Over the past year, a number of people have gotten involved with Trading the Stock Market. Many have even skipped establishing a Savings structure and jumped right into trading. Anyhow, there are some things to keep in mind that may help protect your realized gains from yourself. In this case we are referring to taxable brokerage accounts, since there are different approaches for Tax exempt/deferred accounts.
When one embarks upon Trading, I believe it should be done in a separate account to one’s Investing account, to help us manage the distinction between the two disciplines. So, establish a Trading account.
Next, determine how much money you need to have to efficiently trade the style you have chosen. Different strategies and account types require different account balances, but beyond the minimum requirements, the magic number is often personal.
Once you have arrived at that magic number, get in the habit of transferring excess gains away from your trading account. By doing this, you will eventually be trading with only a fraction of the money you have made. So, transfer the excess gains to a decent interest-bearing account to build your savings. These savings can be assigned to Taxes, building an emergency fund if not done already as well as assigning some for investing.
Remember again that I believe savings should be the first step, followed by Investing then Trading. If you have opted to go in a different order, then remember to reach back to build the savings structure with your trading proceeds.
The market has been very generous in recent years, but tough time will come. You can bet on that! However, when it will arrive is anyone’s guess. So, we should always be prepared for such a market as well as our times during even good markets when things stop going our way. The market can easily take back what it gives and therefore, we want to have a financial structure that can keep us afloat throughout any market or even personal turmoil.