Couple on a road trip navigates their route using a smartphone

Ready to start investing? Navigating the markets without a strategy might feel a little like taking a road trip without a map. You may have a destination in mind, but there’s no guarantee of how or if you’ll get there. Doing a little planning before you embark on your journey may pay off. These trading tips may make it easier to get from Point A to Point B as you build a portfolio.

1. Trading and investing aren’t the same.

Know the difference between trading vs. investing? When you’re trading stocks on the regular, you may be buying them with the goal of turning a profit in the short term. Investing, on the other hand, usually means playing a long game to build wealth. You can trade, invest or do both.

2. Diversification matters.

Diversification is a big word with a relatively simple meaning: Building a portfolio that includes a mix of different assets, generally including stocks, bonds, mutual funds and exchange-traded funds (ETFs). Each carries a different level of risk and reward.

When you diversify your portfolio, you’re trying to avoid putting all your eggs in one basket, so to speak. If you have a portfolio that’s all stocks, for example, you could risk losing money if volatility causes prices to drop. Investing in various assets may help with balancing risk.

3. Risk is a part of investing.

Risk is a natural part of investing. Understanding your own risk tolerance is key when determining your risk capacity. Taking risks might mean realizing bigger returns … or bigger losses. On the other hand, avoiding all risk could mean missing opportunities to grow your portfolio.

The key is finding the right balance between your risk tolerance (how much risk you’re comfortable taking) and your risk capacity (how much risk you can afford to take to reach your goals).

4. Bears and bulls shouldn’t be feared.

Here’s one thing you may not know about the stock market: It moves in cycles known as bear and bull markets.

In a bear market, stock prices are down 20% or more from their previous 52-week highs. Bear markets can be the result of investors losing confidence and can be a precursor to a recession.

A bull market marks a period of stock prices rising 20% or more following a 20% decline. In a bull market, investor confidence is high and the economy is growing at a steady clip.

5. The right approach matters.

Before you can buy stocks online, you’ll need a brokerage account. You’ll use it to buy and sell stocks, mutual funds, bonds, ETFs and other securities.

You can choose between different types of brokerage accounts. If you prefer to take a hands-on role when investing, DIY investing may be right for you. Or you might prefer a more passive approach to building a portfolio. In that case, you might find that automated investing is a better fit. Ally Invest Robo Portfolios are built around your needs, goals and risk tolerance.

6. Watch out for investment fraud.

Vetting brokers carefully and doing your research on investments can help you avoid falling victim to investment fraud. Investment fraud or securities fraud involves the use of deceptive practices to either manipulate the markets or get investors to buy into illegitimate deals.

As a new trader, it helps to know how to recognize a few signs of investment fraud:

  • A broker or advisor is offering “guaranteed” returns for an investment
  • Brokers or advisors use high-pressure sales tactics to encourage you to invest
  • You’re asked for money upfront to take advantage of a “once-in-a-lifetime” investment offer

The bottom line on investment fraud? If something seems too good to be true, it probably is, and you should think twice before giving it a place in your portfolio.

7. Investment income isn’t tax-free.

Trading stocks or other securities creates opportunity to potentially generate income:

  • Purchasing stocks at one price then selling them at a higher price
  • Investing in stocks that pay dividends

One of the unfortunate truths of trading and investing is you must pay taxes on your investment earnings. If you trade through a taxable brokerage account, for example, capital gains tax can apply when selling investments at a profit. Dividends, meanwhile, have their own tax rules.

Tax-loss harvesting is a strategy that may help you balance out gains with losses. When considering tax matters, we do recommend you consult with your tax advisor or other tax professional.

8. Rebalancing can keep you on track.

When you first start trading, you likely have certain goals in mind, like building wealth for retirement or saving for your child’s college education. Regardless of your goals, rebalancing is a tool to help you pursue them. When you rebalance, you realign your portfolio’s assets, so they match your investment goals, risk tolerance and style.

Rebalancing is something you’ll want to consider doing at least once annually. Or you can invest with a robo-advisor, like with Ally Invest Robo Portfolios, which automatically rebalances for you.

Knowledge can be your best commodity.

It can be intimidating to be a new investor. But waiting to invest until you know everything means you may never get started at all. Increasing your knowledge about the markets and how different investments work can make it easier to get on track. These tips are the foundation you need to start trading without fear of getting lost along the way.

As a first-time investor, you should feel empowered to invest the way you want.

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