3 Stock Market Ideas Contrary To Conventional Advice
Above I’ve posted an image from a user post in reddit’s wallstreetbets. If you’ve been following financial news at all, you’ve surely heard about the frenetic run-ups in various underdog “meme stocks”. These stratospheric gains have materialized due to massive crowdsourced interest in bidding these stocks up, which in turn has led to complicated secondary effects that have pushed the prices up even further, and this has made some people a lot of money. In some cases, near-bankrupt companies are able to sell additional stock at those highly-inflated prices, rake in an unusually large amount of proceeds, get out of dire straits, buy some time, regroup, and inch closer to a self-fulfilling prophecy where that company might actually be valuable in the future. I would definitely not recommend this line of investing for most people, but I think it’s genuinely noteworthy because of the sheer audacity of the movement, its disregard for conventional wisdom, and its discovery and belief in a new idea – whereas previously, people were simply set in their ways and couldn’t see anything of interest.
With that said, in my opinion, conventional stock market commentators, gurus, and authors have largely overlooked some of the best and simplest ideas for the average DIY stock market investor. Below I’ll list 3:
1.) Don’t just learn about stocks – learn about options also. The stock market is never perfectly priced, which is why people buy certain stocks. They buy them because they’re betting the price will rise, and that’s generally to say those stocks are mispriced. Likewise, options can be mispriced, and this leads to a second area of potential profit. Additionally, options can help people shape their risk and their bets more accurately. Stocks are like a hammer, which is a useful tool, and options are like adding a bunch of extra tools to the hammer.
One of the most common things a retail investor does is buy stocks and then hold them indefinitely. That investor is literally leaving money on the table each and every year by not selling call options for the stocks that they own.
In my opinion, one of the greatest sins committed by stock market gurus is this sin of omission. It’s almost a crime when they don’t mention anything about simple option strategies that would bring in easy, ultra-low-risk money for many investors.
2.) Strongly consider starting out in a Roth IRA or standard IRA. The reason is pretty straightforward. These IRA accounts only allow you to deposit $6,000 per year, only allow 3 day trades per week (until you’ve built up extra funds), and disallow the borrowing of stocks (which carries unlimited risk). Thus, you’re much less likely to lose your life savings in the blink of an eye, before you’ve even had a chance to get the hang of the stock market. In that sense, IRA accounts create very useful guardrails for those new to the stock market.
There are penalties for early withdrawals from an IRA account. However, if you were planning on doing this for your long-term financial health anyway, that generally wouldn’t be an issue for you.
Although this entire second point sounds like common sense, to the point you’d expect it to be an axiomatic rule-of-thumb, I can’t say I’ve ever heard it promoted anywhere.
3.) If you’re looking to day trade, and you’re not 100% certain that you’re a superstar day trader that can generate a ton of money right away with high certainty, give strong consideration to doing it in an IRA account.
This is completely unorthodox.
To start, you will first need to build up additional funds to access full day trading privileges. A minimum of $25,000 is the FINRA requirement. The reason to go through all this trouble to day trade is two-fold:
First, profits in Roth IRA accounts are 100% tax-free, except for the very obscure UBTI, which you probably won’t be dealing with. (Standard IRA accounts have their major tax advantage on the front end. Roth IRA vs a standard IRA is a big decision, but the point is both offer a major tax advantage.)
Second, tax accounting for day traders is a nightmare. This is beyond what most people would ever want to spend time on, and so you will be spending money having someone else do it for you. But, if you can make your day-trading profits completely tax-free, no IRS return will ever necessary for those funds (barring extremely obscure exceptions like UBTI).