If You're Going to Fund a Brokerage Account, Don't Do This
Money in a brokerage account won't do you much good if you're not actually investing it. Read on to learn more.
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At one point last year, I did something kind of stupid. I transferred $1,000 into my brokerage account with the intent of using that money to buy shares of a specific stock. But it took a few days for the money to clear, and during that time, the stock price rose a bit. So I decided to sit tight and wait things out.
Want to guess what happened next? I forgot that I'd transferred that money over from my checking account and didn't remember until almost two months later. So basically, I had cash sitting in my brokerage account doing absolutely nothing (whereas in a savings account, for example, it at least would've been earning decent interest) all because silly me forgot about the money.
Now thankfully, it was only a $1,000 transfer, and it's not as if I lost the money -- I just didn't invest it as soon as I could've. But if you're going to fund a brokerage account, you really want to make sure you're actually investing the cash you put in. And there's an easy way to make that happen.
When you put your investments on autopilot
Many brokerage accounts allow you to set up recurring investments. What this does is make it so you're buying a preset number of shares on an ongoing basis without having to go in and make trades.
Now in conjunction with that, you have options. You could manually transfer money into your brokerage account at different intervals, or you could set up automatic deposits into your brokerage account that align with your investing schedule.
In a nutshell, here's how it could work. Let's say there's a company you really want to invest in consistently, and you want to buy three shares of its stock every Friday. You could set up a weekly automatic transfer of money that hits your account every Monday. Then, come Friday, the money will be in your account to buy your three shares with. If you set this up in advance, you won't have to do a thing.
The same system works with dividend payments
Some of the stocks you own may be companies that pay quarterly dividends. When dividend payments hit your brokerage account, you get more buying power. But if you don't use that money, it's just going to sit there.
That's happened to me, too. There have been times when I haven't realized I've gotten a dividend payment for a good number of weeks. That's more money that just sat in my account doing nothing.
What you may want to do to avoid that is set up a dividend reinvestment plan. Usually, what'll happen is that once your dividend payments come in, they'll be used to automatically purchase more shares of the company that issued those dividends. However, you may be able to set up your account to buy shares of a different company with that dividend income as it hits your account.
Either way, unless your brokerage account happens to pay a nice amount of interest on cash, there's no sense in letting money just sit there uninvested. So either keep very good tabs on the cash that gets transferred into your account, or set up recurring investments so the process is put on autopilot.
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