The Ins And Outs Of Self Directed Investing

by Junior Boomer on October 29, 2012

self directed investingSelf directed investing can be risky but many traders find it to be very rewarding as well.

The proliferation of the Internet and other forms of communications technology has made it easier than ever to engage in this practice.

There are many ways to approach this increasingly popular form of trading, but curious investors should review the advantages and disadvantages of investing without the guidance of a broker.

It is also necessary to have achieved a certain level of investment sophistication to make this a worthwhile endeavor.

What Is Self Directed Investing About?

The average, non-institutional investor makes his or her every financial move with the assistance of a stock broker or some other financial expert. Self directed investing leaves the investor in charge of the entire operation. He or she reviews the candidates for investment, does the necessary research and even handles the minutiae of buying and selling over the Internet.

This is not to say that those who invest on their own do not use brokers at all. Rather, the key difference is in the type of broker. Most investors, especially those with less than extensive means, work with a human being and discuss their moves in offices or over the phone before asking someone else to actually carry out sales and purchases of stock from their portfolios. Self-directed investors typically rely on automated brokers online. These are frequently referred to as discount brokers. They actually conduct the trades mechanically without any consultation or other assistance. The best online brokers are able to execute trades at a very low cost without disruption.

Why Do People Choose Self Directed Investing?

There are a lot of reasons to choose this direction in your investments. It is not for everyone. However, if you have great deal of experience and know how to live by your wits, this method of investment may save you time and money that you do not need to expend on an assistant who may not know any more than you.

This is also a direction that some people take only in a manner of speaking. They may continue to hold on to their broker for a variety of reasons, but they increasingly ignore advice and choose their own path in investment. This latter style of self directed investing is more characteristic of older investors who want to take the lead with their retirement investments. The opportunities in self-directed IRAs are typical attractions for investors of this mind bent.

Advantages

The first advantage worth mentioning in this field is the ability to do without all the accoutrements of 20th century investments. Stock investment used to be a very mysterious activity which retirement investors only vaguely understood. They sent off a portion of their earnings and occasionally held discussions with intimidating brokers who pontificated about the proper direction of investments. The investor’s job was to meekly accept this guidance.

Technology, as it always has, stripped away a lot of the mystery. Adventurous spirits, such as the famous day traders whom, you might see depicted in film and television, were the first to jump ship. They knew that inexpensive, one-time purchases of software could replace the regular fees that they were paying to people who knew less than they did about stocks.

Other self-directed investors have grown into this activity over the course of their lives. They may have begun humbly when they were younger but over the course of years they have learned as much about the market as anyone might learn in school and more. With the technology at hand and the know-how in their heads, there was little more than custom holding them back from becoming self-directed in this activity.

All the participants in self directed investing profit from the freedom to respond rapidly to opportunities. They do not have to work through a mediator or middleman and lose their chance at something opportune. These opportunities can mean the difference between getting a decent return and earning a fortune.

Disadvantages

It is difficult to know that you are really ready to fly solo in the stock investing world. One way that newly liberated investors can hurt themselves is when they choose an online broker that does them more harm than good. They are recommended to review the status and licensure of any entity with which they work over the Internet.

Solo investors are also more likely to fall prey to schemes. The pump and dump scheme is a pretty common trap into which unescorted investors can fall. Self directed investors may encounter people with hot tips about stocks that are sure to break out. These con artists use the combined pressure of the sudden demand created by these tips to generate a brief and artificial spike in the price of a stock which they already own in significant quantities. Then they sell it and the price plummets. This happens in particular with penny stocks. It may be difficult for self-directed traders to detect schemes like this.

Forms of Self Directed Investments

Day trading is the most well-known example of self directed investing. These traders already style themselves experts. They truly need this format for their work however, because they make their living from lightning trades that could never occur in time when made through a human broker. However, there are a variety of pitfalls which can overtake these traders unless they remain focused for long periods.

Another group of solo investors are those who are nearing retirement or in retirement. There are even some relatively safe versions of self directed investing in which they can participate. The self-directed IRA is one example of such an investment format. Investors can free themselves from the strictly designed focus of a typical IRA and put their money where they think it will be most profitable.

Popular Choices in Self Directed Investing

There are a number of stocks and investment opportunities which drive people to choose self directed investing as the way to go. Gold is an excellent example. Brokers, along with many knowledgeable people in the financial markets, probably told their clients to be cautious with investments in gold. They may have told their clients about bubbles in the economy and to steer a more cautious course. That advice probably looks very bad to anyone who had a chance to invest in gold at $800 or at $1,000.

Penny stocks are a common focus for investments among day traders. Human brokers would almost never approve of such investments. In fact, many discount brokers online do not permit the practice at all. If an investor is dead set on trading in these low-priced securities, self directed investing is the only way to go.

Choosing Self Directed Investing

If you are thinking about self directed investing, you need to consider a few things before you take any definitive steps. It is possible to become a self-directed investor without doing it completely alone. Many brokers are also happy to act as part-time counselors for people with an independent mindset when it comes to investment. You may also want to limit your independent streak to only a portion of your portfolio. You could leave the majority in the hands of a trusted professional while you take a portion of it and invest in opportunities in which you believe very strongly.

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