Limit orders provide you with the convenience of not having
to constantly watch the market. They can also protect
you against dramatic movements in the market.
A limit order directs the brokerage to buy or sell stock when
the price drops or rises to a specific number. When you place
a limit order, the brokerage is limited to
n Buying the stock at the specified price or lower.
n Selling the stock at the specified price or higher.
For example, a limit order to purchase 500 shares of XYZ
stock at $40.00 a share means the broker may fill the order
at $40.00 or less, but not at $40⁄18 per share. Alternatively, a
limit order to sell at $40.00 means that the broker can’t accept
a fraction of a penny less than $40.00 for your stock.
84 CliffsNotes Getting Started in Online Investing
When you place a limit order, you need to specify whether
the order is a day order or a good till canceled (GTC) order.
A day order expires at the end of the trading day. A GTC order
doesn’t expire. You have to remember to cancel it, as I discuss
later in this chapter.
Placing a stop order
A stop order is a contingency order that becomes a market
order when the stock trades, is bid, or is offered at a specific
price. Stop orders differ from limit orders because stop orders
happen at a particular price rather than within a price range
like a limit order.
A stop order can help you stay in control of your portfolio
during a period of time when you can’t get to your computer
or reach your broker by phone. Stop orders are also very helpful
when the market is on the move.
For example, if you purchased XYZ stock at $45.00 a share
hoping it would go up, but now the price is dropping, you
may want to limit your losses by placing a stop order to sell
the stock if the price drops to $42.00 a share.
Understanding the complex stop
limit order
A stop limit order is a contingency order that becomes a limit
order when the security trades, is bid, or is offered at a specific
price. It helps you take advantage of sudden movement
in the market while limiting your risk. It’s more complicated
to understand than the other types of orders, but can be very
useful to you given the right market conditions.
An example of a stop limit order is “Buy 100 shares of XYZ
stock; stop at $120.00 with a limit of $1201⁄4.” This means
you want your order to be activated to purchase stock at
Chapter 7: Making Your First Online Trade 85
$120.00 per share, but not if it goes above $1201⁄4 per share.
Sell stops are used below the market price, and buy stops are
used above the market price.
The advantage of this type of order is that it gives you more
control over the price at which your order is filled. The disadvantage
is that your order may go unfilled if your specifications
can’t be met.
Another variation: Fill or kill
The so-called fill or kill instruction has a name that’s pretty
descriptive of its function. Some online brokerage services
allow you to specify that a limit order should expire — or be
killed — if it can’t be executed within a certain time frame.
Executing, Confirming, and Canceling
Orders
Are you ready to invest a chunk of your savings with a couple
clicks of your mouse? Indeed, all it takes is a few clicks to
reallocate or change the character of your portfolio.
Executing and confirming an order
Now that you’ve scoped out the market, you’re ready to make
a move. Fortunately, it’s easy to act with most online brokerages,
barring the occasional technological glitch.
Regardless of which online brokerage you use to place a trade,
you need to have the following information ready to enter:
n Quantity: Specify the number of shares of stock you
want to buy or sell.
n Ticker symbol: You must enter the ticker symbol for the
stock you want to trade.
n Price: Enter the price at which you want to buy or sell
the stock.
n Order type: Indicate whether you want to place a market,
limit, stop, or other type of order.
n Expiration: Specify when you want the order to expire.
After you place your order, a confirmation message appears
on your screen. If this message doesn’t appear, call the brokerage
immediately. If you simply repeat the steps you took
to enter the trade, you may end up owning twice as much
stock as you planned.
Don't forget this
Enter number of shares Enter price per share Specify date order expires
Enter ticker symbol Select order type
Chapter 7: Making Your First Online Trade 87
Canceling or changing an order
Changed your mind? Got cold feet? Fortunately, canceling
or changing an order online is not a complicated proposition.
All brokerages allow you to cancel an order before the brokerage
executes the trade — but most charge a fee. Normally,
canceling an order costs $10.00 or less, and you accomplish
it pretty much the same way you placed your initial order.
Canceling an order usually takes about as much time as placing
one. Unfortunately, scrapping your order can seem
painfully slow in a volatile market when you’ve changed your
mind. Don’t be surprised if your cancellation is confirmed
moments after your order is filled (and once your order is
executed, you can’t turn back). It’s nobody’s fault; that’s everyday
life in the world of online investing.
