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The Retirement Trader

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November 29, 2007 – Comments (4)

I just thought of something a few days ago: What if I use my Roth IRA at my online discount broker to trade in and out of volatile "good" stocks? Using my experience at Marketocracy, I could set limit orders to cover trading costs with comfortable profit margins, and hold a minimum amount of each stock to capture sudden, unforeseeable upside (and then take the uninvested portion and put it to work elsewhere).

Does anyone know any reason not to do this? Is it illegal? Is there any mathematical unfeasability with $7 commissions and trades of around $400-$600?

As my faithful readers know, I've been following E*Trade (ETFC) and investing in it as it dropped to around $4, bounced back to $5.50 or so, fell back to about $4, then bounced up to about $5.25 as of today's close. If I'd had limit buy orders at $4.10 or so, and limit sell orders around $5.15, and no tax liability, would that not have been great? 

4 Comments – Post Your Own

#1) On November 29, 2007 at 2:54 AM, cluelessmorgan (93.40) wrote:

As long as you are not withdrawing from the IRA I don't know why you couldn't, at least from what I understand, but I'd suggest you talk to a tax preparer who is knowledgeable on this.  It would be worth it to talk to someone professional.

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#2) On November 29, 2007 at 8:41 AM, MakeItSeven (32.33) wrote:

A friend of mine does this with his IRA account.  His account is much bigger though so the commission does not hurt as much for short term trades.   You pay around 1.5% for each trade, that's too much.   IIRC, there's a limitation with his IRA account that the money after a sale must be settled before he can use it to buy another stock so there's a lapse of a few days between a sale and a purchase.

With the market as it is, playing around with volatile stocks without any hedged positions is not a good idea, IMO.

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#3) On December 02, 2007 at 6:26 PM, StockSpreadsheet (73.29) wrote:

It is a risky proposition.  It is not illegal, as far as I know.  The one thing I would suggest if you want to follow this plan is to invest at least $1,500 in each stock that you buy.  The reason is that you will be paying at least $14 on each round trip, (buy and sell of an individual stock).  Investing $1,500 in each stock means that your commission expenses are below 1%, which I think is a good number to stay below.  If the money is in an IRA, then you should be able to avoid any taxes.  Check with your broker though about how many trades you are allowed in your IRA.  Some brokers may limit the amount of trades you can do in an IRA account. 

Other than that, I think a thing to keep in mind is that you would be virtually daytrading, and according to an article that I read a while back, about 90% of daytraders go broke in the first year.  Good luck to you if you pursue this strategy.  May all your picks be winners.

Craig 

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#4) On December 03, 2007 at 12:44 AM, FleaBagger (29.74) wrote:

Thanks, Craig.

As for expenses, it's pretty much covered if I capture a 5% move with just $400 ($20), with a little extra for my trouble ($6). It takes some of the fun out of it to make less than my broker, though. In reality though, I'm doing this to bank the short-term 10-20% swings I see in stocks like ETFC, and see if that doesn't make my Roth grow faster.

As for going broke like 90% of daytraders, I am young and doing this only in my Roth, so it can all be replaced. And besides, how many of those daytraders read the Fool and bought only stocks that they could value by looking at cash flow, growth potential, brand power, and balance sheet? It was probably the other 10%.

May all your stocks win year after year.

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