BBB Tip: Stock trading apps – what to know before you trade

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The Better Business Bureau (BBB) has begun warning investors about stock trading apps, saying while they have made it easier than ever to invest, there are some tips you should keep in mind before trading.

Before you start investing in the stock market on an app, the BBB has recommended the following:

  • Choose a reputable stock trading app. The trading app you choose is more than just a platform for trading; it is the company that will serve as your broker. Be sure that any company you are considering has a good reputation and is legally licensed and registered with the appropriate government authorities.
  • Compare several trading apps. NerdWallet recommends that new investors “look for a broker who can teach them the tools of the trade via educational articles, online tutorials and in-person seminars.” Examine and compare each app closely, taking note of their fees, trading minimums, stock analysis tools, and educational offerings to choose the one that best fits your needs.
  • Understand trading rules. SEC regulations dictate how and when trades can take place. Get to know the rules so you don’t get penalized for breaking them. For example, according to the SEC, “In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding, which violates the credit extension provisions of the Federal Reserve Board.” If you are caught freeriding, your account will be frozen for 90 days.
  • Be wary of “hot tips.” Sponsored ads and online forums promoting “fail-safe” stocks that are “guaranteed” to get you a huge profit for a small investment (if you act now!) are likely fake, or part of a racket designed to drive up the price of a stock temporarily. Don’t fall for this kind of “insider’s advice.” The Balance reminds traders that real profits come only after thorough research: “If you decide to invest in individual stocks, make sure to use some financial analysis ratios to compare a company’s performance to its competitors. Successfully choosing individual stocks is difficult, but extensive comparative analysis can help ensure you’re adding the best stocks to your portfolio.”
  • Practice by trading virtually. If you want to try the stock market, but aren’t ready to risk real money, try “virtual trading” first. Many online stockbrokers offer platforms where you can learn the ropes by buying and selling virtual stocks.

It’s also important to understand how trading will affect your taxes.

“Capital gains taxes are taxes you’ll pay on stock profits. Generally, these taxes are higher if you’ve held the stocks for less than a year, the BBB said in a news release. “Find out how to report capital gains at IRS.gov.”

The BBB has warned of investment scams and recommends stick to brokers that are registered with the SEC and avoid anyone who uses high-pressure sales tactics or pyramid schemes.

“Understand that some scammers go as far as sending you regular reports showing excellent returns on your investment, when, in fact, it never even existed,” the BBB said in a news release.

Visit BBB Scam Tracker to research and report scams.