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.
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 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.
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.
To
avoid buying or selling a stock at a price higher or lower than you wanted, you
need to place alimit 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.
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.
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.
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.
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.
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.
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.
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.
Act
promptly. By law, you only have a limited time to take legal action. Follow
these steps to solve your problem:
Talk to
your broker or online firm and ask for an explanation. Take notes of the
answers you receive.
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.
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.
Source: eagletraders.com
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