The price of some stocks, especially recent "hot" IPOs and high tech stocks, can soar and drop suddenly. In these fast markets when many investors want to trade at the same time and prices change quickly, delays can develop across the board. Executions and confirmations slow down, while reports of prices lag behind actual prices. In these markets, investors can suffer unexpected losses very quickly.
Investors trading over the Internet or online, who are used to instant access to their accounts and near instantaneous executions of their trades, especially need to understand how they can protect themselves in fast moving markets.
You can limit your losses in fast moving markets if you
Online trading is quick and easy, online investing takes time
With a click of mouse, you can buy and sell stocks from more than 100 online brokers offering executions as low as $5 per transaction. Although online trading saves investors time and money, it does not take the homework out of making investment decisions. You may be able to make a trade in a nanosecond, but making wise investment decisions takes time. Before you trade, know why you are buying or selling, and the risk of your investment.
Set your price limits on fast moving stocks: market orders vs. limit orders
To avoid buying or selling a stock at a price higher or lower than you wanted, 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. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. When you place a market order, you can't control the price at which your order will be filled.
For example, if you want to buy the stock of a "hot" IPO that was initially offered at $9, but don't want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. By entering a limit order rather than a market order, you will not be caught buying the stock at $90 and then suffering immediate losses as the stock drops later in the day or the weeks ahead.
Remember that your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled. But by using a limit order you also protect yourself from buying the stock at too high a price.
Know your options for placing a trade if you are unable to access your account online
Most online trading firms offer alternatives for placing trades. These alternatives may include touch-tone telephone trades, faxing your order, or doing it the low-tech way--talking to a broker over the phone. Make sure you know whether using these different options may increase your costs. And remember, if you experience delays getting online, you may experience similar delays when you turn to one of these alternatives.
If you place an order, don't assume it didn't go through
Some investors have mistakenly assumed that their orders have not been executed and place another order. They end up either owning twice as much stock as they could afford or wanted, or with sell orders, selling stock they do not own. Talk with your firm about how you should handle a situation where you are unsure if your original order was executed.
If you cancel an order, make sure the cancellation worked before placing another trade
When you cancel an online trade, it is important to make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don't assume that that means the trade was canceled. Orders can only be canceled if they have not be executed. Ask your firm about how you should check to see if a cancellation order actually worked.
If you trade on margin, your broker can sell your securities without giving you a margin call
Now is the time to reread your margin agreement and pay attention to the fine print. If your account has fallen below the firm's maintenance margin requirement, your broker has the legal right to sell your securities at any time without consulting you first.
Some investors have been rudely surprised that "margin calls" are a courtesy, not a requirement. Brokers are not required to make margin calls to their customers.
Even when your broker offers you time to put more cash or securities into your account to meet a margin call, the broker can act without waiting for you to meet the call. In a rapidly declining market your broker can sell your entire margin account at a substantial loss to you, because the securities in the account have declined in value.
No regulations require a trade to be executed within a certain time
There are no Securities and Exchange Commission regulations that require a trade to be executed within a set period of time. But if firms advertise their speed of execution, they must not exaggerate or fail to tell investors about the possibility of significant delays.