Читать книгу The Handy Investing Answer Book - Paul A Tucci - Страница 14
ОглавлениеWhat are “stocks”?
Stocks are a way to own the assets and earnings of a company. Companies that offer the opportunity for investors to own their stock place a value on the shares or pieces of the company based upon the value of all the assets of the company and the value of its past, current, and future earnings. A stock can be traded (purchased or sold).
How do companies use the proceeds of a stock issue?
A stock may also be created, and then marketed and sold, when a company wishes to raise capital or cash to help fuel its business development, to pay off loans and other debt, and perhaps to buy back shares from other investors at attractive prices. A company’s stock is originally valued when the company first begins, based upon its capital or cash and other initial assets.
What is a “stock market”?
It is a place—whether a physical building or an online virtual environment—where stocks are bought and sold. Stock markets or exchanges, as they are also known, can trade stocks, bonds, and derivatives of stocks and bonds, along with many other financial instruments.
Which stock market opens first?
As the day begins in each part of the world, there is a flow of stock trading. The first of the major markets in the world to open are those in the countries nearest the International Date Line. New Zealand’s market opens first, followed by Sydney (Australia), Tokyo, Hong Kong, Singapore, China, Mumbai (India), and Moscow. Europe then follows, with Switzerland, France, Germany’s Frankfurt Exchange, and London, England. Then the North American markets open, in Toronto, New York, and finally Chicago.
Does the stock market ever close?
Because there are stock markets in many parts of the world, investors may trade 24 hours a day.
What are the largest stock markets in the world?
By far the largest stock market is the New York Stock Exchange, which trades $30 trillion worth of stock, followed by National Association of Securities Dealers Automated Quotations (NASDAQ) in New York ($15 trillion); London, England ($10 trillion); the Tokyo [Japan] Stock Exchange ($6.4 trillion); Euronext [Belgium, France, Holland, and Portugal] ($5.6 trillion); Frankfurt, Germany ($4.3 trillion); and Shanghai, China ($4.1 trillion).
How many countries have stock markets?
Stock markets are found in 77 countries around the world.
The New York Stock Exchange building in New York was constructed in 1903.
What are some of the pitfalls of buying individual stocks?
Although buying individual stocks can be economically rewarding, many experts believe that for the individual investor there can be many factors that detract from whatever benefit we might enjoy. Acquiring individual stocks requires a great deal of time to do research to decide the safety of the stock. To have a diverse portfolio, you must have many individual stocks, and each needs to be researched and followed. It may take more time to do so than you have.
What types of risks could I see if I own individual stocks?
Inherent to individual stock ownership is the concept of various types of risks that must be understood prior to acquiring individual stocks. Broad economic risk may occur and temporarily or permanently depress a stock’s price after you purchase it. Economic risk could be the effects on the economy and the stock investing community’s perception from such events as high unemployment, lower than expected exports, a drop in consumer purchases or confidence, an abrupt devaluation of a currency, or an unexpected increase in interest rates, among many others. Industry- or market-specific risks may also negatively affect the price of an individual stock, as perhaps a game-changing introduction of a new technology, or availability of cash for consumer credit, may negatively affect a stock’s price.
A change in government policies (political risk) may also cause a stock’s price to be depressed (for example, if the government decides to levy a tax or duty on the sale of a particular product). This may have both short- and long-term consequences. Materials and other input risks may influence the price of a stock, if the materials represent a rather notable component to the underlying product the company creates and sells. (Inputs are things used to make products, especially commodities like steel, copper, and petroleum.)
As prices for such inputs increase, profits of the company may fall. If profits fall, influencing the stock price, the value of the shares may fall. Technology risks may occur, and may have an immediate or delayed effect on the stock price. An example could well be the effect of the usage and proliferation of the Internet, and the effect this has had on industries such as the video rental market, music industry, and book publishing industry. How the target stock’s competitors develop and innovate may also affect the price of a stock, as a competitor may develop and apply a manufacturing or logistical methodology that makes it far more competitive, and therefore relatively more valuable to the market, perhaps affecting the price of stock.
