Monday, September 21, 2015

Tips for the New Online Investor

Trading in stocks online is not like shopping at your local major retailer, where prices are set. Because investments are priced in real time through active bidding between buyers and sellers, there are techniques to buying and selling. When dealing with investments, you have five main ways to buy or sell them online:

  • Market orders: This is the most common type of order. You tell your broker to sell your shares at the best price or to buy shares at the current price. Because these orders are executed almost immediately and are straightforward, they typically have the lowest commissions.

  • Limit orders: With a limit order, you tell your online broker the price you’re willing to take if you’re selling stocks and the price you’re willing to pay if you’re buying. The order will execute only if your price is reached.

    Imagine you own 100 shares of ABC Company, which are trading for $50 a share. The stock has been on a tear, but estimate it will fall to $30. You could sell the stock outright with a market order, but you don’t want to miss out on any gains in case you’re wrong. A limit order would let you instruct your broker to sell the stock if it fell to $45 a share. 

  • Stop market orders: Similar to limit orders stop market orders let you set a price you want to buy or sell shares at. When a stock hits the price you designated, the order converts into a market order and executes immediately.

    Imagine that you have 100 shares of ABC Company, which are trading for $50 a share. But this time, you enter a stop market order for $45. And again, you wake up to find the stock plunged instantly to $25. This time, though, all your stock would have been sold. But, your online broker will sell the shares at whatever the price was the moment your order converted to a market order, which in this case could have been $25.

  • Stop limit orders: Stop limit orders are customizable. First, you can set the activation price. When the that price is hit, the order turns into a limit order with the limit price you’ve set.
    Okay, ABC Company is trading for $50 a share when you enter a stop limit order with an activation price of $45 and a limit price of $35. It would work like this: Again, you wake up to find that the stock plunged instantly to $25. This time, your broker would turn your order into a limit order after it fell below $45.

    When the stock fell to $35, the broker would try to fill orders at that price if possible. But Unlike with the stop market order, you would not dump the shares when they fell as low as $25.

  • Trailing stops: Regular limit orders are either executed or they expire. Trailing stop orders get around this problem by letting you tell your broker to sell a stock if it falls by a certain number of points or a percentage.

    If you’re buying and selling individual stocks, trailing stops can be a good idea. Even before you buy a stock, you should have an idea of how far you’ll let it fall before you cut your losses. Some investment professionals suggest never letting a stock fall more than 10 percent below the price you paid. If this sounds like a good idea to you, a trailing stop could work for you.

Online Investing Success

  1. Terms you must know: what is a stock, what are bonds, what is an investment or asset allocation, what are mutual funds, what are EFTs ..

    "If it’s too hard to understand, maybe I shouldn’t invest in it." ~
    Warren Buffett

  2. Diversify your portfolio with low-cost ETFs (exchange traded funds) and index funds.

  3. Do not buy and sell at less than optimal times.

    "No one goes through a bull market and a bear market and comes out better than an index fund," says Michael Kitces, Partner and Director of Research for the Pinnacle Advisory Group.

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