Trading For Dummies. Lita Epstein

      ❯❯ Check with the brokers you’re planning to use to ensure that they accept stop orders.

      ❯❯ Find out what your brokers charge for stop orders.

      ❯❯ Review how your broker’s stop orders work, so you don’t run into surprises.

      After all, you don’t want to execute a stop order and end up selling a stock that you didn’t intend to sell or at a price you find unacceptable.

      You can protect yourself from any buying or selling surprises by placing a stop‐limit order. This type of order combines the features of both a stop order and a limit order. When your stop price is reached, the stop order becomes a limit order rather than a market order.

      A stop‐limit order gives you the most control over the price at which you will trade your stock. You can avoid a purchase or sale of your stock at a price that differs significantly from what you intend. But you do risk the possibility that the stop‐limit order may never be executed, which can happen in fast‐moving markets where prices fluctuate wildly.

      For example, you may find that deploying stop‐limit orders is particularly dangerous to your portfolio, especially when bad news breaks about a stock you’re holding and its price drops rapidly. Although you have a stop‐limit order in place, and the stop price is met, the movement in the market may happen so rapidly that the price limit you set is missed. In this case, the limit side of the order actually prevents the sale of the stock, and you risk riding it all the way down until you change your order. For example, say you purchased a stock at $8 near its peak. On the day the company’s CEO and CFO were fired, the stock dropped to $4.05. You may have had a stop‐limit order in place to sell at $5, but on the day of the firing, the price dropped so rapidly after the company announced the firing that your stop‐limit order could not be filled at your limit price.

      

Stop‐limit orders, like stop orders, are more commonly used when trading on an exchange than in an OTC market. Broker‐dealers likewise can limit the securities on which stop‐limit orders can be placed. If you want to use stop‐limit orders, be sure to review the rules with your broker before trying to execute them.

      You can avoid having to replace an order time and again by using a good‐’til‐canceled (GTC) order. GTC orders are placed at a limit or stop price and last until the order actually is executed or you decide to cancel it. A GTC order won’t be executed until the limit price is reached, regardless of how many days or weeks it takes.

      You can choose to use this type of order whenever you want to set a limit price that differs significantly from the current market price. Many brokerage firms limit how much time a GTC order can remain in place, and most of them charge more for executing this type of order.

      Less commonly used order methods include contingent, all‐or‐none, and fill‐or‐kill orders. Contingent orders are placed on the contingency that another one of your stock holdings is sold before the order is placed. An all‐or‐none order specifies that all the shares of a stock be bought according to the terms indicated or that none of the stock should be purchased. A fill‐or‐kill order must be filled immediately upon placement or be killed.

Chapter 3

      Going for Broke(r): Discovering Brokerage Options

      IN THIS CHAPTER

      As an individual, you can’t trade stocks – or bonds, or options, or futures – unless you have a broker or are a broker yourself. That doesn’t mean, however, that you have to work with a human being to trade stocks. Online brokers and direct‐access brokers enable you to make trades electronically, so you never need to speak with a human being for these processes unless you’re having a technical problem.

      The differences among brokers are based on prices, services, and special capabilities. High‐volume swing traders and day traders typically require the services of a direct‐access broker, while position traders can and do trade successfully with more traditional discount, online, and full‐service brokers. In this chapter, we help you understand the brokerage options that are available, the types of accounts you can establish, and the basic trading rules you must follow.

      Why You Need a Broker

      Unless you plan to get your brokerage license from the National Association of Securities Dealers (NASD) and set up shop yourself (which is hard – and expensive – to do), you need to work with a broker to be able to buy and sell stocks. How you choose a broker is based on the level of individual services you want. The more services you want, the more you pay for your ability to trade.

      As an individual, you can open your account with a brokerage house, but if you work with a human being, that person is considered a broker. Brokerage houses or brokerage services are also usually referred to as brokers for short.

      

For now, just be aware that on one side of the spectrum is the full‐service broker who does a lot of hand‐holding and offers stock research and advice and other human‐based services. When using a full‐service broker, you pay a significant commission for each stock trade. In the middle are discount brokers that offer fewer services but charge less per trade. On the opposite side of the spectrum are direct‐access brokers, who offer few human‐based services and instead provide extensive trading platforms so you can trade electronically and access the stock‐exchange systems directly on a real‐time basis.

      Exploring Types of Brokers and Brokerage Services

      Before you can pick the type of broker that best fulfills your needs, you need to understand the kinds of services that each kind of broker provides. After you gain an understanding of your options and select the types of services you want, you then need to carefully research each of the brokers that match your needs. Within each classification are good and bad brokers. We give you the tools for researching brokerage firms in the sections that follow.

      If you want someone to assist you with buying decisions and implementing those decisions, you need to check out full‐service brokers. They offer extensive research and other services. Usually, they call you with trading ideas. All you need to do is say yes or no. You pay a transaction fee for trades plus a commission percentage based on the dollar volume. You can invest in stocks, futures, options, bonds, mutual funds, money‐market funds, and variable annuities. You can work with a full‐service broker by telephone, mail, fax, or Internet. Most have websites you can access for information, and many allow you to enter your own trades.

      Here is an example transaction fee schedule for one of the better‐known full‐service brokers (others can be as much as twice as high):

      Alternatively, some full‐service brokers do permit you to make all the trades you want per year for a fee of 0.30 percent to 2.5 percent of the total assets in your brokerage account. Using language common to traders, that’s 30 to 250 basis points. You have to have more than $10 million in an account to get the lowest fee. Traders with less

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