Many Americans invested their $1,200 stimulus checks. What the pros say you should know before you trade

For millions of Americans, the $1,200 stimulus checks sent by the government earlier this year were a financial lifeline.

For others, whose incomes were uninterrupted, it was something else — an opportunity to invest in the markets.

The two sets of circumstances Americans may find themselves in reflect sharp contrasts in the broader economy. A record 57 million initial jobless claims have been filed since mid-March. Last week, initial weekly jobless claims climbed back over 1 million, pointing to a slow recovery.

Meanwhile, the stock market has rebounded from March lows. The S&P 500 index climbed to a new high last week, taking less than five months to recover from its bottom.

Some people who are watching the market gains want a part of the action. Research from Envestnet Yodlee, a software and data aggregation company, found that trading was among the more common uses for the $1,200 stimulus cash.

That was especially true for people who earn between $35,000 and $75,000 per year, who increased stock trading by 90% in the week after receiving their stimulus checks. Those with annual incomes between $100,000 to $150,000 increased trading by 82%, while people earning more than $150,000 increased that activity by 50%.

Stock trading app Robinhood also saw an uptick in activity. “What we have seen is an increase in the percentage of deposits equaling $2,100 or $2,400,” a company spokesperson said. “This was around the week of April 13, when people first started getting their stimulus checks.”

The company did not track more specifics on that activity, including whether the money was kept in cash or invested. Other firms including Betterment and TD Ameritrade said they have also noticed a shift in investing behavior, though they haven’t monitored activity specifically related to the stimulus checks.

“Since lockdowns in the pandemic, people have not been able to do other things they would normally do, like watch sports,” said Dan Egan, managing director of behavioral finance and investing at Betterment. “There has been some people who are using investing as a form of entertainment.”

Many people have used the extra time  at home to pay attention to the market, said JJ Kinahan, chief market strategist at TD Ameritrade. 

“Our last earnings and our competitors’ last earnings show great lift in the amount of people who are participating in the market and starting to get involved,” Kinahan said.

Firms saw record trading revenue prompted by lower commission fees, another factor that has also boosted investor activity.

Recently, TD Ameritrade’s clients have been drawn to investing in familiar consumer names. Microsoft, Apple and Tesla were among the most popular stocks they bought in July.

Notably, Tesla crossed the $2,000 per share mark last week ahead of its upcoming stock split.

Investor interest in that company comes as some analysts have said it’s as much a battery company as it is a car company, leading some people to think it’s undervalued, Kinahan said. Many investors are also attracted to the star power of its co-founder and CEO, Elon Musk, he said.

There is the risk that public perceptions can distort the company’s stock price, Egan said. Having a very supportive fan base can “constantly put pressure on the price to go upwards,” he said.

That highlights one risk investors should watch out for: becoming too attached to company names you love.

Again, it’s like sports, Egan said, and the questions of whether you want your home team to win versus whether you think they will actually win.

“If you want to make money, a lot of people should be betting against their home team, but that feels really bad to do,” Egan said. “So a lot of people don’t actually do it.”

When it comes to investing, a lot of lessons are learned after mistakes have already been made.

“The school of hard stocks is a very expensive tuition to pay,” Egan said.

Here are ways to steer clear of those high-cost lessons: 

• Get educated. “The beautiful thing about the market is that it’s different every day,” Kinahan said. Start by studying one or two products, either exchange-traded funds or individual equities. “Get to know those products first and then expand your horizons,” Kinahan said.

• Consider play investing. Before putting actual cash to work, pick some strategies and see how you would hypothetically do. “It’s a good place to start just to learn the mechanics of the market,” Kinahan said.

• Be ready to lose. Once you are ready to put real money to work, set up an account only with an amount you would be willing to lose, Egan said. Importantly, that means capital left over after you’ve fully funded your retirement and other big goals elsewhere. “If you’re really good at it, it will get bigger and be worth more and more as a percent of your overall portfolio,” Egan said.

• Start small. When trading stocks, you ideally want to buy low and sell high. Picking the right timing can be difficult, even for professionals. “Start smaller than you think you can take,” Kinahan said. So if you have 300 shares to buy, start with just 100 and see how that works out. Buying in increments can help you figure out what your average price target should be, he said.

• Be realistic. It’s hard to beat professional investors, who have high-level tools, technology and education on their sides, Egan said. So if you’re looking to make extra money, trading stocks might not be the best way. If you earn an extra 1% per year trading $10,000 in stocks, that’s just $100. Other efforts, like learning a new skill, setting up a side hustle or figuring out how to make more money at your job, will likely reap you more money, Egan said.