While any investor looks at the Nasdaq chart for 20 years above, he would be tempted to just dive into it BUT WAIT…..
There are some things which would just let him think more before jumping to any harried conclusions….So Here We Are, Presenting:
- Things Every Online Investor Should Know
- Tiny Drops of Water make an ocean …..Yes!
It is perfectly applicable to even financial decisions also. Starting small always helps as
- It is easier to handle
- It is easier to keep track of
- In worst cases, there is small amount of loss which can be easily tolerated
So if you are new to online investing, don’t put your entire life savings into an online account. Start with a smaller sum .Once you’ve built up the confidence & experience, you can then decide to add more money to your online account.
- Do not put all eggs in one basket …..
Diversification is the golden rule for investing online. Be it industry wise, volume wise, business wise or capital structure wise, online investor shall always look for different platforms for investing rather than concentrating on single scrip.
This is very important because:
- As pros call it unsystematic risk, which means the type of risk which can be avoided.
One way to avoid it is diversification for e.g. – merger effects, industry specific issues like labour crisis etc.
- Also there are different & sometimes attractive returns on various scrips, & in such cases diversifying provides nice bouquet of attractive returns together
Take into account your time horizon (period for which you would stay put in scrips selected) and risk tolerance (risk level which can be tolerated financially) to develop a well-balanced portfolio of stocks, bonds, and cash.
For e.g.A cautious investor would invest in Apple Inc. (IT) , eBay Inc.(Retail), & Vodafone Group Plc.(telecommunications) at same time , so as to avoid any unsystematic risk associated with particular industry.
Don’t bail on mutual funds
Mutual Funds can just be described as a bouquet of relatively attractive & relatively less risky combination of shares, debt funds or both.
Most investors are in mutual funds for a good reason. They don’t have the expertise and time to make their own investments calls on individual stocks. So keep your mutual funds & Leave your tension on to a licensed professional for the majority of your long-term and retirement account.An investor who actually has limited time paying attention to ups & downs of markets & also who is more concerned about security of amount invested & stable returns, would go for Mutual Funds
Costs may not always be obvious
Every business has its costs, & online investing is not an exception. There are 4 components, which an online investor should take into account
Account Opening charges
This may include onetime charges towards actual account opening, legal charges, banker’s charges & any other related charges. All are one time so it would not be incurred each year or month.
Annual Maintenance Charges (AMC)
This is incurred towards account maintenance per year or per quarter or, per month. Account maintenance charges differ from one brokerage/ investment firm to another, so online investor should carefully choose from the options available. Also every firm has its separate structure for AMC based on volume & nature of transactions. For e.g. – A firm may have 0.003% AMC charges debited per month , if no of transactions are minimum 100 no’s in a month, But if the transactions are 10 or so per month, then AMC may be charged at $4 per transaction taking place.
Securities Transaction Tax
It is charged per transaction at uniform rates. It is for the Securities Board, so as to cover their expenditure & administrative costs.
Federal Capital Gains Tax
Your shares, debentures & bonds are assets so it will attract capital gains tax whenever you sell them, be it for long term & short term. So always keep in mind that a chunk of your proceeds is always taken away by TAX & plan your strategy accordingly, because you really don’t want to mess your earnings due to TAX FACTOR.
These are just important charges, but there may be other hidden costs or charges charged by the brokerage firms (above image representation purpose), which are to be taken into account by the online investor.
BE-AWARE of Orders
If you are going to do your own investing online, you need to learn how to use the tools available to avoid potentially steep losses and to buy or sell a stock at attractive prices. Here are three types of orders that you should use to your advantage:
A MARKET ORDER is an instruction to buy or sell a specified amount of a stock (or other security) at the current market price. The advantage of a market order is you are almost always guaranteed your order will be executed – as long as there are willing buyers and sellers. Depending on your firm’s commission structure, a market order may also be less expensive than a limit order.
A LIMIT ORDER is an order to buy or sell a security at a specific price. A limit order allows you to avoid buying or selling a stock at a price higher or lower than what you specify. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. By contrast, a market order only guarantees you the best available price — not the limit order’s specified price.
sets a sell price for a broker. When the price of the stock drops below this level, it automatically is sold. Also: Take the time to learn about “stop orders,” day orders and good-till-cancelled orders
These order types are particularly useful in different situations for e.g. – Stop Loss order may save online investor in the bearish market where large volumes of selling are on. Also Limit order ensures a particular price which relaxes the investor in unstable market. Market order is suitable when the stock market is racing high & online investor wishes to take his part of earnings at those high rates….
Every coin has two sides
Having said that, it implies that the online investing has both its strengths & weaknesses. Two important factors are as follows –
Made to order
Orders mentioned above are particularly useful in peculiar situations & peculiar type of investors, For e.g.- Limit orders are often used to guarantee that an investor will not pay over a certain dollar level for a stock , but If no limit is placed, the trade is considered to be a market order. Placing a market order means you won’t necessarily get the price you see when you buy or sell online.
It can be explained with a simple example- An online investor may put a limit for selling at $10 for his share A .But in racing markets where share A’s value is increasing continuously reaches to its peak, the cautious investors will get $10 for sure, but would lose any excess earnings over & above $10, if he had resorted to market order
Problems are inevitable
Trading online is not foolproof. There are instances when an online investor would face some problems for e.g.:-
- Inability to access the account due to absence of physical presence near computer system
- Your Internet connection could be down.
- The online brokerage firm’s server could crash due to heavy trading, unexpected software glitches or a natural calamity.
Know about the firm’s alternative trading options. This could include automated telephone trading or calling a broker.
If you are going to buy and sell individual stocks online, it is your duty to keep as well informed as possible about what is going on with the company in question. Don’t just settle for the hype about hot stocks! Go to the company’s Web site and download its prospectus. Check out the company’s publicly available filings through the U.S. Securities and Exchange Commission’s EDGAR system. Take advantage of free services that allow you to get automatic e-mail or SMS messages whenever there is news about your stock.
Nobody becomes “WOLF OF THE WALL STREET” in a day without gaining information & knowledge.
As with many things in life, you are told to “Go-with-your-heart” and it works in some cases. Unfortunately online investing is NOT one of those. With investing, it is advised to make decisions based solely on research and knowledge. Always conduct your full due diligence and learn more about the stocks you intend to buy. Investing WISELY should be on agenda.
BEWARE OF THE FAULTY EXPERTS
It is always better to sort the advice of an expert before investing in stocks but taking the right advice is very essential. Take advice from a qualified professional team who are well versed in the financial field with good proven experience.
ALWAYS STAY AWAY FROM- HOT PICK OF THE DAY (may be temporary attraction), CIRCUIT SHARES (where only buyers or sellers prevail)