Tips for Online Investing:
What You Need to Know About Trading
In Fast-Moving Markets
The price of some stocks, especially recent "hot" IPOs
and high tech stocks, can soar and drop suddenly. In these fast
markets when many investors want to trade at the same time and prices
change quickly, delays can develop across the board. Executions
and confirmations slow down, while reports of prices lag behind
actual prices. In these markets, investors can suffer unexpected
losses very quickly.
Investors trading over the Internet or online, who are used to
instant access to their accounts and near instantaneous executions
of their trades, especially need to understand how they can protect
themselves in fast-moving markets.
You can limit your losses in fast-moving markets if you
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know what you are buying and the risks of your investment;
and
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know how trading changes during fast markets and take additional
steps to guard against the typical problems investors face in
these markets.
Online trading is quick and easy, online investing takes time
With a click of mouse, you can buy and sell stocks from more than
100 online brokers offering executions as low as $5 per transaction.
Although online trading saves investors time and money, it does
not take the homework out of making investment decisions.
You may be able to make a trade in a nanosecond, but making wise
investment decisions takes time. Before you trade, know why you
are buying or selling, and the risk of your investment.
Set your price limits on fast-moving stocks: market orders vs.
limit orders
To avoid buying or selling a stock at a price higher or lower than
you wanted, you need to place a limit order rather than a
market order. A limit order is an order to buy or sell a
security at a specific price. A buy limit order can only be executed
at the limit price or lower, and a sell limit order can only be
executed at the limit price or higher. When you place a market order,
you can't control the price at which your order will be filled.
For example, if you want to buy the stock of a "hot"
IPO that was initially offered at $9, but don't want to end up paying
more than $20 for the stock, you can place a limit order to buy
the stock at any price up to $20. By entering a limit order rather
than a market order, you will not be caught buying the stock at
$90 and then suffering immediate losses as the stock drops later
in the day or the weeks ahead.
Remember that your limit order may never be executed because the
market price may quickly surpass your limit before your order can
be filled. But by using a limit order you also protect yourself
from buying the stock at too high a price.
Online trading is not always instantaneous
Investors may find that technological "choke points" can slow or
prevent their orders from reaching an online firm. For example,
problems can occur where:
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an investor's modem, computer, or Internet Service Provider
is slow or faulty;
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a broker-dealer has inadequate hardware or its Internet Service
Provider is slow or delayed; or
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traffic on the Internet is heavy, slowing down overall usage.
A capacity problem or limitation at any of these choke points
can cause a delay or failure in an investor's attempt to access
an online firm's automated trading system.
Know your options for placing a trade if you are unable to access
your account online
Most online trading firms offer alternatives for placing trades.
These alternatives may include touch-tone telephone trades, faxing
your order, or doing it the low-tech way--talking to a broker over
the phone. Make sure you know whether using these different options
may increase your costs. And remember, if you experience delays
getting online, you may experience similar delays when you turn
to one of these alternatives.
If you place an order, don't assume it didn't go through
Some investors have mistakenly assumed that their orders have not
been executed and place another order. They end up either owning
twice as much stock as they could afford or wanted, or with sell
orders, selling stock they do not own. Talk with your firm about
how you should handle a situation where you are unsure if your original
order was executed.
If you cancel an order, make sure the cancellation worked before
placing another trade
When you cancel an online trade, it is important to make sure that
your original transaction was not executed. Although you may receive
an electronic receipt for the cancellation, don't assume that that
means the trade was canceled. Orders can only be canceled if they
have not been executed. Ask your firm about how you should check
to see if a cancellation order actually worked.
If you purchase a security in a cash account, you must pay for
it before you can sell it
In a cash account, you must pay for the purchase of a stock before
you sell it. If you buy and sell a stock before paying for it, you
are freeriding, which violates the credit extension provisions
of the Federal Reserve Board. If you freeride, your broker
must "freeze" your account for 90 days. You can still trade during
the freeze, but you must fully pay for any purchase on the date
you trade while the freeze is in effect.
You can avoid the freeze if you fully pay for the stock within
five days from the date of the purchase with funds that do not come
from the sale of the stock. You can always ask your broker for an
extension or waiver, but you may not get it.
If you trade on margin, your broker can sell your securities without
giving you a margin call
Now is the time to reread your margin agreement and pay attention
to the fine print. If your account has fallen below the firm's maintenance
margin requirement, your broker has the legal right to sell your
securities at any time without consulting you first.
Some investors have been rudely surprised that "margin calls"
are a courtesy, not a requirement. Brokers are not required to make
margin calls to their customers.
Even when your broker offers you time to put more cash or securities
into your account to meet a margin call, the broker can act without
waiting for you to meet the call. In a rapidly declining market
your broker can sell your entire margin account at a substantial
loss to you, because the securities in the account have declined
in value.
No regulations require a trade to be executed within a certain
time
There are no Securities and Exchange Commission regulations that
require a trade to be executed within a set period of time. But
if firms advertise their speed of execution, they must not exaggerate
or fail to tell investors about the possibility of significant delays.
More Information - http://www.sec.gov/investor/pubs/onlinetips.htm
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