Giant lawsuits may present legal risks, especially in such industries as finance, health, pharmaceuticals, and chemicals. An unforeseen lawsuit settlement may cause a company to file for bankruptcy protection, which would have an immediate effect on its share price. If a competitor to the target company attracts more competent management, or if the management of the target company is engaged in illegitimate activities, and less than competent management practices, these factors may also greatly influence the value of a stock.
What other risks are inherent to individual stock or mutual fund investing?
Many experts believe the most apparent risk of investing in an individual stock or mutual fund is market risk. Market risk occurs when the market in general does not move in the “right” direction. When this happens, there is a tendency for the majority of stocks—regardless how good—to follow in the same direction. This means that whether or not the investment is sound, with great potential, a short or long market dip will tend to move even the best of stocks down. Sector risk is similar; even if you invest in a winning sector, if the market in general declines, it may affect this sector as well. Some sectors may move less or more, given a variety of variables that influence that particular sector. Even if you pick the right stock and sector, an unexpected event that affects the stock price, value, or demand for the stock may occur, and this may negatively affect your returns.
Why is information overload a huge risk factor when I invest in individual stocks?
In hopes of generating more viewers and readers, media companies must create stories to keep their consumers interested. With the proliferation of Internet usage by the individual investor, the once secretive investment community may in fact use and have access to much of the same information that individuals use. Financial stories abound in today’s world, and the less-than-savvy investor may become overwhelmed or panic upon the release of any news story. Many people in the investment community believe the global financial news has a degree of homogeneity, in which all media sources report on approximately the same stories, making individual investors who follow such news outlets and networks unnecessarily anxious, even when the story may have little impact on the stock’s long-term price. The unprofessional investor may be unable to distinguish the difference between a meaningless piece of information and one that may affect a stock’s price.
What are some common mistakes investors make when thinking of buying stocks?
Some common mistakes may include buying at a high price and being averse to suffering a loss, therefore holding the stock too long; putting too much weight in past historical information to guide him in making an investment decision; an inability to distinguish between many investment choices; and insensitivity to brokerage and management fees associated with trading individual stocks. Some experts also note the failure on the part of the individual investor to understand how difficult it is to “beat the market,” to do better than the returns of an underlying stock exchange, or to outperform a broad array of stocks such as an index.
Why do some experts believe the individual investor should avoid investing in individual stocks and mutual funds, and should rather invest in indexes such as the S&P 500?
In a recent article, Forbes cited a few studies that support the argument that we should avoid investing in individual stocks. In a study published by Dalbar, Inc. in 2003, researchers found that in looking at average annual returns from 1984 to 2002, the annual average return of the S&P 500 was 12.2%, while mutual fund managers achieved a 9.3% return during the same period. The article also cited an annual report issued by Standard & Poor’s, the S&P Indices Versus Active Funds Scorecard, finding that by mid-2012, 89.8% of all managed domestic (U.S.) funds failed to beat the performance of the benchmark S&P 500 Index. Furthermore, the scorecard reported that in 2009–2012, 73.2% of managers underperformed the Index, and in 2007–2012, 67.7% underperformed the Index.
What about the success of high-performing stocks?
The experts at Forbes also cite a study by Longboard Asset Management that analyzed 3,000 individual stocks from 1983 to 2007. Their findings showed that 39% of these stocks were unprofitable, that 19% lost 75% or more of their value, 64% underperformed the market, and that just 25% of the stocks were responsible for the great gains in the stock market during the period analyzed.
What are some important points to know when I invest in stocks?
