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After Hours Trading
Brokerage Firms
Cash Accounts
Day Trading (Day Traders)
Dow Jones Industrial Average (DJIA)
Diversification (Diversified)
ECN's (Electronic Communication Networks)
IPO's (Initial Public Offerings)
Limit Order
Liquidity
Margin
Margin Account
Margin Account with Options
Margin Call
Market Order
Minimum Maintenance Requirement
Mutual Funds
Online Broker Ratings (ratings/rankings)
Prospectus
Stop Loss Order
Suitability
Stocks
Taxable versus Tax-Deferred



After Hours Trading

After-hours trading is the trading of securities, such as stocks and bonds, on organized markets and exchanges after regular business hours. These after-hours, electronic transactions explain why a security may open during regular business hours at a price that is different from the one it closed at the day before. Some interpret the level of activity and the direction the after-hours trading – up or down – as an early indicator of what may happen in the market the following day.

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Brokerage Firms

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.

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Cash Accounts

Requiring that you pay for the securities transaction in full, this is the most common type of investment account. This account is used by customers who invest in securities using only the money they currently have available in their brokerage account.

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Day Trading (Day Traders)

This is a trading strategy in which the investor buys then sells, or sells short then buys, the same security on the same day in an attempt to profit from small movements in the price of that security. The strategy is to take advantage of rapid price changes to make money quickly.

This is a legal investment strategy; however, it is also highly risky and should be reserved for more experienced investors. Most of us do not have the wealth or time to make money by day trading, much less the ability to sustain the devastating losses that it can bring.

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Dow Jones Industrial Average (DJIA)

Frequently referred to as the Dow, this is the best known and most widely followed market indicator in the world. It tracks the performance of 30 blue chip US stocks. Despite the fact that it is called an average, the Dow is actually a price-weighted index. This means that the gains and losses of the highest priced stocks are counted more heavily than gains and losses of lower priced stocks. In response to financial conditions new companies may be added to the DJIA while existing companies may be dropped.

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Diversification (Diversified)

This is an investment strategy wherein the investor spreads their investment dollars among different markets, sectors, industries, and securities. By adopting this strategy the investor seeks to protect the value of their overall portfolio in the event that a single security, industry or market sector takes a serious downturn and drops in price. Studies have shown that diversification can help secure your investments against market and management risks without sacrificing the level of return desired.

Establishing a well-diversified portfolio will depend on the investor’s age, assets, risk tolerance and investment goals. The securities mix that’s right for you may include small-, medium-, and large-cap domestics stocks, stocks in multiple sectors or industries and international stocks.

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ECN’s (Electronic Communications Networks)

This technological advancement completes trade orders electronically, from start to finish, and maintains each order as part of an electronic record. When new orders are entered, the system automatically checks them against existing orders to see if there is a match — a buyer offering what a seller is asking. If there is a match, the system will execute the deal immediately without involving a specialist.

Since matches are made anonymously, large institutional investors have the ability to make trades without attracting attention or creating speculation about their possible motives. An additional advantage of the ECNs is that they make it easy to trade after-hours, when the markets are closed; however, ECNs are accessible only to its members.

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IPO’s (Initial Public Offerings)

As a company grows larger, it may decide to go public by issuing stock, or adding shareholders, through an initial public offering (IPO). The purpose of issuing stock and adding shareholders may be to raise capital, to provide liquidity for the existing shareholders, or a number of other reasons. When planning to issue an IPO the company must register its offering with the Securities and Exchange Commission (SEC). Typically, the company will work with an investment bank, which underwrites the offering by purchasing all of the shares at a predetermined price and then reselling them to the public in hopes of making a profit.

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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.

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Liquidity

Liquidity refers to the ease with which an investment can be converted to cash. The more liquidity the investment is said to have, the easier it will be for the investor to convert it to cash.

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Margin

Within a margin account, the margin is the portion of the purchase price that the customer must deposit into the account. This portion may also known as the customer’s initial equity in the margin account.

