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.
Investors may find that technological “choke points” can slow or prevent their orders from reaching an online firm. For example, problems can occur where:
- an investor’s modem, computer or Internet Service Provider is slow or faulty;
- a broker-dealer has inadequate hardware or its Internet Service Provider is slow or delayed; or
- traffic on the Internet is heavy, thus slowing down overall usage.
A capacity problem or limitation at any of these choke points can cause a delay or failure in an investor’s attempt to access an online firm’s automated trading system.
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.
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.
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 it means the trade was canceled. Orders can only be canceled if they have not been executed. Ask your firm about how you should check to see if a cancellation order actually worked.
In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are free riding, which violates the credit extension provisions of the Federal Reserve Board. If you free ride, your broker must “freeze” your account for 90 days. You can still trade during the freeze, but you must fully pay for any purchase on the date you trade while the freeze is in effect.
You can avoid the freeze if you fully pay for the stock within five days from the date of the purchase with funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.
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.