According to experts at CNN/Money, you need to understand several important points when you begin to invest in stocks. A stock represents your ownership in a company, and also represents your ownership of assets, liabilities, and current and future earnings or profits of the company (and the perception of the possibilities of hitting these earnings targets). The stock market is a very diverse marketplace consisting of many entities that can be arranged and understood by several attributes, including the size of the company (measured by market capitalization), the sector in which it competes, and its type of growth pattern based upon historical performance, among many others.
From 1983 to 2007 only 25% of stocks were responsible for most of the growth in the market, while the majority either underperformed or were unprofitable.
The price of a stock at any given moment depends on a wide variety of factors, including earnings, especially for the long-term investor. It may also be influenced by the sentiment of its buyers and sellers, fear created by information about the company and its competitors, and macroeconomic news that may have an effect on the company’s performance. According to the same experts, since the 1940s, stocks (as compared against bonds, cash, real estate, and other savings choices) provide for nearly a 10% return over the long term, better than most other investment choices. It is important to note that the performance of any one individual stock does not represent the overall performance of the market. A great individual stock may beat an index over time, but may also decline even when the market in general is booming.
Because of the dynamic nature of businesses and the marketplace, it is difficult to use a stock’s historical performance to gauge whether or not its value will continue to grow; even great companies run into unexpected problems. These unexpected occurrences may influence a stock’s price and value. Diversification of a portfolio seems to mitigate many risks. Furthermore, you should not judge a stock simply by looking at its price or the relative price in its sector or industry, because there are many fundamental factors that may contribute to a stock’s underlying price. For the long-term investor, it is better to buy and hold great stocks than to generate many short-term trades for a variety of expense-related reasons, such as short-term capital gains taxes, commissions on trades, and exposure to many market risks.
Can I pay too much for stocks?
Yes. Like anything you buy, if you are first in line to buy a stock, you may get a very good deal, because the company may have anticipated less demand for the stock than there really is. So if there is great demand for a stock, the price of the stock may increase quickly—in a few minutes, or even seconds, from the initial offering price, until all the stock’s buyers and sellers have been satisfied during the trading day. If you arrive at the sale late, the price could be many percentage points higher than in the morning, and you may end up paying more than the person who bought the stock first thing in the morning.
What is an “initial public offering” (IPO)?
An initial public offering occurs when a company wishes to offer its stock shares to the public, hoping to raise capital for the first time.
Why should I care about IPOs?
An IPO can give you the opportunity to invest in a company at an early stage in its development. Individual investors may be able to purchase those shares that large institutional investors haven’t purchased, giving you the opportunity to profit from the sale of the shares.
How many initial public offerings occur in a year?
In the 1990s, because of the onset of the Internet era, an average of 193 IPOs occurred per year. After the economic crashes in the 2000s, IPO activity fell to an average of 48 per year.
How large is the IPO market at the NYSE?
The NYSE/Euronext raised more proceeds for the initial public offerings of stock than any other exchange in the world. In 2008 alone, the NYSE raised $45 billion in IPO proceeds, approximately 21% of the total IPO capital raised throughout the world. The next largest market for IPOs, Hong Kong, raised $12 billion.
On average, how long has a company been in business before it issues shares for the first time to the public?
On average, most companies have been around seven to eight years before they “go public.” At this time, after the IPO is made, the original investors in the company may be paid back money for their initial investment.
What are some decisions an individual investor must make before investing in a particular stock?
Many experts believe you need to make certain decisions before you begin to invest in a particular stock. Some of these decisions may include: the point or price at which you will buy and sell the equity, how long you plan to hold the equity, and at what price increase or decrease you are willing to sell the equity.
How do I begin to select individual stocks?
