Tips for Online Investors
Online brokerage activity is rapidly expanding. Some 200 securities firms offer Internet brokerage services and an estimated 10 million plus online accounts exist, according to the North American Securities Administrators Association (NASAA). Internet firms are spending hundreds of millions of dollars on advertising to attract additional customers, many of them new to investing and the stock market. Against this backdrop, securities regulators developed these "hot tips" to educate consumers who may be thinking about investing online.
Opening an Online Brokerage Account
- Be sure that you receive full disclosure about the alternatives for buying and selling securities, and how you can obtain account information if you are unable to access the firm's website.
- Ask for information that substantiates any firm advertising claims regarding the ease and speed of its online trading.
- Review the firm's privacy and web site security policies, and ask whether your name may be used for mailing lists or other promotional activities by the firm or any other party.
- Carefully review information about sales commissions and any conditions that may apply to advertised discounts on commissions. Even if online brokerage costs are lower than those of full-service brokers, they can still add up, particularly if you do a lot of buying and selling. Online brokerage firms can also impose a number of other fees and charges that you should study closely. Keep in mind, as well, the potential tax consequences of your trading. Before you start frequently buying and selling stocks online, give careful consideration to how the federal capital gains tax "bite" may affect your returns.
- Contact the Securities Division to verify the registration status and inquire about the disciplinary history of the online brokerage firm.
- Start slowly. Don't begin trading online with your entire life savings. When you feel confident, then decide whether to add more money to your online account.
- Recognize that you will likely not be linked directly to the market and that the click of your mouse will not instantly execute a trade.
- Determine whether you are receiving delayed or real-time stock quotes, and how often your account information is updated.
- Learn how to use limit, stop and market orders, and understand the risks of margin accounts (borrowing to buy stocks). A buy limit order is an instruction to buy a security only if the market price has not moved beyond a certain point. For example, if you wish to buy Xcompany.com stock for $10 or less and the stock price moves above $10, the trade will not be executed. Similarly, a sell limit order can only be executed at the limit price or higher. A stop-loss order sets a sell price for a broker. When the security's price drops below this level, it is automatically sold.
If a limit order is not placed, the trade is considered to be a market order. With a market order, you won't be able to set the price at which your trade will be executed. Here's how that works: an investor places an order for Xcompany.com stock which he sees is priced at $10 per share. The stock is highly volatile, however, and when the investor's order actually reaches the market, the stock has risen to $15 a share and his trade is executed at that new price.
- Keep your investment goals in mind. Once online, many investors have a tendency to concentrate on stocks, specifically large-cap domestic stocks. Consider your time horizon and risk tolerance and the advantages of a well-balanced, diversified portfolio of investments when trading online.
- Stay well informed. If you are going to buy and sell individual stocks online, you should be aware of developments affecting companies. Don't just settle for hype about hot stocks! Go to a company's web site and download its prospectus. Check out the company's publicly available filings through the U.S. Securities and Exchange Commission's EDGAR system. Take advantage of the many other valuable services online or in your local library that allow you to research potential investment opportunities.
- Online trading is not foolproof. You could be away from your computer when the market makes a major move. Your Internet connection could be down. The online brokerage firm's server could crash due to heavy trading, unexpected software glitches or a natural calamity. Know how to contact the firm's customer assistance personnel to receive information about significant web site outages, delays and other interruptions to securities trading and account access. Be familiar with the firm's alternative trading options for times when you can't access your account online. These could include automated telephone trading, fax or calling a broker.
- If you're unsure whether an online order has actually been processed by the firm's computer system, follow the web site's instructions for confirming a trade or contact the firm for more information. Don't simply try placing your order again; you may end up buying the stock twice.
- If you have a complaint, act promptly and try to resolve the problem with the firm. If you're not satisfied with the firm's initial response, write (not via email) to the firm's compliance department and ask for a written response to your concerns. Document the situation, including the firm's responses. If your complaint is not resolved, contact us for help.
The preceding tips are adapted from original material developed by the North American Securities Administrators Association and the Washington State Department of Financial Institutions.