Remember Investment Basics When Trading Online
Investors Urged to Set Realistic Goals
BY VALORIE SEYFERT
Special to the Business Journal
These days, it seems as if everyone wants their little piece of the wealth creation pie and are looking for fast and simple ways to get it.
Consequently, more Americans are investing in the stock market without the help of investment professionals, using the abundance of tools, research and information that is now available on the Internet.
Approximately 25 percent of all retail stock trades are conducted through personal online brokerage accounts, which now number well over 10 million in this country alone.
There are indisputable benefits to online trading and investing, including low transaction fees, fast and easy access to markets, and a wealth of information and resources to help investors make more informed decisions. But unfortunately, all that glitters is not gold, particularly when it comes to online trading and investing.
Risk is inherent in any type of investing, but it suddenly becomes heightened when the element of do-it-yourself online trading over the Internet is added to the equation.
– Three Basic
Applying the three “Golden Rules of Investing,” regardless of how and where that investing is taking place, will help to assure that the choices an investor makes are appropriate in light of all relevant facts and circumstances.
o First, investors should know what they are buying and why. They should do their homework before buying or selling a stock, and study the company’s fundamentals , net earnings, P/E ratios and its products and services , to gain a thorough understanding of the investment’s potential value to them.
To determine “why,” they should evaluate the investment in light of their available resources, current and future needs, short and long term financial goals and how much risk they are willing to take to achieve their objectives. Like managing any successful venture, the greatest potential for success in investing comes as a result of developing a long-term plan and sticking with it.
The markets will go up and down, and it is important to have a clear strategy in order to avoid getting caught up in short term fluctuations.
o Second, they should know the ground rules under which they are buying or selling investment vehicles. Today’s markets move quickly, and it is essential to know and understand the regulations and restrictions that govern trading and investing.
It is worth noting that there is a difference between online trading and online investing. Online trading experienced a tremendous boom in years past. There was a lot of hype about the legions of day traders who were intent on making fast money by making split-second decisions and taking advantage of rapidly fluctuating prices, with little thought given to long term investing.
Investing wisely, however, requires a great deal of time, patience and painstaking research along with the ability to execute transactions with a certain degree of skill, timing and a thorough understanding of the rules of the game.
o Finally, investors should understand the level of risk involved. All investments entail risk, and investors should be aware that prices often fluctuate widely, meaning that they face the very real possibility that they could lose money at any time.
With the volatility of stocks and bonds today, investors need some degree of protection from finding themselves faced with an unexpected price when making a trade. That protection comes in the form of a limit order.
With a limit order, investors establish the maximum price they are willing to pay for a stock or a minimum price at which they are willing to sell. When the limit price is met or exceeded, the order is filled as soon as market conditions permit.
Limit orders can be canceled at any time prior to execution. These are much different than market orders, which are executed at the prevailing market price in a matter of seconds in the order received.
Because of the tremendous volume of securities being traded, online investors may occasionally experience system delays in placing orders or receiving trade confirmations. But just because they don’t receive a trade report right away doesn’t mean the system has not received their order or their order has not been filled.
There is a natural temptation to re-enter the order, but investors should strongly resist it. Otherwise, they could end up placing multiple orders for the same security that unfortunately cannot be cancelled and for which they will be financially responsible.
Before giving in to this temptation, they should double check to verify that the order has been placed. And if an order has been cancelled, they should make sure that it was never executed.
Investors need to understand where and how to use the online system to review real time trade history, trade confirmations, as well as positions and balances. They should check and double check orders before entering to assure accuracy, and verify that the correct account is being used if they have multiple accounts at the same firm, because they will be financially responsible for any errors made.
Investors who decide to trade on margin should fully understand all of the risks involved. A sudden drop in the price of stock could cause them to receive a margin call, in which case they would be required to deposit additional cash or securities into their account. If they don’t respond quickly enough, their securities could be sold to cover the call and they would be held responsible for any losses. In order to reduce the risk of this occurring, they should not overextend themselves, and should maintain account equity above the minimum margin maintenance requirements. They should also be aware that maintenance requirements on certain stocks can change at any time.
– Options Exist,
But At A Price
Investors should also know that many online trading firms offer alternatives for placing trades when their online account cannot be accessed. These include touch-tone telephone trades, faxing orders or speaking to a broker over the phone. They should find out if any of these options will increase their transaction costs, and they also need to be aware that they may experience delays with these options as well.
Another element for investors to bear in mind is the fact that if they purchase a security in a cash account, they must pay for it before they can sell it. Buying and selling a stock before it is paid for is called free riding, which is a serious violation of the Federal Reserve Board provisions, and requires a freeze on the account for 90 days.
Investors can continue to trade but must pay for purchases on the date of the transaction while the freeze is in effect.
Most importantly, investors should have realistic expectations and should not be misled into thinking that online investing is a source of easy money. They should invest wisely, know the ground rules, understand the risks, not be afraid to do the necessary homework, and only take risks that they feel comfortable taking.
If they don’t feel comfortable doing what it takes, then they should consult with an investment professional who can help them develop a sound financial plan and guide them through the complex decisions for investing. Investor protection begins with the investor.
Seyfert is president of CUSO Financial Services, LP, a full-service broker dealer located in San Diego.