Many experts agree there is no perfect method for individual stock selection; the choice of what procedure to follow depends upon each individual investor. Most experts agree that at the very beginning of developing your stock portfolio, you should engage in intensive research. In the research phase, you may identify themes, markets, segments, industries, or brands on which to focus. This may be followed by an analysis of such fundamental variables as the potential target’s size, debt load, P/E ratio, competitive threats, and earnings potential. Some experts will even test to see how the stock price moves upon the release of news, or how the stock price reacts to certain events that may occur during the course of a year or other historical period. Other investors who seek growth in a stock’s price from the date of purchase may look at the company’s asset value to see if there is hidden value the market seems to have missed. Many experts assert the importance of knowing at what price to acquire a stock, since if you acquire the equity at a relatively high price, it may take a much longer time to realize your goal for the expected rate of return on the investment.
What are some other considerations when I try to identify individual equity target companies?
There are many different considerations when investors try to distinguish winning stocks from potential problem stocks. Some experts who seek undervalued companies understand that the value of a company may be quite different in the future than it is today. A company may have a short-term management problem that may be solved next month. Meanwhile, the broad investor market may have already abandoned the company, thereby depressing its price. Value investors look very specifically at companies that appear undervalued to try to see if they have the ability to correct themselves over time. Other experts look closely at companies’ and their competitors’ debt to measure the strength of the target company’s financial position. A company that is ready and able to clear away debt may be viewed more favorably than a company that cannot seem to get out of debt. Debt can depress a company’s earnings, and can also cause a company eventually to fold and declare bankruptcy.
Why do some people prefer to buy individual stocks, instead of purchasing an index fund or a mutual fund?
There are several reasons why some individual investors prefer to choose and invest in individual stocks, rather than invest their money into index funds or mutual funds. Some experts believe that when you buy an index or mutual fund, you may get many lower-performing stocks along with many top-performing stocks. Even if the top performers do very well, their performance is pulled down by the poorer-performing stocks. Although diversifying one’s portfolio may be a great strategy over the long term, some individual investors believe in specializing in a sector, as they can become more familiar with and learn the dynamics of the sector, and earn a profit. The investor who researches and acquires individual stocks also has a strong interest in the stock market, and is willing to spend the time to do so. Individual investors who cannot be bothered with spending the time to identify, analyze, and invest in individual stocks would probably be better served by buying index or mutual funds. Other experts assert that some individual investors perceive an investment in an index or mutual fund is in some way “safer” than owning a portfolio of individual stocks. If you own an index fund, and the underlying index or market falls—no matter how diversified the index may be—the value of the portfolio will decline, in the same way it would if there were a broad decline in some of your individual stocks. Many experts believe that simply owning an index or mutual fund is no guarantee against losses.
Some people might want to invest in companies that they consider to be socially or environmentally responsible, 72 such as a clean energy business.
How do I buy individual stocks?
You can buy individual stocks through a stockbroker, a stock brokerage firm, certain banks that offer stock investments, online brokerage firms, and directly from some companies that offer stocks directly to consumers.
What are some general factors that might be interesting to use while I evaluate a stock?
Some general factors might be interesting to use while you evaluate a stock, including: whether it is a company you know and understand; is in an industry that you understand; has a stable management team; is diverse geographically (not concentrated in any region or country); and is a great place to work.
What are some macroeconomic factors that might influence the growth of a stock’s price?
Many macroeconomic factors might influence the growth of a stock’s price. Economic trends that might affect a stock’s price help place the stock in the context of aspects of the economy that may suppress or grow the company’s earnings. The company could be dependent on oil prices, employment rates, currency values, prices of commodities, etc.
What types of financial signs should I investigate?
Investors need to look for various financial signs that signify a buying opportunity. Many experts believe that investors should 1) find companies with strong quarterly earnings growth over a long time period; 2) consider the size of the company’s debt load (especially relative to other competitors); 3) consider the diversity or concentration of the company’s income streams; 4) consider the company ’s annual sales growth over time; 5) identify the company’s ability to make great products year-in and year-out; 6) determine the company’s ability to control expenses; and 7) determine whether the company uses capital wisely. You may also want to investigate if the company spends money appropriately on other cash-intensive items, such as people, equipment, marketing, research and development, etc.
