|Note: This is the 2nd entry of a blog that I've recently set up on WordPress. I don't expect the reader to be interested or knowledgeable about finance (neither am I) here. My goal is to get some feedback on the style and readability so that I can refine my skills as a blogger. Thanks for your comments and suggestions!
Today, I want to talk about the classic investment dilemma that all new investors face – should I first learn about basic investment concepts and strategies and then open an investment account or do the opposite?
Making this decision was not easy for me. First, I didn’t have a mentor who could walk me through the ‘baby steps’ of setting up a new portfolio. Moreover, I knew a few people who had lost their hard-earned savings because they had bought hot tech stocks that later collapsed or the market had just taken a dip and they panicked and sold their equities at a huge loss. I wanted to be reasonably prepared and at the same time I didn’t want to miss out the action (the market was hot in early 2012)!
I now know that this does not have to be an either-or decision; people can open an investment account and at the same time get trained on trading (here, I will use ‘trading’ and ‘investing’ interchangeably though these two concepts differ in a subtle but important way).
On good thing about opening an account is that it usually comes with a “practice account,’ which should be used for as long as needed to get a sense of how the marker or a particular sector behaves. It is also important, as I found out the hard way, to understand and use all the features of the practice account so that the mechanics of initiating (buying) and closing (selling) a trade are clearly understood.
So that’s what I did, I opened up an online ‘direct investment’ account (I will talk about with who and of what type later) by depositing the minimum amount needed. Through this account, I could access a number of useful resources such as charting tools, research reports, and tools for trading and portfolio management.
Rookie investors should ensure that their accounts allow trading in both local and US currencies. Canadian investors need to convert Canadian dollars into US dollars for buying US stocks, which involves paying a hefty currency conversion fee. It is also important to specify which currency to use while closing a trade because the default could the local currency.
Since it is not easy to keep track of the ever changing exchange rate, one should use US dollars for trading US equities and Canadian dollars for trading Canadian equities. For a small investor such as myself, it makes a lot of sense to decide beforehand how much resources to allocate for the Canadian market and the US market (and for other global exposures if desired) and avoid frequent reallocation of funds across different portfolios. Otherwise, the transaction costs could easily eat up most or all of the gains (or even the capital).
So there you go – if you are interested in investing now or in the near future, get an investment account. This could be just a free practice account. Trade using the practice account for several months before jumping in with real money and this will certainly lessen the risk of making basic rookie mistakes.
You will still make mistakes, some costly ones too. Making mistake is an inevitable part of a rookie investor’s learning curve, and part of being human. The key is to learn from past mistakes and not let them repeat again.