Sunday, July 1, 2007
Friday, June 29, 2007
Opening Your Account: The Process
Opening an account varies a bit from brokerage firm to brokerage
firm. But the basic process is the same. You must first
access the Web site for the brokerage firm. You then find a
link that says something like open an account now (this link
is unsurprisingly easy to locate) and perform some variation
of the following steps:
1. Complete a secure online application. The application asks
you questions like your Social Security number, whether
you’re opening a joint account, and other information necessary
to get you set up on the company’s system.
2. Return your signed application by mail. Some firms
allow you to receive an account number and begin trading
right away, but your signed application must be
received within three days of your first trade.
3. Fund your account. You can get money into your
account by mailing a check, providing a credit card number,
or authorizing the brokerage to create an electronic
check from an existing account, depending on the policies
of the brokerage.
Should you open more than one brokerage account? On one
hand, you want to avoid opening more accounts than you
need, because this tactic can increase fees. On the other hand,
the Gomez Advisors recommend that you consider opening
a second account with a smaller, less-heavily-trafficked brokerage
firm if your primary account is with a popular firm
that may experience periodic capacity overloads and transaction
delays.
firm. But the basic process is the same. You must first
access the Web site for the brokerage firm. You then find a
link that says something like open an account now (this link
is unsurprisingly easy to locate) and perform some variation
of the following steps:
1. Complete a secure online application. The application asks
you questions like your Social Security number, whether
you’re opening a joint account, and other information necessary
to get you set up on the company’s system.
2. Return your signed application by mail. Some firms
allow you to receive an account number and begin trading
right away, but your signed application must be
received within three days of your first trade.
3. Fund your account. You can get money into your
account by mailing a check, providing a credit card number,
or authorizing the brokerage to create an electronic
check from an existing account, depending on the policies
of the brokerage.
Should you open more than one brokerage account? On one
hand, you want to avoid opening more accounts than you
need, because this tactic can increase fees. On the other hand,
the Gomez Advisors recommend that you consider opening
a second account with a smaller, less-heavily-trafficked brokerage
firm if your primary account is with a popular firm
that may experience periodic capacity overloads and transaction
delays.
Asking the Right Questions before Deciding on a Brokerage
Online brokerage services are competitive and eager for your
business. They offer an ever-increasing and innovative range
of services to entice you to open an account with them.
Accordingly, use the following checklist to determine which
services interest you, and remember to ask who offers them:
n Do quoted commission costs vary? Does the advertised
low commission vary with the size of the trade? Is there
a minimum charge for small trades? A surcharge for a
maximum number of shares?
n Are there other transaction costs? Does any “handling”
or “service fee” or other transaction charge apply in addition
to the commission?
n Are minimum deposits and balances required? What
is the minimum required initial deposit? Am I required
to maintain a minimum balance in the account?
n What types of orders are accepted? Does the online
brokerage accept the types of orders you may want to
make? What is the policy for cancelled orders?
n How quickly are orders filled? Does the brokerage have
the ability to quickly execute orders so that you can take
advantage of changes in the market throughout the day?
n How quickly are orders confirmed? Does the online
brokerage service give you immediate confirmation that
an order has been executed?
n What emergency communications are available? Can
you reach the broker by fax or by telephone in case you
can’t get online or get to a computer?
n What portfolio information do you receive? How
often is your account information updated? Will you
receive an income tax summary? A transaction summary?
n Does the firm pay interest on idle funds? If you maintain
a substantial cash balance in the account, does the
brokerage firm pay interest on “idle” funds? Some brokerage
accounts automatically “sweep” idle funds to a
higher-interest-bearing account.
n What research resources are available? Does your brokerage
make reports and research available to you? If so,
is this service subject to an additional charge?
n What checking and wiring services are available? Do
you receive free checking services? Can you wire funds
to and from the account free of charge?
n How is the brokerage firm rated by the experts? How
do the services of the brokerage firm measure up using
the online rating services I discuss later in this chapter?
n Do you get price quote information? Some online brokerage
services.
business. They offer an ever-increasing and innovative range
of services to entice you to open an account with them.
