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Online Investing
Online investing has made the stock market
available to a multitude of new investors. When these investors are drawn into
new fast-moving markets, such as recent "hot" IPO’s and high tech
stocks, certain risks are taken. The prices in these volatile markets can rise
and fall suddenly, without warning, and sometimes without apparent reason. 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.
Investors can suffer unexpected losses very quickly.
You can limit your losses in fast-moving 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.
- First, you should realize online trading is
quick and easy, but online investing takes time and research. Do not be
drawn in by the ease of online trading without doing your homework first.
Before you trade, know why and what you are buying or selling, and the risk
of your investment. Making wise investment decisions takes time.
- With fast-moving stocks the price fluctuations
may move the stock out of your intended purchase or sale price range. To
avoid this use limit orders instead of market orders. 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 not control the price at which your order will be filled.
- When online you may experience unique
investing problems, such as slow connections, inability to access your
online account, uncertainty as to whether your order (or cancellation of an
order) went through. When your connection is slow or you are unable to reach
your online account, look to 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. When unsure
as to the status of your order, do not resubmit the order or go ahead on the
assumption it went through. Contact your broker to confirm, remember
assumptions can cost you money.
- Avoid freeriding, where you purchase a
security in a cash account and sell it before you pay for it. Freeriding
violates provisions of the Federal Reserve Board and may incur penalties,
such as the freezing of your account for 90 days.
- Fully understand your margin agreement, if you
trade on margin. Remember, "margin calls" are a courtesy, not a
requirement. Brokers are not required to make margin calls to their
customers and can legally sell your securities if your account has fallen
below the firm's maintenance margin requirement.
- Understand there are no regulations requiring
a trade to be executed within a certain time. But, if firms advertise their
speed of execution, they must not exaggerate or fail to tell investors about
the possibility of significant delays.
- Finally, the ease and accessibility of online
investing has created a new king of problem: the investing gambler. Be sure
your activity in online investing is not really being fueled by a gambling
problem. One idea which can be safely applied from gambling is "Always
invest with your head and not over it".
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