Protecting Your Online Investments
By: Source: AARP.org Date Posted: 2005-03-20 12:09:02
Now that you can trade through online brokerage accounts, investing in the stock market is just a click away. According to estimates, 16 to 25 percent of investors use a brokerage company's Web site to buy or sell stocks. However, easy access to the stock market through the Web may increase your risk.
What You Should Know
Before you trade through an online account, be aware of the following:
Research Your Proposed Investment
A "hot tip" by itself isn't a sufficient reason to invest your money in a particular company or mutual fund. Nor is the fact that you can place a trade easily online. As always, conduct thorough research to find out about the company through its annual report, or the mutual fund from its prospectus. Then you can decide how the investment fits in with achieving your financial goals.
Online Trading Is Not Always Instantaneous
You may find that technological issues can slow orders from reaching an online firm at the time you make them, or prevent them from reaching the firm at all. In addition, even if an order reaches the firm, it is not necessarily placed at the time it is received.
Limit Order vs. Market Order
To avoid buying or selling a stock at a price higher or lower than you intend, 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. When you place a market order, you can't control the price at which your order will be filled.
Because your stock may go up or down considerably before your trade goes through, with a market order you may end up paying more for the stock than you intend, or selling at a price lower than you wish.
Confirm That Your Order Is Executed
Some investors mistakenly assume that their orders have not been executed and consequently place another order. They end up either owning twice as much stock as they can afford or want, or selling stock they do not own. Check with your firm to learn how to determine whether an order was executed.
Before Canceling a Trade
Orders can only be canceled if they have not been executed. If you wish to cancel an online trade, it is important to make sure that your original transaction has not gone through. Although you may receive an electronic receipt for the cancellation, don't assume the trade was canceled. Check with your online brokerage firm to learn how to determine if an order was actually canceled.
What to Know About Commissions
While the commissions may initially appear to be cheaper online, there are often requirements, such as number of shares traded, or number of trades made, that are needed to get the lowest price. If you trade a lot, these commissions add up.
For More Information
Securities and Exchange Commission (SEC)
The SEC offers a variety of useful information for consumer-investors from the SEC's Office of Investor Education and Assistance, including:
- tips on avoiding Internet investment scams
- fourteen downloadable online publications in the "Financial Facts Tool Kit"
- a database of mutual fund prospectuses
- a mutual fund calculator
- tips on getting assistance and lodging a complaint
- resources to help you safely use the Web to research investments and trade online
URL: http://www.sec.gov
Investing Online Resource Center
This Web site is sponsored by The Hastings Group, which holds programs on financial literacy.
URL: http://www.investingonline.org
National Association for Securities Dealers (NASD)
This Web site of the National Association for Securities Dealers provides information to help people who invest online.
URL: http://www.nasd.com
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