How important are market forces on the long-term growth of a stock’s price?
Many market forces work in tandem to influence the perception of a particular stock to investors. It is important to focus on the size of the market potential for the target company’s products, threats to the company’s products or profits, and whether the market in which the company is competing is in a state of growth or decline.
What about the analysis of the stock itself?
It is good to see if the company’s stock price is outperforming its peers, whether the price of the stock is too high or too low, and the reasons why. You may also want to know if any single individual or entity owns a large percentage of the stock, which could influence its price. It is also good to know if the company regularly pays a dividend to its shareholders.
What is “preferred stock”?
Preferred stock is stock or equities issued by a company that combines some qualities of common stock with some qualities of a bond. When you own preferred stock in a company, it is considered preferred because under normal circumstances, the shareholder is paid a dividend on the shares before all other classes of stock issued by the company. In the event of the company’s bankruptcy or liquidation, preferred shareholders receive their share of assets before common stockholders (but behind bondholders). The terms of the preferred shares in which you may invest are found in the prospectus of the investment offering, and in the company’s articles of association. Preferred stock is also rated by many ratings agencies (e.g., Moody’s). Preferred stock may be either cumulative (the company must pay a stated dividend in arrears, if it misses that payment) or non-cumulative (the company does not have to pay a missed stated dividend payment in arrears). Each class of preferred stock in a company confers upon the owner certain rights, as each class or issuance of preferred stock may have different terms. Convertible preferred stock allows you to convert the preferred stock to shares of common stock. Investors in preferred stock generally do not experience the great variations in price that common stockholders experience, so long as the company is paying its stated dividends to the preferred shareholders regularly.
What is “behavioral economics”?
Behavioral economics, or behavioral finance, is a relatively new science that tries to help you understand why people make often irrational financial decisions, based upon their own perceptions and biases. For example, if the consumers of a product or stock investment perceive the supply is somehow diminishing, they may be more prone to purchase it now, rather than waiting for a better, more rational time during which to purchase.
Using principles of behavioral economics, how do men and women differ when it comes to investing?
After concluding a study of the investing behavior of men compared with women, experts from the University of California found that single women investors outperformed single men investors by a 2.3% average return. When it comes to investment groups, female-based investment groups outperformed male-based investment groups by 4.6%. The experts assert that the reasons behind this are that men traded 45% more often than women, generally making poor decisions, and holding on to a position too long because of ego and a constant comparison to other investor friends, as opposed to rationally selling laggards and retaining winners.
How do I purchase a company’s shares directly from the company, rather than using a broker?
In order to avoid paying transaction fees, many individual investors purchase stocks directly from companies, rather than going through a broker and paying commissions on the purchase and sale of the stock, which may amount to several percent of the value of the trade. In this case, individual investors may buy shares directly from some companies by identifying the target company’s stock transfer agent, discovering if the company offers shares directly to individual investors, and opening an account on the transfer agent’s website. The company may require a minimum investment.
Studies have shown that female investors have outperformed their male counterparts because they tend to trade less often and make better, less ego-driven decisions.
What are some important stock market indexes that I should consider when I am investing, and why?
There are many key markets and indexes upon which investors may focus when measuring investing success. Each composite market and its underlying index has its own character, created in part by the types of stocks that are listed, as well as historical factors. Companies that are listed on various exchanges may change, and the market on which they are traded may also change. Some important indexes are the NASDAQ Composite Index (many key technology-based stocks), Standard and Poor’s 500 Index (includes blue chip stocks and key stocks on different exchanges), and the Russell 2000 Index (small capitalization company stocks often valued below $1 billion).
What are the New York Stock Exchange’s “circuit breaker” rules?
