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; or
- 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 6 weeks. 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.
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 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.
