What should investors look for in an online stock brokerage?
Investors should look for a reputable company that has been in existence for several years. Additionally, they should understand that “free” trading is not actually free. The company is finding a way to earn money off of the trades of those customers, and often this involves selling the order flow from those customers to another party. This practice does not necessarily guarantee best execution for the customer.
What does it mean to be an active investor vs. a passive investor?
An active investor is one who believes that with time, effort, and/or skill, they can consistently achieve higher risk-adjusted returns than the overall market. Oftentimes, an active investor believes that pricing inefficiencies exist in financial markets.
A passive investor is one who believes that markets are generally price efficient, and that superior risk-adjusted returns cannot be consistently achieved over multiple time periods. In other words, an investor cannot “beat the market,” and so the best strategy is to passively invest in a market index fund with very low expenses.
What are some questions new investors should ask when developing an investment strategy?
New investors should likely either 1) engage a professional financial advisor, or 2) pursue a passive investing strategy. A novice investor likely does not have the skill to beat the market on their own. A new investor should also familiarize themselves with common behavioral biases exhibited by investors (i.e., overconfidence, framing, regret avoidance, etc.).
What tips would you give someone new to online brokerages?
They need to recognize three things:
- They likely do not possess superior knowledge or skills.
- If something is advertised as “free,” there likely is a hidden cost.
- They need to recognize the difference between trading (speculation) and investing.
What would you say to people who don’t think they know enough about the stock market to start investing?
Everyone needs to start somewhere. A passive index fund can be a great tool for someone who does not know anything about the stock market, as it essentially allows one to invest in the entire market using very small sums of money.