that can range up to $1,000 to get started.
Not Enough Money to Diversify
Because a mutual fund buys so many stocks, a small investment is diversified among those stocks. An individual investor may not have enough money to buy a large number of stocks. This can leave the individual investor vulnerable to price drops in the few stocks he owns.
Deciding What to Invest In
When investors do all the stock picking, they’re responsible for the choices they make. This puts investors in charge of what’s in their portfolio. They can not only make decisions about what they think will be profitable, investors can choose companies that do business in a way that aligns with their values. For example, if the environment is important to an investor, they can invest in companies that have green technologies.
Mistakes Are Possible
Being in charge means that the investor takes the risk that she may make mistakes. Without the help of a money manager, as they'd have with a mutual fund or an ETF, investors can make poor stock-buying decisions and find themselves losing money. Even if an investor has a full-service account with a broker that gives advice, that investor must make her own decisions about what to buy. Those decisions, despite the best advice, can be faulty.
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