Circuit breaker rules limit steep, unexpected declines in stock prices, as they are being traded, to prevent market price collapse, and to offer some protections to both buyers and sellers. The circuit breakers comprise three levels: Level 1 (a 7% decline between 9:30 A.M. and 3:25 P.M.), Level 2 (a 13% decline between 9:30 A.M. and 3:25 P.M.), and Level 3 (a 20% decline at any time during the trading day). When the NYSE reaches the Level 1 or Level 2 threshold, the NYSE pauses trading for 15 minutes. When the NYSE reaches its Level 3 threshold, all trading activity is halted for the remainder of the trading day. The circuit breaker rules also mandate that each level can only be reached once per day. So if the markets decline by 7%, and after a 15-minute pause, decline by another 7%, trading continues until the next level is reached, and that rule will be used once. If prices slide and the 20% decline level is reached, then trading is suspended until the next trading day. The rules are meant to prevent bottomless declines in stock market prices or severe crashes.
What are “growth stocks”?
Growth stocks have had—and may continue to have—good track records for growing revenues, profits, and market share, even as larger economic forces may depress the performance of other similar companies. For example, many experts believe these types of stocks may include great companies in industries such as health care and food as people need to eat and receive medical care despite any current economic conditions.
What are “cyclical stocks”?
Cyclical stocks typically signal the recovery of a period of economic decline, as they tend to begin to grow early as a recovery is under way. Experts like to include companies within certain industries such as automotive, steel, heavy machinery, and mining, as indicative of an impending recovery as they may recover sooner from a decline, and play a pivotal role in the general economy.
How much change must occur in a stock market in order to call it a correction?
A stock market correction occurs upon a 10% decline from a high observed on a major exchange or composite stock average.
How much of an increase in the average price of stocks must occur in order to declare a bull market?
In order to better understand broad movements in the market—and whether today’s conditions represent buying or selling opportunities—investors characterize increases in the price of stocks in an average by more than 20% from a low as a bull market. It characteristically is a period in which stock prices are rising, profits are increasing, inflation is low, interest rates are relatively low, and money is flowing into the stock market.
How do companies use an initial public offering to help support their continued growth?
An IPO is a way in which a private company raises capital in order to fuel further expansion and investment. Typically, a private company may need more capital than what its current business generates in order to expand its market imprint, product offering, innovation, manufacturing, information systems, or a combination of all of these. Company founders may desire a liquidity event in order to cash out of the company. By making an offer for the sale of equity (shares), the company can quickly raise capital needed and continue to generate or improve its profitability over time.
What kinds of information can I find by using the U.S. Securities and Exchange Commission (SEC) website?
The SEC website makes available to the public all information concerning publicly traded companies’ filings that are required by law. This library of business information may provide the details necessary to make informed decisions regarding purchasing or selling stocks in publicly traded companies. It includes such information sources as the EDGAR Company Database (Electronic Data Gathering, Analysis, and Retrieval System), and publishes all corporate filings and forms necessary for publicly traded companies, as well as earnings reports, annual reports, and IPO forms. The site also includes tutorials and information for individual investors, including tips and information regarding stockbrokers and firms to see if they are properly licensed, or have complaints or actions against them.
According to the SEC, what types of questions should I ask when trying to decide which broker to choose?
The SEC recommends that investors ask potential brokers the following questions, in order to determine if the broker is legitimate, properly licensed, and trained. Questions may include:
• What experience do you have, especially with people in my circumstances?
• Where did you go to school?
• What is your recent employment history?
• What licenses do you hold?
• Are you registered with the SEC, a state, and/or the Financial Industry Regulatory Authority (FINRA)?
• Are the firm, the clearing firm, and any other related companies that will do business with me members of the Securities Investor Protection Corporation (SIPC)?
• What products and services do you offer?
• Can you recommend only a limited number of products or services to me? If so, why?
• How are you paid for your services?
• What is your usual hourly rate, flat fee, or commission?
• Have you ever been disciplined by any government regulator for unethical or improper conduct, or have you been sued by a client who was not happy with your work?
• For registered investment advisers, will you send me a copy of both parts of your SEC Form ADV?
