8 Things You Need to Know

If you think you're ready to begin investing online, follow these 8 rules to help you succeed.


	Place your mouse over each rule below for details.
	Start small.
	Stay diversified.
	Don't bail out on mutual funds.
	Costs may not always be obvious.
	Make 'orders' work for you.
	Mind those market orders.
	Problems are inevitable.
	Information is power.

If you are new to online investing, don't put your entire life savings into an online account.

Start with a smaller sum, which will be easier to handle and keep track of.

Once you feel confident, you can then decide to add more money to your online account.

Once online, many investors tend to concentrate on stocks, specifically large-cap domestic stocks.

While these stocks should make up part of your portfolio, they shouldn't be ALL of it!

Take into account your time horizon and risk tolerance to develop a well-balanced portfolio of stocks, bonds, and cash.

Most investors are in mutual funds for a good reason. They don't have the expertise to make their own investments calls on individual stocks.

They also are too preoccupied by work, family and other concerns to spend every minute watching the market.

So keep your mutual funds; it probably is an unwise move for you to cash out your long-term fund holdings so that you can start "playing the market" in individual stocks!

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 brokerages firms also impose a number of other fees and charges that you should study closely.

The federal capital gains tax is also something with which you must reckon. Before you start buying and selling stocks or mutual funds online on a large scale, you should give careful thought to what the tax bite would be as a result of such trading.

If you are going to do your own investing online, you need to learn how to use the tools available to avoid potentially steep losses and to buy or sell a stock at attractive prices. Here are three "orders" that you should use to your advantage:

A MARKET order is an instruction to buy or sell a specified amount of a stock (or other security) at the current market price. The advantage of a market order is you are almost always guaranteed your order will be executed - as long as there are willing buyers and sellers. Depending on your firm's commission structure, a market order may also be less expensive than a limit order.

A LIMIT order allows you to avoid buying or selling a stock at a price higher or lower than what you specify. 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. By contrast, a market order only guarantees you the best available price -- not the limit order's specified price.

A STOP-LOSS order sets a sell price for a broker. When the price of the stock drops below this level, it automatically is sold.

Also: Take the time to learn about "stop orders," "day orders" and "good-till-cancelled" orders

Limit orders are often used to guarantee that an investor will not pay over a certain dollar level for a stock. If no limit is placed, the trade is considered to be a market order.

Placing a market order means you won't necessarily get the price you see when you buy or sell online. Here's how that works: an investor places an order for a fast-moving stock at $10 share price, but the order does not reach the market until the stock's price is at $15 a share.

Trading online is not foolproof. There will be times when you can't access your account. 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 about the firm's alternative trading options. This could include automated telephone trading or calling a broker.

If you are going to buy and sell individual stocks online, it is your duty to keep as well informed as possible about what is going on with the company in question. Don't just settle for the hype about hot stocks!

Go to the 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 free services that allow you to get automatic e-mail messages whenever there is news about your stock.

Mutual Funds

Mutual funds pool money from several investors (individual and/or institutions) and invest the pooled money in various types of investments (i.e., stocks, bonds, specific industries, etc.). Investment decisions are based on the common financial goals of the investors. The suitability of a particular mutual fund depends on the types and nature of the fund’s investments and the amount of diversification. Not all mutual funds are equal and investors need to determine if the goals of a particular mutual fund match their own personal financial goals.

The advantages of mutual funds are diversification, liquidity, and professional management. By pooling money from many investors, individual investors are able to own more securities than they might be able to afford on their own; therefore, owning a mutual fund may offer the investor instant holdings in several different companies. In terms of liquidity, mutual fund investments can be converted to cash upon request. And rather than managing your investments yourself, a mutual fund allows you to turn over the responsibility to a "professional."

Stocks

Stocks represent individual ownership in a company. A share of stock is equivalent to a proportional share of ownership in a company. The goal of stock ownership is to see the value of the company increase over time. As the value of the company changes, the value of the share in that company rises and falls.

Brokerage Firm

Brokerage firms are licensed to buy and sell securities for clients and for their own accounts. Brokerage firms provide individual investors their link to the financial markets by employing brokers who carry out the investor’s order to buy or sell securities.

The firm may be a huge, corporation with hundreds of brokers, a small partnership with only one broker or any size in between. A brokerage firm could also be a full-service firm, a discount firm or somewhere in between. Typically, larger firms, and full-service firms, provide an increasing range of financial services, including financial planning, asset management, and educational programs. In addition, many maintain research departments for their own and their clients’ benefit. Other brokerage firms, such as online firms and discount firms, are increasingly providing their customers with a wealth of investment information on their websites and encouraging their customers to trade electronically.

An investor should note that while online and discount brokerage firms may charge lower commissions than full-service brokerage firms to execute their buy and sell orders, those firms are also less likely to provide the range of services mentioned above. This may not be an issue for many investors as extensive information and online account access are now readily available. The individual investors’ needs will dictate which services will be required.

Market Order

This is an order in which the investor instructs his or her brokerage firm to buy or sell as security at the current market price, ideally as soon as possible. Unless the investors specifies otherwise, a broker will enter the order as a market order.

The advantages of a market order are that the investor is almost always guaranteed that their order will be executed (as long as there are willing buyers and sellers) and a market order is typically less expensive than a limit order.

The disadvantage of a market order is that the investor has no control over the price at which their order will ultimately be filled. If the price of the security is moving quickly and there is a delay in the execution of the market order, then the price at which the investor buys or sells the security may be quite different than what they expected with the market order was originally placed.

Limit Order

Limit orders allow the customer to specify the price at which he or she is willing to buy or sell a security. While limit orders can help investors avoid buying or selling security at an undesirable price, thereby protecting them from the possibility of rapid price changes, there is the risk that the limit order will not be executed (i.e., the market price may quickly surpass your limit before the order can be filled). In addition, some firms may charge you more for executing limit orders.

Stop Loss Order

A stop loss order instructs a broker to sell a specific stock it if falls to a certain price. This is a useful tool in preventing investor losses. For example, you buy ABC Company at $100 a share and you instruct your broker to sell if it falls to $90 a share. On a given day the stock falls to $80 a share. Your broker sold your shares when they reach $90 thereby saving you an additional $10 per share loss on your investment.

Prospectus

A written, legal document outlining the investment offered for sale. A prospectus provides all of the material information about an offering of securities, and serves as the primary sales tool of the company issuing the security and broker-dealers who sell the security.

The prospectus is also serves as written proof that the investor was given all the material facts as they are set out in the prospectus. It is for this reason that investors should be certain that they understand the information contained the prospectus.