| Important Facts for Online Investors | ||||||||||
Online investing offers indisputable benefits, including low transaction costs, fast access to the markets, and a wide array of information resources. But the ease with which orders may be placed raises the possibility that some investors might ignore prudent investing principles and subject themselves to an inordinate amount of risk.
On January 27, 1999, SEC Chairman Arthur Levitt released a public statement warning of the
potential dangers of undisciplined online investing. In it, he outlined three "golden rules"
for all investors, with which we wholeheartedly agree:
There are several other key issues you should bear in mind when assessing your current investing strategies.
Market and Limit Orders
Stock prices can be extremely volatile, especially in the "hot" technology and
Internet sectors. A stock may be up $10 one minute and down $10 the next. One
way to protect yourself from getting an unexpected price when placing a trade is to
use a limit order.
With a limit order, you can establish the maximum price you're willing to pay for a
stock or the minimum price at which you're willing to sell. When the limit price is met
or exceeded, your order is filled as soon as market conditions allow. Unlike a market
order which is typically executed at the prevailing market price in a matter of seconds
and may be difficult to cancel, a limit order may be cancelled any time prior to
execution.
Delayed Trade Confirmations
With the huge volume of securities being transacted
online, you may occasionally
have trouble getting initial trade confirmations
immediately after execution. The fact
that you did not instantaneously receive a trade
report does not mean that your order
has not been filled. Avoid the temptation to
re-enter the order; otherwise, you may
end up placing multiple live orders for the same
security that cannot be cancelled.
You can check your Open Orders to verify that your order has been placed. As soon as our system receives confirmation of your
trade, the order status link will be updated.
The Risks of Margin Trading
If you decide to trade on margin, you should fully understand all of the risks involved.
A sudden drop in the price of a stock could cause
you to receive a margin call. In this
case, you would be required to deposit additional
cash or securities into your
account. If you do not respond in a timely manner,
your stocks could be sold to cover
the call, and you would be held responsible for any
losses. To reduce risk, don't
overextend yourself. Maintain account equity well
above the minimum margin
maintenance requirements, and be aware that
maintenance requirements on certain
stocks, especially highly volatile issues, can change at any time.
Realistic Expectations
When it comes to investing, it's important to have
realistic expectations. Don't be
misled into thinking that frequent or day trading is
a source of "easy money." These
strategies can be extremely risky. If you're new to
investing, you'll find a wide variety
of high-quality information and investment tools
available on our site, including our
Online Help, to help you learn about the markets
and formulate your long-term
investing strategy.
Some important responsibilities go along with self directed investing: To invest smart, know the ground rules, and understand the risks. Do your homework and take only the financial risks that you are personally comfortable taking. We will continue to provide more and better educational resources as part of our ongoing commitment to your long-term financial success.
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