Today's (TD) American Trade
Tips for Online Investing - What You Need to Know
About Trading
In Fast-Moving Market Conditions?
The price of some stocks, especially recent 'hot'
initial public
stock offering (IPO's) 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, trading 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
trade losses very quickly.
Investors trading over the-web 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 know what you are buying and the risks involved (and very
importantly use a resting stop-loss order with your broker) and also
know how trading changes during fast markets and
take additional steps to guard against the typical problems
traders face in quick financial markets.
Online-trades are quick and easy, online
profitable trading takes time, expertise and work
With a click of a mouse, you can buy and sell stocks, options
or commodities futures from a
broker online at hundreds of different stock market, forex market,
or commodity brokers online, offering trade executions for as low as
$5 per trade or transaction.
Although online-trading saves investors considerable time and money,
it does not remove the homework out of making sound investment or
trading decisions. You may be able to do day trading and execute a
trade in a nano-second, but making wise investment decisions takes time.
Before you trade the markets know why you are buying or selling,
and the risk of your trade.
Set your price limits on fast-moving futures or 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 new
IPO that was initially offered at say $9, but don't want
to end-up paying more than $20 for the stock, you can
place a resting stop-limit-order to buy the stock on a stop
at any price up to $20. By entering a limit order rather
than an at-the-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 on profit-taking, or over 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-hosting ISP service provider is an issue;
- a broker-dealer has inadequate hardware or its Internet
Service Provider is slow or;
- traffic on The-Web 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's important to
make sure that your original transaction was not executed.
Although you may receive an electronic receipt for the
trade cancellation, don't assume that that means the trade
was canceled. Orders can only be canceled if they have
not been executed. Ask your brokerage 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, pf course you must pay for the purchase of
a stock or
annuity before you can sell it. If you buy and sell a stock
before paying for it, you are free riding, which violates
the credit extension provisions of the Federal Reserve
Board. If you free ride, 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 5-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
For more information on online trading problems, read
former SEC Chairman Arthur Levitt's message to investors,
and the National Association of Securities Dealers'
Notice to Members, dealing with online trading.
Are you gambling, or investing? The CT Council
on Problem Gambling has a quiz you can take to help
you decide if you have a problem, and suggests where
you can go for help.
What To Do If You Have a Complaint
Act promptly. By Amercian 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 trading firm and ask for
an explanation. Take notes of the answers you receive.
2. If you are not satisfied with the response and believe
that you have been treated unfairly by your broker we suggest
you ask to talk with the broker's manager. In the case of an online
firm, go directly to step-3 below.
3. If your are still dissatisfied, write to the regulatory
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. If there is no satisfactory settlement of your claim
you might consider filing for
stock broker arbitration proceedings against your stock-broker.
4. If after all that you are still dissatisfied, next send a complaint
letter to the
National Association of Securities Dealers, your
state government
securities administration department, or to the Office of Investor Education
and Assistance at the U.S.A. SEC along with
copies of the letters you've sent already to the broker firm involved.
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