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Margin Account

This account allows the investor to increase their purchasing power by borrowing money from a brokerage firm to invest in securities. The money that the investor borrows must be repaid and the investor must possess collateral in their margin accounts in the form of securities in the event that they are unable to repay their brokerage firm. In the event that the investor is unable to pay the brokerage firm for a margin loss, the investor may be forced, with or without their knowledge, to liquidate the securities in their margin account. The investor’s liability may also extend beyond the value of the securities in their margin account. In addition, the investor must pay applicable margin interest for borrowing the money from their brokerage firm. While buying securities on margin may equate to greater profits than an investor would received simply using their own resources, those profits must exceed the margin borrowing expenses in order for the investor to profit.

Buying on margin is risky and the investor should understand the principles and risks entirely before trading on margin.

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Margin Account with Options

This is a margin account with the opportunity to purchase options. By purchasing an option, the investor has the right to buy or sell a specific security at a specific price, called a strike price, during a predetermined period of time.

If the investor buys an option to buy, known as a call, they will pay a one-time premium -a fraction of the cost of the actual transaction. For example, an investor might buy a call option giving them the right to buy 500 shares of a particular stock at a strike price of $100 a share when that stock is currently trading at $85 a share. In the event that the prices goes higher than the strike price, the investor would want to exercise the option and buy the stock at the lower cost per share, or even trade that option with someone, in either case experiencing a profit. If the stock price didn’t go higher than the strike price, the investor would simply choose not to exercise the option and that option would expire. The only money that investor would have lost was the money paid for the premium.

Similarly, an investor may purchase a put option, which gives them the right to sell the security to the person who sold them the option. In this case, the investor would exercise the option if the market price dropped below the strike price.

Trading in options is a risky investment opportunity and should be reserved for more experienced investors.

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Margin Call

In a margin account if the investor falls below the margin requirements, they may be subject to a margin call wherein the brokerage firm asks for additional funds to be added to the investors account. In the event that the investor is unable to pay the brokerage firm for a margin call, the brokerage firm may sell part or all of the securities held in the margin account, with or without the investor’s knowledge, in order to make up the value and meet the margin limit requirements.

Margin calls can occur suddenly and investors should understand fully the financial impact that trading on margin can have on the value of their accounts.

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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.

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Minimum Maintenance Requirement

With regards to trading on margin the amount that an investor can borrow is limited by both the Federal Reserve Board and the specific brokerage firm used. Generally, there are two requirements - how much margin an investor can use initially in the margin account and then how much margin they can have once the initial transaction has been executed. While each brokerage firm creates its own requirements, typically, in the initial transaction, 50% of the purchase price of any security can be margin. Once the initial transaction has been executed the maintenance margin account requirement is usually much lower, often around 25%. Investors should consult with their individual brokerage firms to determine the initial and ongoing maintenance margin requirements.

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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."

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Online Broker Ratings (ratings/rankings)

In general, online brokerage ratings indicate the level of customer service or satisfaction with the online brokerage firm. There are several sources of online broker ratings and each may use different criteria in their ratings. In addition, the online broker ratings sources are not regulated entities. Investors should keep in mind that while a brokerage firm may be ranked #1, that is in terms of customer satisfaction and it does not mean that they will have a better chance of making you money.

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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.

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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.

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Suitability

The suitability of an investment depends on whether the investment in consistent with the person’s investing objectives and profiles (age, financial status, long-term goals, income, current financial status, etc.). Investment advisors and brokers giving investment advice are required by law to ensure that their recommendations are suitable for the investor. To help these financial professionals make appropriate recommendations an investor should provide honest and accurate information to that professional.

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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.

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Taxable versus Tax-Deferred

A taxable investment refers to investments in which the earnings will be taxed as they are received. A tax-deferred investment refers to investments in which the tax is not paid as earning are received but will be due when the untaxed money is withdrawn from that tax-deferred account.

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