Today's
Stocks
Tips for Online Stock 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.
Stock 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 stock markets if you:
- know what you are buying and the risks of your investment; and
- know how trading changes during fast markets and take additional
steps to guard against the typical problems investors face in these
markets.
Online stock 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:
- an investor's modem, computer, or Internet Service Provider is slow
or faulty
- a broker-dealer has inadequate hardware or its Internet Service
Provider is slow or delayed
- 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 stock 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 stock investors have been rudely surprised that "margin calls"
are a courtesy, not a requirement. Stock 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 - For more information on online stock trading problems,
read former SEC Chairman Arthur Levitt's message to investors, and the
National Association of Securities Dealers' Notice to Members 99-11,
dealing with online trading.
What To Do If You Have a Complaint -
Act promptly. By law, you only have a limited time to take legal action.
Follow these steps to solve your problem:
1. Talk to your broker or online firm and ask for an explanation.
Take notes of the answers you receive.
2. If you are dissatisfied with the response and believe that you have
been treated unfairly, ask to talk with the stock broker's branch manager.
In the case of an online firm, go directly to step number three.
3. If your are still dissatisfied, write to the compliance department
at the firm's main office. Explain your problem clearly, and tell the
firm how you want it resolved. Ask the compliance office to respond
to you in writing within 30 days.
4. If you're still dissatisfied, then send a letter of complaint to
the National Association of Securities Dealers, your state securities
administrator, or to the Office of Investor Education and Assistance
at the SEC along with copies of the letters you've sent already to the
firm.
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