Trade stocks online with caution, say financial planners

Trade stocks online with caution, say financial planners

It’s tough to argue with the success of buying an Internet stock that posted a gain of 966 percent in 1998. It’s tough to argue with the ability to execute a stock trade from the comfort of your own home computer for less than $10. And who can argue with the idea of the little investor muscling in with the “insiders” on the floor of the stock exchange?

Many certified financial planners may not argue against buying stocks online, or even buying Internet stocks. But they do sound a note of caution for those investors who trade online, particularly those who trade frequently, such as day traders who buy and sell stocks on the same day in search of quick profits. Planners recommend that online investors keep in mind the following recommendations:

1. Understand the risks. Investing always carries a certain degree of risk, but day trading for Internet or other high-technology stocks is especially risky. Highly volatile prices for these stocks can drop steeply in the time it takes you to execute a buy or sell order.

2. Many investors, enamored of the big gains they see with certain stocks and sometimes stock indexes, don’t realize many other stocks gain little or even lose money. For example, a relatively small number of stocks accounted for most of the dramatic gains of the S&P 500 and NASDAQ in 1998.

3. Invest only “fun money.” If you want to trade frequently in high-risk stocks, financial planners recommend that you keep the amount you invest to a small portion of your overall portfolio-perhaps two to five percent-and then only if you are “financially comfortable” overall. You might call it “fun money”-something you can afford to lose without upsetting your overall financial plans.

4. Don’t risk “serious money.” It’s fine to use an online trading service to execute the types of trades you normally make as part of the management of your “serious” portfolio. But don’t risk your daughter’s college fund, your emergency fund, or your retirement money for day trading on Internet or other high-risk stocks. Some amateur investors quit their jobs to day-trade -and quickly find themselves broke.

5. Don’t borrow money. Online investors have borrowed against their credit cards, their home, or their retirement accounts to finance trades. You can lose a lot of money very quickly investing in volatile stocks.

6. Diversify. This Golden Rule of investing certainly applies to Internet trading-as it does to any investment strategy. Spreading your investment funds among a variety of investments and a variety of types of investments (a portfolio of 10 different high-tech stocks is not a diversified portfolio) reduces the impact of inevitable losses.

7. Don’t buy stocks you don’t know anything about. Follow the same investing rules you would follow if you were trading through a broker or working with your financial planner. Buy only stocks you have researched, that you feel comfortable with, and that fit the needs of your portfolio. Because buying and selling online is fast, easy, and inexpensive, investors are more tempted to execute trades without proper analysis.

8. Don’t buy on rumor. It’s easy to get caught up in the rumors, enthusiasm, and sometimes intentionally misleading information that’s passed around online, especially in investing chat rooms, and it’s usually difficult to judge the quality or validity of information.

9. Set limit orders. Many experts recommend that investors who buy and sell volatile Internet or other high-tech stocks, particularly with the intent of selling them quickly, use limit orders instead of market orders (actually, a good idea for any trading). Market orders are orders to buy and sell at market price, whereas limit orders stipulate the highest price at which you’ll buy or the lowest price at which you’ll sell a particular stock.

10. Keep taxes in mind. Profits made from trading quickly are subject to your regular income-tax rates, which may run as high as 39.6 percent. Only assets held a year or longer can take advantage of the lower capital-gains tax rates that top out at 20 percent.

The information in this article is provided by the Institute of Certified Financial Planners, a national organization representing financial planners in the United Stated.

Copyright American Chiropractic Association Jul 1999

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