Investing on Your Own
Used with permission from The United States Securities and Exchange Commission.
The first step to investing, especially investing on your own, is to make sure you have a financial plan. How much are you going to invest? For how long? What are your financial goals? Do you understand your tolerance for risk? All investments carry some risk.
The next step is research, research, research. When investing on your own, you are responsible for your decisions. How will you select one stock, bond, or mutual fund over others? Always make sure that all securities are registered with the SEC, using the SEC’s EDGAR database. Don’t purchase solely on stock tips from others.
There are several ways you can invest on your own, including Online Investing, Direct Investing and Dividend Reinvestment Plans.
Online trading is quick and easy, but online investing takes time.
With the click of a mouse, you can buy and sell stocks from one of the many online brokers offering low-cost trades. Although online trading saves investors time and money, it does not take the homework out of making investment decisions. You may be able to make a fast trade, but making wise investment decisions takes time. Before you trade, know why you are buying or selling, and the risk of your investment.
Set your price limits
To avoid buying or selling a stock at a price higher or lower than you wanted, you should place a limit order rather than a market order. A limit order is an order to buy or sell a security at a specific price. 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. Your limit order will not be executed if the market price quickly surpasses your limit before your order can be filled. But, by using a limit order, you protect yourself from buying the stock at too high a price or selling it at too low a price.
If you place an order, check to make sure it was executed
Some investors mistakenly assume that their orders have not been executed and place the order again. They end up buying or selling twice, which can be a costly mistake. Talk with your financial services firm about how you should handle a situation where you are unsure if your original order was executed.
If you cancel an order, make sure the cancellation worked before placing another trade
When you cancel an online trade, make sure that your original transaction was not executed. Although you may receive an electronic receipt for the cancellation, don't assume the trade was cancelled. Orders can only be cancelled if they have not been executed. Ask your financial services firm about how you can confirm that a cancellation order worked.
If you purchase a security in a cash account, you must pay for it before you can sell it
In a cash account, you must pay for the purchase of a stock before you sell it. If you buy and sell a stock before paying for it, you are freeriding. Freeriding violates the credit extension provisions of the Federal Reserve Board’s Regulation T. If you freeride, your broker must "freeze" your account for 90 days. You can still trade but you must pay in full for any purchases on the date you buy them as long as the freeze is in effect.
You can avoid the freeze if you pay for the stock in full by the settlement date, using funds that do not come from the sale of the stock. You can always ask your broker for an extension or waiver, but you may not get it.
You may be able to invest directly using direct stock plans (DSP) or dividend reinvestment plans (DRIP). Here’s how they work:
Direct stock plans (DSP). Some companies allow you to buy or sell their stock directly through them without using a broker. This saves on commissions, but you may have to pay other fees to the plan, such as fees incurred if you transfer shares to a broker to sell them. Some companies limit direct stock plans to employees of the company or existing shareholders. Some require minimum amounts for purchases or account levels. You’ll want to read and understand the plan’s rules before investing.
Direct stock plans usually will not allow you to buy or sell shares at a specific market price or at a specific time. Instead, the company will buy or sell shares for the plan at set times — such as daily, weekly, or monthly — and at an average market price. Depending on the plan, you may be able to automate your purchases and have the cost deducted automatically from your savings account.
Dividend reinvestment plans (DRIP). These plans allow you to buy more shares of a stock you already own by reinvesting dividend payments into the company. You must sign an agreement with the company to have this done. Check with the company or your brokerage firm to see if you will be charged for this service.