Accordingly, use the following checklist to determine which
services interest you, and remember to ask who offers them:
n Do quoted commission costs vary? Does the advertised
low commission vary with the size of the trade? Is there
a minimum charge for small trades? A surcharge for a
maximum number of shares?
n Are there other transaction costs? Does any “handling”
or “service fee” or other transaction charge apply in addition
to the commission?
n Are minimum deposits and balances required? What
is the minimum required initial deposit? Am I required
to maintain a minimum balance in the account?
n What types of orders are accepted? Does the online
brokerage accept the types of orders you may want to
make? What is the policy for cancelled orders?
n How quickly are orders filled? Does the brokerage have
the ability to quickly execute orders so that you can take
advantage of changes in the market throughout the day?
n How quickly are orders confirmed? Does the online
brokerage service give you immediate confirmation that
an order has been executed?
n What emergency communications are available? Can
you reach the broker by fax or by telephone in case you
can’t get online or get to a computer?
n What portfolio information do you receive? How
often is your account information updated? Will you
receive an income tax summary? A transaction summary?
n Does the firm pay interest on idle funds? If you maintain
a substantial cash balance in the account, does the
brokerage firm pay interest on “idle” funds? Some brokerage
accounts automatically “sweep” idle funds to a
higher-interest-bearing account.
n What research resources are available? Does your brokerage
make reports and research available to you? If so,
is this service subject to an additional charge?
n What checking and wiring services are available? Do
you receive free checking services? Can you wire funds
to and from the account free of charge?
n How is the brokerage firm rated by the experts? How
do the services of the brokerage firm measure up using
the online rating services I discuss later in this chapter?
n Do you get price quote information? Some online brokerage
services.
Commissions, Costs, and Fees
Looking for a broker with low commissions? You should
always try to get the most for your money, but a broker’s
advertised commissions may not tell the whole story.
Questioning the advertised commission
Sometimes you’ll see a broker advertise a “flat-rate” commission
or “commissions starting at” a certain amount.
You need to make sure when you’re comparing commissions
that you’re comparing apples to apples. Make sure that you
ask whether advertised commissions change based on the
following:
n The type of order placed: Commissions may vary
depending on whether you’re placing a market or a limit
order. A market order directs your broker to buy or sell
shares at the best market price currently available. A limit
order directs the broker to buy or sell shares only at a
specified maximum or minimum price. Brokers may
charge a higher commission for executing a limit order,
but only advertise the lower fee they charge for a market
order.
n The kind of securities you’re buying: Sometimes
brokers charge a higher commission for buying or selling
an over-the-counter stock as opposed to a listed
stock. A listed stock is one that is traded on a major stock
exchange — such as the American Stock Exchange or the
New York Stock Exchange. A stock that isn’t listed is
called an over-the-counter stock. NASDAQ is the leading
market for over-the-counter stocks. (Most investors
afford NASDAQ stocks the same status and prestige as
stocks listed on exchanges.)
n How many shares you’re buying or selling at one
time: An advertised “flat-rate” commission may be good
only up to a certain number of shares. Find out how
many shares you can buy or sell before a surcharge
applies to the flat rate.
Looking for hidden fees and costs
You may think that commissions are the only costs involved
with online trading. Unfortunately, this isn’t the case. Several
types of hidden costs can nibble away at your investment
profits.
Here are a few fees to watch for, when opening an account,
all considerations being equal:
n Fees to close the account: Some brokerages charge a fee
of $50 or more to close an active account.
n Charges for a copy of your statement: If you need a
copy of a prior month’s statement that isn’t online or
simply would like to receive your statements in the mail,
you can be charged up to $10 per page.
n Charges for transferring funds to or from your
account: If you need access to the funds in your account
or plan to purchase additional securities by wiring funds,
you should inquire about any associated charges for these
types of transactions.
always try to get the most for your money, but a broker’s
advertised commissions may not tell the whole story.
Questioning the advertised commission
Sometimes you’ll see a broker advertise a “flat-rate” commission
or “commissions starting at” a certain amount.
You need to make sure when you’re comparing commissions
that you’re comparing apples to apples. Make sure that you
ask whether advertised commissions change based on the
following:
n The type of order placed: Commissions may vary
depending on whether you’re placing a market or a limit
order. A market order directs your broker to buy or sell
shares at the best market price currently available. A limit
order directs the broker to buy or sell shares only at a
specified maximum or minimum price. Brokers may
charge a higher commission for executing a limit order,
but only advertise the lower fee they charge for a market
order.
n The kind of securities you’re buying: Sometimes
brokers charge a higher commission for buying or selling
an over-the-counter stock as opposed to a listed
stock. A listed stock is one that is traded on a major stock
exchange — such as the American Stock Exchange or the
New York Stock Exchange. A stock that isn’t listed is
called an over-the-counter stock. NASDAQ is the leading
market for over-the-counter stocks. (Most investors
afford NASDAQ stocks the same status and prestige as
stocks listed on exchanges.)
n How many shares you’re buying or selling at one
time: An advertised “flat-rate” commission may be good
only up to a certain number of shares. Find out how
many shares you can buy or sell before a surcharge
applies to the flat rate.
