2 lessons learned while trading stocks on Robinhood

As I’m writing this, I’ve been active on the Robinhood app (it’s a financial tech startup) for about a year and a half. Why Robinhood? It’s simple: No commission fees or minimums.

Before I started trading on Robinhood, my knowledge was limited to trading on stock simulators (e.g. MarketWatch VSE) and learning the basics of stocks through my finance classes in college. I started off my account with $500 and went directly into purchasing stock in three different companies. Currently, I have a total of $700 invested with a portfolio value of $930.

Here’s what I’ve learned:

Always try to diversify to minimize risk

In the beginning, I invested most of my money solely in tech stocks (three companies at first). That was a mistake. I wasn’t thinking about diversification. Instead, I was thinking about buying low and selling high. It was challenging because my portfolio would move up and down A LOT. Over time, however, I set rules for how I would invest my money.

I began limiting my investments in any single company to $100 and chose four sectors to focus on: energy, information technology, financials, and consumer discretionary. At first, it was difficult to find the right stocks to invest in. Restricting myself to $100 meant that I could not buy stock in some companies that I truly wanted to be a part of, like Facebook (they’ve been releasing some new products that I find very interesting but each FB stock is over $100).

More info on diversification here.

Review the financials and enjoy peace of mind

There’s one stock I purchased at the very beginning that I held on to a little too long. It had recently gone public (IPO) and I felt bullish on the stock as at one point, it doubled in value in only after four months of trading. Unfortunately, a year later, I ended up selling it and taking a 50% loss. This was still better than the 75% loss I would have taken had I sold when it reached its 52-week low.

I haven’t seen any of my stocks dip so low since I started paying attention to company income statements, cash flow statements, and balance sheets. Things I look at:

  1. Net income: Why is it positive/negative? Is revenue up/down? Furthermore, how were expenses affected?
  2. Cash flow balance: If net income has been positive/negative, what do the cash flows show? Can the company pay off debts in the short term with positive/negative net income?
  3. Balance sheets: How much short-term debt does the company have? How have assets and liabilities changed from year-to-year?

Along with the financial documents, I search for news on the company. It’s important to get an idea of what is expected in the upcoming quarter or year. Robinhood does a good job sending notifications when there are large price movements or important news, however, it does not provide financial information. I use Yahoo Finance or Google Finance for such numbers.

Check out some financial statement basics here.

I’m glad that I’m learning as I trade with Robinhood. If I had used another online brokerage, I believe their fees would have cut into my gains. Can’t wait to see how my portfolio does in the long term.

The above post describes my experience and opinion on stocks and is only for informational purposes; this post is not investment advice. Seek a licensed professional for investment advice.