The last few weeks for me have been…interesting… to say the least, so apologies for not posting last Friday. I’m back to finish up our discussion on securities markets!
Let’s start by asking one question… are you a bull or a bear? (NO shade!) I know you may have heard the terms bullish and bearish before, but may not know their meanings. These are types of investment positions. Bullish investors are aggressive investors and want to buy shares. They take a long position in investing – they anticipate prices rising so they buy now while prices are low and sell when they think prices are high. Bearish investors don’t buy much stock; they take a short position in investing. They anticipate prices falling so they hold on to their investments or may sell, but wait to buy when prices fall.
There is one golden rule to investing rather you’re bullish or bearish:
Buy low. Sell high.
NEVER do the opposite. The tricky part is speculating what is considered low and what is considered high for a particular investment.
Last #FinanceFriday , we discussed the difference between full-service brokers and discount brokers. Other than the information and assistance offered, one main difference is the commission you pay with each trade you place, buy or sell. Commission at a full-service broker can be in the hundreds of dollars per order. In other words, any time you want to buy an investment through a full-service broker, you will have to pay for the investment plus hundreds of dollars in commission to your broker. If selling an investment, subtract hundreds of dollars in commission you will get back from the sell of the investment. Commission at discount brokers can be as low as $9.99 at E-Trade or $7 at Scottrade.
There are two types of buy orders:
- Market Order: With a market order, you buy at the current market price. These orders are done very quickly during the trade day.
- Limit Order: Limit orders allow you to name the price you want to buy an investment for that is lower than the current market price. When the stock gets to your named price, the order is placed to buy. You can specify a certain day you want this order to expire or set it as pending until you manually cancel the order (GTC– good till canceled). However, there are certain risks when placing a limit order. These orders are filled in order of receipt, so if you are farther down the list to buy at the price you named and the price changes quickly, you still may not be able to buy at that price. If the price of the stock does not go down to the price you want, you won’t get the investment. Bigger investors also have a better chance at filling a limit order than smaller investors.
There are also two types of sell orders:
- Market Order: You sell at the current market price.
- Stop Order: Stop orders allow you to specify the price you want to sell your investment and are done to prevent a loss after purchasing a stock. There are two types of stop orders:
- Stop Loss: This converts to a market order once the target price is reached. This type of order guarantees that the order will be placed; however, it does NOT guarantee you will sell for the price specified. Since market prices change rapidly throughout the trading day, once the stock reaches the price you want to sell it for and your stop loss order is initiated, the price may change once the order is placed. You cannot reverse an order once placed.
- Stop Limit: The sale only takes place at the price you have specified. This order guarantees that you will sell at the price you specified, but does NOT guarantee that the order will get filled.
Once your order is placed, you will receive an electronic confirmation statement with the details of each trade (what stock you bought, how many shares, price per share, commission cost, trading cost, etc.). However, the order is not finalized until the settlement date. The settlement date is T+3= the trade day plus 3 BUSINESS days afterwards (not including holidays or weekends). The means you have to have the money for the trade in your account by the settlement date in order to finalize the trade (if buying). If selling, you will received the money from the sale by the settlement date. You can actually request to have a certificate delivered to you stating that you own the investment; however, most people leave their securities registered with their broker. It’s also safer to leave your securities registered in your name with your broker due to the potential of it being lost or stolen and someone else claiming the investment.
The following are terms you should be familiar with:
- VC (Venture Capitalist): A VC is a private investor who invests in start-up companies. They are comfortable with high risk with the small potential of a big reward. VCs are always looking for an exit strategy.
- Round Lot: Buying a round lot means you either bought 100 shares (odd lot is less than 100 shares) or $1 Million worth in bonds. Due to the price, it is very difficult for a small investor to buy a round lot of bonds, but some small investors buy a round lot of stocks.
- Round Trip: The purchase and sale of the same security and same number of shares.
- Thinly Traded Stocks: These stocks aren’t traded often and include smaller, not well known companies. Most companies traded are not thinly traded stocks, but they might be more common if you invest in overseas markets.
- ADR (American Depository Receipt): This is what you receive if you buy an investment from a foreign company whose shares trade on an American exchange. ADRs are NOT the exact same as the shares that trade in the company’s home country. There are other ways to invest in foreign companies including: buying an international mutual fund or invest in a multinational American company (like Coca-Cola or McDonalds) that has its largest share of profit from American, but also gets income from foreign operations.