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Today’s self-directed investor has more options and more direct control over the transactions in his or her account than those in past decades. But, don’t let that control fool you — it’s still an intense process that requires at least three steps before hitting the "buy" or "sell" button.
One of the best ways to avoid mistakes in both buying and selling is to thoroughly research the stock you want to trade. This can be difficult for many self-directed investors, and that’s why they often get the assistance of a financial advisor to help them analyze various company data, industry factors, and investor perceptions or trends in the market that can also affect stock price. While some investors rely on resources such as the SEC’s EDGAR archives to pull a company’s financial reports and analyze their performance and potential, others may prefer reading the market commentary and equity research provided by analysts working with their brokerage firm.
Some stocks, such as blue chips, might make great long-term investments while others could be better suited for capitalizing on short-term market swings. Understanding your ultimate objectives for the position helps to narrow your choices, especially when you factor in both buy and sell side commissions and how they might affect potential profit margins.
It’s also important to remember the tax consequences for short-term and long-term gains as these can cut into your potential profits. There may be a higher tax consequence (such as paying ordinary income tax rates) when you sell a stock that you've held for one year or less. Stocks sold after more than one year, however, are subjected to long-term capital gains tax.
Some investors enjoy the process of researching companies and choosing stocks to invest in, but not everyone's comfortable with the opportunity and responsibility of self-directed investing. That’s why many investors choose to secure the services of an investment professional.
With an advisor helping to direct the activity in your portfolio, not only do you gain from their valuable experience and knowledge, but you also benefit from having an objective third party involved. Advisors can help you avoid making decisions that are based on emotions, such as fear. This makes it less likely that you’ll sabotage your portfolio by reacting to short-term swings and other market or industry events. Instead, your advisor will work with you to develop a disciplined approach to investing that works to meet your goals—whether they’re long- or short-term.
There are no guarantees when trading stocks, but you can take steps that help reduce your overall risk. If you consider every angle, understand the positions you invest in and secure the objective guidance of an investment advisor, you could have a much greater chance of success.
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Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Wells Fargo Advisors is not a tax or legal advisor.
WellsTrade is offered through Wells Fargo Advisors, LLC.
Wells Fargo Advisors is the trade name used by two separate registered broker-dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company.