Investor Education
Online Investing: What You Should Know
What You Should Know Investing online can be an easy and efficient way for self-directed investors to make their own investment decisions. Indeed, the technology now available to those investing online enables investors to seize market opportunities that previously appeared out of reach to the average investor. However, investing online does not diminish the importance of evaluating potential investment decisions and researching the fundamentals of a stock, such as a company's net earnings, P/E ratio, beta, the products a company offers and the market in which it competes. Additionally, the same technology responsible for online investing also has the capacity to amplify market risks, as well as create new risks unique to online investing. It is essential that you understand these risks before investing.
Day Trading
The explosive growth of online investing in recent years reflects a corresponding growth in the use of a strategy known as "day trading." As the name suggests, day traders purchase and sell stocks in a short period of time in an effort to capture short-term profits created by rapid fluctuations in the prices of securities. Day trading has become a popular online strategy as real-time quotes and related market data now can be disseminated quickly to online investors. However, it is important to note that it is just as easy to lose money by day trading as it is to make money. For various reasons day trading is not for everyone.
The explosive growth of online investing in recent years reflects a corresponding growth in the use of a strategy known as "day trading." As the name suggests, day traders purchase and sell stocks in a short period of time in an effort to capture short-term profits created by rapid fluctuations in the prices of securities. Day trading has become a popular online strategy as real-time quotes and related market data now can be disseminated quickly to online investors. However, it is important to note that it is just as easy to lose money by day trading as it is to make money. For various reasons day trading is not for everyone.
- Day trading requires sophisticated knowledge of securities markets.
Since the prices of stocks can change very quickly, day trading was traditionally undertaken by market professionals utilizing sophisticated strategies designed to capture differences in the price of a stock. Consequently, day trading requires an in-depth knowledge of the securities markets and of trading techniques and strategies. In attempting to profit through day trading, an investor must compete with professional traders employed by securities firms. Thus, an online investor should have appropriate knowledge and experience before engaging in day trading. - Day trading can be extremely risky.
Stocks targeted by day traders are often extremely volatile and subject to significant price swings. As a result, day trading can lead to large and immediate financial losses. You should exercise caution before undertaking this strategy. Customers should be prepared to lose all of the funds that they utilize for day trading purposes. Consequently, day trading should not be funded with retirement savings, student loans, second mortgages, emergency funds, funds set aside for purposes such as education or home ownership, or funds required for current income. Day trading is not appropriate for all investors. - Claims of large profits from day trading are suspect.
Customers should be wary of advertisements or other statements that emphasize the potential for large profits from day trading. As discussed above, day trading may involve significant financial loss. - Day trading results in increased commissions and fees
Day trading may require an investor to trade his or her account aggressively. On each trade the customer will be charged a commission or markup/markdown. As a result, these costs to a customer will increase losses or reduce profits. - Day trading on margin may result in losses beyond the initial investment.
When a customer embarks on a day trading strategy with funds borrowed from a broker-dealer, ("margin loans"), the customer can lose more than the funds originally invested. A decline in the value of the securities that are purchased may also require additional funds to immediately be paid to a broker-dealer in order to avoid the forced sale of securities from the customer's margin account.
Risk Of Investing In Volatile (Fast) Markets
Most commentators agree that the growth in the popularity of online investing has contributed to market volatility. Specifically, the speed at which information is communicated and orders are entered over the Internet makes it easier for online investors to influence prices and trading volume in popular stocks, particularly new Initial Public Offerings ("IPOs"). The result can be a stock, industry group or market that is volatile (i.e., characterized by rapid price swings and heavy volume). Significant changes in the price of a security can occur rapidly. This is especially true for "hot" IPOs and technology stocks. Online investors should be aware of certain risks associated with increased market volatility, including:
Most commentators agree that the growth in the popularity of online investing has contributed to market volatility. Specifically, the speed at which information is communicated and orders are entered over the Internet makes it easier for online investors to influence prices and trading volume in popular stocks, particularly new Initial Public Offerings ("IPOs"). The result can be a stock, industry group or market that is volatile (i.e., characterized by rapid price swings and heavy volume). Significant changes in the price of a security can occur rapidly. This is especially true for "hot" IPOs and technology stocks. Online investors should be aware of certain risks associated with increased market volatility, including:
- Pricing information may not be timely.
During volatile markets you may not be able to "instantaneously" access markets. Quotes can be delayed simply because the market is moving too fast for the reporting agency to keep pace. Consequently, there can be a discrepancy between the price quote you view prior to placing your order and the actual price at which your order is executed. In other words, the market may be moving too fast for the order to be executed at the quoted price. - Order executions may not reflect the quote.
It is important to remember that all quotes, including real-time quotes, reflect what has already happened in the market and not necessarily the price you will receive upon execution. A quote on your computer screen does not mean you will be able to purchase or sell the stock at that price. Moreover, when many investors attempt to purchase or sell the same stock at the same time (e.g., at market openings) the price of the stock can move up or down very quickly. This can result in delays in execution and/or trade reports and execution prices significantly different than the last quote viewed prior to entering your order. Although H&R Block Financial Advisors's will endeavor to enter your order quickly and efficiently, such volatile market conditions are beyond the control of H&R Block Financial Advisors. - Market and Limit Orders.
A market order is subject to immdiate execution without regard to price. As discussed above, while the customer may receive a prompt execution, the execution may be at a price significantly different from the quoted price (This is especially true for "hot" IPOs). In order to avoid buying a stock at too high a price or selling a stock at too low a price, you should consider placing a limit order. A limit order allows you to set a maximum price at which you are willing to buy a stock or the lowest price at which you are willing to sell ("limit price"). Thus, a buy limit order is executed only at the limit price or lower while a sell limit order is executed only at the limit price or above. As a result, you are afforded price protection in a volatile market. Keep in mind, however, there is the risk that your limit will not be reached and, as a result, your limit order will not be executed. - Canceled and Duplicate Orders.
During volatile market conditions, there may be a delay in executing your order. However, you should not assume that H&R Block Financial Advisors did not receive your order and then place another order. If you do so, you may end up purchasing twice as much stock as you wanted or selling stock you do not own. In addition, during normal market hours cancellations of market orders will be unlikely to occur because the order may already be in the process of being executed.If you attempt to cancel an order after market hours, do not assume the order has been canceled simply because you receive an electronic message acknowledging receipt of your cancellation order into the system; wait until you receive actual confirmation that the market order has, in fact, been canceled.
Access to your Investment account during times of market volatility.
It is important to understand that in periods of market volatility or heavy trading volumes in a specific security, you may suffer market losses when systems problems due to such volatility cause the inability to place buy or sell orders. Customers may also have difficulty accessing their accounts due to the high Internet traffic during such times. You should contact our Investor Center at 1-866-295-7912 if you experience any problems.
It is important to understand that in periods of market volatility or heavy trading volumes in a specific security, you may suffer market losses when systems problems due to such volatility cause the inability to place buy or sell orders. Customers may also have difficulty accessing their accounts due to the high Internet traffic during such times. You should contact our Investor Center at 1-866-295-7912 if you experience any problems.