Avoid Online Investing Mistakes
Investors often make mistakes as they navigate the online investing world. Common missteps by investors include:
- Placing market orders in a volatile market
- Placing the wrong type of order in error
- Selecting the "Buy" button in a panic
- Experiencing account restrictions from pattern day-trading
Placing market orders in a volatile market
When you place stock trades as "market orders," you are exposing yourself, often unintentionally, to the market's price swings. Your market order to buy 1,000 shares, for example, will be executed at the next obtainable price. If the market price is changing rapidly or if other investors' orders placed are ahead of yours in the queue, then the block of 1000 shares you thought you were buying at, say, $25 might actually cost you $28, for a total order of $28,000, not the $25,000 you planned to spend.
Placing the wrong type of order in error
The many types of brokerage orders can be confusing, but it is important to understand the difference when placing your own trades to avoid unintentional errors.
- A market order seeks the best price available at the time the order is executed in the trading marketplace. Note that the current trading price is not necessarily what you will get or pay, especially in a volatile market.
- A limit order is an order to buy or sell a stated quantity of a security at a specified price or at a better price (higher for sales or lower for purchases). For example, you place a limit order to buy 1,000 shares of XYZ at $25 or less, and place a limit order to sell 1,000 shares of ABC at $30 or more.
- A stop order is an order type that becomes a market order when the stock trades at or below the specified price. The price at which the order executes may not necessarily be the specified stop price. For example, you place a sell stop order to sell 1,000 shares of XYZ to limit your losses when it declines to $20 a share, but actually your shares are sold at $19.50 which is the next available market order price.
- A stop-limit order combines a stop order and a limit order. The order becomes a limit order once the security trades at the designated stop price. You are instructing a broker to buy or sell at a specific price or better, but only after a given stop price has been reached or passed.
Selecting the "Buy" button in a panic
You've just hit the "Buy" button to execute a market order (at $7 per share) to buy 100 shares of a company that you've been monitoring and evaluating for a week. You were in a bit of a hurry to place the trade; did you actually hit the button? Did your order get accepted?
You wait for 15 minutes, and in the meantime, the stock price has moved to $9 per share. You check your brokerage account balance again - your account still does not indicate that your purchase has been executed. You could be losing money. You should have made a $2 per share profit by now, but it looks as if your brokerage firm did not place your order.
In a panic, you hit the "Buy" button again, just to be sure. You check your account a couple minutes later, and your heart sinks. Not only were BOTH of your orders placed, but also the combined total of your two purchase orders well exceeds the balance in your account. You are now the proud owner of 200 shares at a cost of $1,600 ?? and you only had $1,000 to invest.
Order departments prioritize processing market orders first, and then limit orders, and eventually confirmation reports. So in heavy volume markets, your online brokerage account might show that a trade is pending, when in reality your brokerage firm just hasn't yet posted the transaction to your account.
If you think you have mistakenly double-placed an order, call (do not email) your brokerage firm immediately. Cancel one of your orders and ask for a "firm out," a verbal confirmation that one of your orders was cancelled.
Before placing trades in your online brokerage account, carefully review your account's user guide, online demo, and investment education to reduce the possibility of making a potentially expensive mistake.
Experiencing account restrictions from pattern day-trading
Day Trade: A purchase and sale, or the short sale and purchase, of the same security on the same day (before the market close).
Pattern Day Trader: As defined by NASD 2520 (f) (8) (B) (ii) a Pattern Day Trader is any client who executes four day trades within five business days. In addition, accounts with trading activity that resemble active or pattern day trading (just under the threshold as described above over an extended period of time) can be flagged as pattern day traders as well.
Margin Maintenance Excess: The amount of margin eligible equity in excess of the minimum margin maintenance requirement including any settled cash balances.
When you are identified as a "pattern day-trader," you are exposed to both day and intraday risks and are subject to a specific set of requirements and restrictions including:
- You are required to have a minimum account equity of $25,000.
- Your account's day trade buying power on margin is based on your margin maintenance excess available at the close of business the previous business day, equal to four times the margin maintenance excess in the account. If your account is restricted to cash up front for any reason, your day-trading ability is reduced to twice margin maintenance excess.
- You will have a 90-day restriction placed on your account and a special margin maintenance requirement imposed if you exceed the day trade buying power limit.
- Margin day-trade violations require funds to be deposited in the amount of the violation with no deadline on covering the amount of the violation.
- If you are trading on a cash basis, per the free-ride provisions of the Federal Reserve Board's Regulation T, a 90-day restriction will be placed on your account if you day trade without available (settled) funds to cover each opening transaction.
- If your account has a 90-day restriction, you are required to have settled cash up front to place any trades.
- Day-trade violations in a cash account require funds deposited by settlement date in the amount of the violation.
If you sell an existing position (fully paid) held from the previous day and you repurchase that position later the same day, you are not considered a "pattern day-trader" and your account will not be restricted.