Looking for hidden fees and costs
You may think that commissions are the only costs involved
with online trading. Unfortunately, this isn’t the case. Several
types of hidden costs can nibble away at your investment
profits.
Here are a few fees to watch for, when opening an account,
all considerations being equal:
n Fees to close the account: Some brokerages charge a fee
of $50 or more to close an active account.
n Charges for a copy of your statement: If you need a
copy of a prior month’s statement that isn’t online or
simply would like to receive your statements in the mail,
you can be charged up to $10 per page.
n Charges for transferring funds to or from your
account: If you need access to the funds in your account
or plan to purchase additional securities by wiring funds,
you should inquire about any associated charges for these
types of transactions.
OPENING AN ONLINE BROKERAGE ACCOUNT
Looking over Online Brokerage Services
You can purchase most things these days by entering your
credit card number on a Web site. But you can’t buy everything
this way. To trade stocks, bonds, mutual fund shares,
or other securities, you must first open an online brokerage
account through a brokerage firm.
In the world of Web-based trading, your online brokerage
firm is responsible for
n Executing trades: When you tell a brokerage firm that
you want to buy or sell stocks, bonds, mutual fund
shares, or other securities, the firm is responsible for
communicating with the securities exchange or entity
through which these securities are sold.
n Maintaining account records: The brokerage firm is
responsible for maintaining information about the assets
held in your account and updating this information
periodically.
n Providing updates and information: Your online brokerage
firm is an important link to the investing world.
The firm’s Web site should provide quotes, updates of
the market, and access to charts, news, and research
reports.
n Providing other convenient services: You may get the
benefit of free checking and other handy services with a
particular broker.
Finding a Reputable Online Broker
How do you find a broker that’s reputable? Protecting yourself
isn’t difficult, but traps for the unwary are still out there.
For starters, be sure to choose a broker that meets the following
criteria:
n SIPC insured: The Securities Investor Protection Corporation
(SIPC) currently insures securities and cash in
a brokerage account for up to $500,000 (but no more
than $100,000 of that may be in cash).
n Listed on survey sites: Select a broker that is evaluated
on the Gomez Advisors and SmartMoney Web sites
(which I discuss later in this chapter) or at least gets a
good write-up in a national magazine. Stay away from
brokerage firms that haven’t been prescreened on these
sites or by the media.
n Look for objective referrals: Steer clear of chat room
advice from unknown sources whose motives and credentials
you can’t discern. (As a matter of fact, you can’t
even tell when chat room information was last
updated.)Your goal is to avoid online sales pitches disguised
as “hot tips.”
You can purchase most things these days by entering your
credit card number on a Web site. But you can’t buy everything
this way. To trade stocks, bonds, mutual fund shares,
or other securities, you must first open an online brokerage
account through a brokerage firm.
In the world of Web-based trading, your online brokerage
firm is responsible for
n Executing trades: When you tell a brokerage firm that
you want to buy or sell stocks, bonds, mutual fund
shares, or other securities, the firm is responsible for
communicating with the securities exchange or entity
through which these securities are sold.
n Maintaining account records: The brokerage firm is
responsible for maintaining information about the assets
held in your account and updating this information
periodically.
n Providing updates and information: Your online brokerage
firm is an important link to the investing world.
The firm’s Web site should provide quotes, updates of
the market, and access to charts, news, and research
reports.
n Providing other convenient services: You may get the
benefit of free checking and other handy services with a
particular broker.
Finding a Reputable Online Broker
How do you find a broker that’s reputable? Protecting yourself
isn’t difficult, but traps for the unwary are still out there.
For starters, be sure to choose a broker that meets the following
criteria:
n SIPC insured: The Securities Investor Protection Corporation
(SIPC) currently insures securities and cash in
a brokerage account for up to $500,000 (but no more
than $100,000 of that may be in cash).
n Listed on survey sites: Select a broker that is evaluated
on the Gomez Advisors and SmartMoney Web sites
(which I discuss later in this chapter) or at least gets a
good write-up in a national magazine. Stay away from
brokerage firms that haven’t been prescreened on these
sites or by the media.
n Look for objective referrals: Steer clear of chat room
advice from unknown sources whose motives and credentials
you can’t discern. (As a matter of fact, you can’t
even tell when chat room information was last
updated.)Your goal is to avoid online sales pitches disguised
as “hot tips.”
