Before you invest online, you need to know the facts about online investing. Below are the most commonly held myths in regards to online trading. Debunk the myth and learn the reality!
Place your cursor over the numbers to see the myth and the reality.
I'm going to make a killing investing online.
Online investing isn't a surefire way to get rich.
In fact, research shows that the vast majority of day traders - the handful of online stock traders who are the busiest - lose money.
Though online investing isn't for everybody, it can be a powerful tool for investors who are disciplined about research, make carefully reasoned decisions and maintain a balanced portfolio.
If I trade online, I can get in on all those high-flying IPOs!
Initial public offerings consist of the shares of publicly traded companies that are being offered for the first time to investors. Because the price
often rises rapidly in early trading, they are popular with many investors.
Even though some online brokers are taking steps to get more IPO shares to
individual investors, many investors will find it difficult or impossible to
"get in on" a hot IPO in which they are interested. This is really a
function of supply and demand -- a relatively small number of IPO shares and
a big demand on the part of interested investors.
The second I execute this trade, my shares will be purchased.
Just because you click buy doesn't mean that your stock or mutual
fund will be purchased at or even anywhere near that particular moment in
Sometimes -- particularly during heavy trading periods in the markets and as a result of computer problems -- your online order will be processed minutes or even hours later.
As a result, an order for stock at $10 per share could go up (or down) by the time your purchase is actually executed.
A limit order, which can be used to set a ceiling for what an investor is
willing to pay for a stock, can be used to minimize this kind of
uncertainty. Additionally, investors may want to put a stop-loss order in
place. A stop-loss order sets a sell price for a broker. When the
security's price drops below this level, it is automatically sold.
With my online account, I'll be able to buy and sell stocks at any hour of the day.
It's true that you can access your online investment account at any hour.
You can even place buy/sell orders and receive confirmations at 3 a.m.
This does not mean, however, that those trades are executed immediately.
Any trades you institute after market hours will not be carried out until
the market opens again.
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.
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.
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 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.
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
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.