What is a “stock split”?
A stock split happens when a publicly traded company decides to divide its outstanding stocks in half, or split (doubling the number of shares outstanding), while cutting the price of the shares in half. Investors usually view this as a favorable indicator for the company’s stock, and normally will wish to acquire more shares at a more favorable price. It also indicates the company’s belief in its own future prospects. Some experts discount the perception that stock splits are generally beneficial for the company or investor, as a company has inherent value no matter how many shares are available.
What is a “reverse stock split”?
A reverse stock split occurs when a company decides to consolidate its outstanding shares. If a company has two million shares outstanding, it may wish to consolidate these shares down to one million by doubling the price of each share. So instead of having two million shares trading at $50, the company now has one million shares trading at $100. Companies normally decide to engage in reverse splits when they have a depressed stock price, and that decision generally is not seen by the investment community favorably.
What are stock or share “buybacks”?
Yet another strategy that companies may employ is share “buybacks,” or the purchasing back of shares from the open market. Since the earnings of a company are often calculated on a per share basis, a company can make its earnings per share radically improve if there are fewer shares on the market. An important way to tell if a company is in fact buying back its shares is to scrutinize its quarterly reports, and find the line item “shares outstanding.” From here, you may compare past quarters or years to see if any buybacks have occurred.
What is another strategy that a company might employ to make its stock attractive to potential investors and current shareholders?
Another strategy that companies might use to distinguish their stock from all others is by paying dividends or distributing the earnings of the company either on a regular quarterly basis or, in some cases, as a one-time event. Normally, a company announces the record date, which is the date that any shareholder must own stock prior to the payment of dividends, and distributes the dividend, usually shortly thereafter. When a company has amassed a lot of cash, it may pay out a special dividend to shareholders of record. Companies that regularly pay dividends tend to be large, predictable, and profitable companies, such as many companies listed in the Dow Jones Industrial Average.
What is a “market order”?
When you purchase a stock, you may request your broker or online brokerage interface to enter a market order. A market order is an order to purchase or sell a stock at the best available price. Even if the order is executed immediately, it does not necessarily mean that you will get the last traded price, as prices change every second, and the price you receive may be quite different from the price you originally wanted.
A lot of people still picture stockbrokers shouting out orders to buy or sell stock, but these days computer transactions make the process a lot more quiet.
Why is there a difference in price from the time that I want to buy or sell a stock and the time that I actually buy or sell that stock?
When you call a broker or click the “execute” button on an online interface, your trade ultimately goes to an intermediary, who must determine to which market to send the order. The stock orders may or may not be packaged together with many other orders to be fulfilled at the most favorable price. According to the SEC, there are no current regulations making brokerage firms execute trades within a certain time, only that the firm cannot deceptively advertise its ability to trade, and must meet its promises to its clients.
What is a “limit order”?
A limit order allows an investor to buy or sell a stock at a specific price. If the limit order is a “buy” limit order, it may be executed at the stipulated price or better. If the limit order is a “sell” limit order, the brokerage firm or site must execute this trade at the limit price or higher, so that the client receives the most money in exchange for his shares at the time of order execution.
Why are limit orders good to use?
For investors who are buying or selling positions, limit orders help ensure that the investor is getting the best price for his transaction, and does not pay more or sell for less than a predetermined amount. Limit orders provide investors with some protection against volatile price movements of securities while trades are moving through various electronic systems. Limit orders may be more expensive to execute than market orders, so experts generally assert to check with your brokerage firm regarding its fees.
What other types of special orders may help investors when executing trades?