Finding Treasuries on the Web
After you decide to buy Treasuries, your research is far from
over. The U.S. government offers you lots of choices. You can
select from the following:
U.S. bonds, notes, and bills are called Treasuries because
they’re sold by the Treasury Department through its subagency,
the Bureau of Public Debt.
n Treasury bills (T-bills): T-bills are short-term bonds
with maturities of 13 weeks, 26 weeks, and 52 weeks.
The Treasury periodically holds an auction in which it
posts notices of new issues and makes them available to
the public on the Web. The 52-week T-bills pay interest
semiannually, and the 13- and 26-week varieties pay
interest when they mature. T-bills come in minimum
denominations of $1,000.
n Treasury zero coupon bonds: These bonds earn interest
to reach their stated face value upon maturity. For
example, you may purchase a $10,000 bond for $5,000.
They’re a favorite for college savings. Because these bonds
don’t pay interest until you cash them in, you don’t have
to report the interest as income before you redeem them.
n Treasury notes: This type of bond has a maturity date
of two years, five years, or ten years. You’re paid interest
semi-annually and have to invest at least $1,000.
n Treasury bonds: This type of bond represents the government’s
longest-term bonds, having a 30-year maturity
date. The Treasury sells them three times a year in
multiples of $1,000. They pay interest semiannually.
n Inflation-indexed notes: These bonds are the new kids
on the auction block — they were first introduced in
January 1997. They pay a fixed rate of interest plus an
extra amount to reflect the current inflation rate. The
inflation adjustment is based on the consumer price
index. These notes pay interest semiannually, have a tenyear
maturity date, and are auctioned every three
months.
over. The U.S. government offers you lots of choices. You can
select from the following:
U.S. bonds, notes, and bills are called Treasuries because
they’re sold by the Treasury Department through its subagency,
the Bureau of Public Debt.
n Treasury bills (T-bills): T-bills are short-term bonds
with maturities of 13 weeks, 26 weeks, and 52 weeks.
The Treasury periodically holds an auction in which it
posts notices of new issues and makes them available to
the public on the Web. The 52-week T-bills pay interest
semiannually, and the 13- and 26-week varieties pay
interest when they mature. T-bills come in minimum
denominations of $1,000.
n Treasury zero coupon bonds: These bonds earn interest
to reach their stated face value upon maturity. For
example, you may purchase a $10,000 bond for $5,000.
They’re a favorite for college savings. Because these bonds
don’t pay interest until you cash them in, you don’t have
to report the interest as income before you redeem them.
n Treasury notes: This type of bond has a maturity date
of two years, five years, or ten years. You’re paid interest
semi-annually and have to invest at least $1,000.
n Treasury bonds: This type of bond represents the government’s
longest-term bonds, having a 30-year maturity
date. The Treasury sells them three times a year in
multiples of $1,000. They pay interest semiannually.
n Inflation-indexed notes: These bonds are the new kids
on the auction block — they were first introduced in
January 1997. They pay a fixed rate of interest plus an
extra amount to reflect the current inflation rate. The
inflation adjustment is based on the consumer price
index. These notes pay interest semiannually, have a tenyear
maturity date, and are auctioned every three
months.
Differentiating notes and bills
Often when investors and Web sites talk about bonds, they’re
referring to instruments technically and correctly called notes
and bills. You’ll see these terms on the Web, and knowing
what they mean is important.
Bonds, notes, and bills are called fixed-income securities
because the amount of income you earn is predetermined.
Whether a fixed-income security is a bond, note, or bill
depends solely upon its maturity date. The distinctions are
as follows:
n Bonds: The maturity date is more than ten years from
the issue date.
n Notes: The maturity date is between one and ten years
from the date of issue.
n Bills: The maturity date is within one year from the issue
date.
referring to instruments technically and correctly called notes
and bills. You’ll see these terms on the Web, and knowing
what they mean is important.
Bonds, notes, and bills are called fixed-income securities
because the amount of income you earn is predetermined.
Whether a fixed-income security is a bond, note, or bill
depends solely upon its maturity date. The distinctions are
as follows:
n Bonds: The maturity date is more than ten years from
the issue date.
n Notes: The maturity date is between one and ten years
from the date of issue.
n Bills: The maturity date is within one year from the issue
date.
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