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.
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.
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
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.
Dow Jones Industrial Average
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.
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.
ECN’s (Electronic Communications
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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."
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.
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
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.
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.
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
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.