In addition to market and limit orders, there are a few other special orders that may be available to the investor, either at a brick-and-mortar brokerage firm or an online brokerage site. A stop order or stop-loss order is used when you want to buy or sell a stock at a specific price, also called the stop price. A buy-stop order is executed at a stop price somewhere above the recent market price. A sell-stop order is executed at a stop price below the current market price. Investors like to use buy-stop and sell-stop orders to limit losses and to protect profits when executing trades. You should check the specific rules at your brokerage firm (whether full service or online) regarding at what price your order will be executed. Some firms use current quoted prices, while other firms use the last-sale price to determine the stop or buy limit price to be executed.
What other special orders can investors use to help secure a certain price or limit a potential loss?
Investors may use other order instructions to help protect their profits or limit potential losses. “Day orders” mean the order is to be fulfilled during the trading day. “Good-til cancelled” means the order is in the system for whatever time it takes for the order to be fulfilled and transacted. “Immediate or cancelled order” means an order must be transacted immediately, or it must be cancelled. Check with your firm to discover how it defines the word “immediate.” Other special orders may include a “fill-or-kill” order, when an order for stocks must be filled in its entirety, and an “all-or-none” order, in which the trading order to either buy or sell must be executed in its entirety immediately. If it is not executed immediately, an “all-or-none” order will remain active unless it is executed or cancelled by the investor.
What if I want to buy or sell a stock after regular market hours?
Normally, if you wish to buy or sell a stock after regular trading hours, the transaction is settled at the next opening price. However, the timing of these trades depends upon the brokerage firm, so check with your firm for additional information.
What types of factors affect my ability to execute a trade when I want?
There are many different situations that may cause a trade not to execute at the exact price, or the precise time we want. Some situations that influence your order execution may be the volume of Internet traffic at the very moment you are making a buying or selling order, the volume of orders for the security that may be taking place simultaneously, and limits to the technology of the individual trading platform the firm is using. Even when you are given notice that an order was received by your broker, it does not necessarily mean your order was executed. It may just be an order confirmation, so please check with your brokerage firm about its notification procedures.
What are some common myths or beliefs that limit what I may earn as an investor?
Experts at both Investopedia and NASDAQ believe potential investors may have certain inaccurate beliefs about investing that may cause problems when you first invest. One belief is that stocks that plummet in price eventually will bounce back, which is not necessarily true. The reasons why a stock drops in value may be complex in origin, and good research on the investor’s part may help limit losses in this environment. Another belief may be that people who actively trade stocks and manage their personal portfolios are part of some sort of exclusive club. This is simply untrue, as many millions of individuals actively engage in learning and managing personal stock portfolios, either indirectly through brokers and advisers, or directly through their retirement plans and personal investments. Another widely held belief may compare the investment in stocks to gambling in Las Vegas. This is also an erroneous belief, as with proper research, risk analysis, long-term strategies, discipline, and diversification, an investor can actively obtain his results without ever having luck involved in the equation. Yet another widely held belief is that stocks that rise in price over time must always come down. Many experts assert this is simply incorrect, as some companies are so well managed that their stock price may continue to rise even when purchased at a high point. Over a longer period of time, the stock’s price may continue to rise. And finally, that only a bit of knowledge about the complexities of investing in the market is enough for all of us to invest in the market. This belief may also cause many problems with new investors, as it takes a considerable amount of learning, training, and understanding of this complex system in order to do well as an investor.
Another widely believed myth is that investing in stocks is about as safe as gambling in Las Vegas. With proper research and help from a professional, it is actually considerably safer.
How do I begin setting up a brokerage account?
You can easily set up a brokerage account by completing and submitting an online application or mailing a completed form that can be downloaded from most brokerage firms’ websites. The form asks for basic information about yourself, and may also ask you to fill in some personal financial information, such as your annual income, net worth, investment goals, likely frequency of trading, etc. You may also be asked to associate your new account with another external bank account, or use the firm’s banking products, if available. You may also be asked how you wish to keep your uninvested cash on hand. Many firms will give you different choices for how you wish to save or invest this cash, used to execute trades and invest proceeds. Many firms will require some sort of minimum deposit to begin trading, so you should check with each individual firm.
