Vanguard and JP Morgan offer free trades. How to tell if this is right for you.

  • J.P. Morgan unveils a new investing app, allowing users to get at least 100 free trades in the first year.
  • Vanguard has also started a commission-free trading platform, making available about 1,800 ETFs.
  • Speculative investments may cost you more than you think. Proceed with caution.
img_0370.jpg
Ramin Talaie / Contributor | Getty Images

Just because your brokerage firm is offering free trades, it doesn't mean you should wager your nest egg on your trading capabilities.

This week, J.P. Morgan Chase debuted You Invest, a brokerage service that gives clients access to free or discounted trades.

Individuals who already use the company's mobile banking app or website are entitled to 100 commission-free stock or exchange-traded fund trades in the first year. Users who exceed that amount and execute their transactions online will be charged $2.95 per trade — which is lower than the $6.95 per trade TD Ameritrade and E-Trade assess.

You Invest clients also pay no transaction fees for mutual funds they trade online.

Vanguard announced a commission-free trading platform for about 1,800 ETFs, on Aug. 21, and Fidelity and Charles Schwab offer commission-free ETF programs, as well as stock trades for $4.95.

Yet commissions are only one portion of the expenses involved in trading: Mutual funds and ETFs themselves have fees. And brokerage accounts may be subject to additional costs, including transfer and service fees.

"I'm not sure you should be doing 100 trades in the first year or in any year," said David Mendels, director of financial planning at Creative Financial Concepts in New York.

"Taking this opportunity to become an active day trader is almost universally a mistake," he said. "Maybe someone out there can pull it off, but I haven't met them."

Here's why you should proceed with caution.

Keep the stakes low

Simon Webb and Duncan Nicholls | OJO Images | Getty Images

Roaring markets tend to attract amateur traders.

"It's fairly common in market run-ups," said Patrick Amey, a certified financial planner at Aspyre Wealth Partners in Overland Park, Kansas. "People want to play or invest in individual stocks."

When the market is rallying, the price of shares will rise, meaning you're purchasing stocks when they are expensive.

Snapping up individual stocks comes with its own risks, too: You can easily become too concentrated in any one industry, meaning that all of your holdings will rise — and fall — together.

For this reason, it's best to avoid using the lion's share of your retirement savings for speculative purchases.

Creating a sandbox

Provided they are on track to meet their savings goals, trading hobbyists can cordon off a small portion of their wealth to pursue their trading passion.

You can do that by establishing a brokerage account — a sort of sandbox that's separate from your main savings and that won't devastate your long-term goals if your investments don't work out.

"If you enjoy trading, as long as you do it with a modest amount that you can fully afford to lose, then sure, this is a good way to get it out of your system," said Mendels, who recommends that investors use no more than 3 percent of their savings for these purchases.

Free isn't always free

Bear in mind that while a brokerage firm may offer you commission-free trades, you'll still face tax consequences for your activity.

Frequent traders tend to generate larger amounts of short-term capital gains, which are taxed as ordinary income if you're using a taxable account, said Debbie J. Freeman, CPA and director of financial planning at Peak Financial Advisors in Denver.

Select your stocks with an eye toward buying and holding, said Amey.

"If you're going to put money in something, then you should have some conviction in it," he said. "They shouldn't be turned over very often if you believe in the company long term."

What do you know?

Clients who invest on the side tend to select companies that they interact with on a regular basis, said Amey. FAANG stocks — Facebook, Apple, Amazon, Netflix and Google parent Alphabet — are also popular.

"We encourage them to invest in what they know," said Freeman. "Are they in the health-care space? They should tilt their allocations to industries they are familiar with."

Turn your stock-picking into an educational experience: Crack open the annual reports of the companies you're checking out.

Keep an eye on the news cycle and monitor your stocks' performance. For that reason, investors generally shouldn't snap up more than five individual stocks, or else they may end up overwhelmed, said Freeman.

Share your know-how with your family.

"Use it as a tool to teach your children or grandchildren about the markets," said Freeman.

More from Personal Finance
As this bull market crosses a historic mark, here's how to protect your portfolio
Your credit score may have just gone up. Here's why

Taxpayers scramble as proposed IRS rule on local taxes wrecks workaround strategy