Hugh F. Doherty, DDS, CFP
Here is a little fact for investors to think about, especially those with on-line accounts. Stockbrokers are being advised to build up their legal defenses so they can`t be blamed if computer missteps cost investors money. If stockbrokers are assessing their exposure to risk, maybe you should, too.
The investors who brokers worry about the most are those who buy or trade high-flying tech stocks, Internet stocks, and initial public offerings (IPOs). [IPOs are from companies selling their stock to the public for the first time.] Frankly, the professionals aren`t sure that on-line investors know what they are doing. When a purchase or sale goes wrong because of a misunderstanding or trading snafu, arbitration claims fall on brokerages.
The risks are highest for the army of day traders, who hold fast-moving stocks for just a few hours or days before selling. Their version of "stock research" is to surf the message boards on the Web.
But investors with longer-term goals face serious dangers, too, if they dabble in IPOs and Internet stocks. Those stocks can be scuttled by sudden market action that traders precipitate. Say, for example, that you decide to buy some shares in an IPO coming to market at $15 a share. You call your broker or enter your order through an on-line account. You place your usual "market order," meaning the stock will be bought at the best available price. But let`s say the IPO is sizzling hot. It opens the following morning at $80 and rises from there. Your order is filled at $90. Then the traders who bought for less pull out and the stock nosedives, leaving you with an irretrievable loss.
You should put more emphasis on "limit orders," which save you from paying more for the stock than you intended to. For a $15 IPO, a limit order might specify "not over $20." With a limit order, you might not be able to buy the stocks - and sometimes that is just as well. Some firms insist on limit orders for hot IPOs.
Another issue: You might have arranged for "real time" stock quotes, meaning your screen shows the prices offered in the market with no time lag. But in "fast market" conditions for a particular stock transaction, prices change so quickly that quoted prices can`t keep up. You might think you have sold a stock at $30, only to learn that the sale really went through at $10. You don`t just push a button in your house and make a trade like some on-line investors think. Your trade has to be routed through a broker and into a market that might be different from the one that appears on your screen.
On-line trades can be virtually instantaneous, but sometimes high volume creates delays. If a trade isn`t confirmed within a few minutes, investors might push the button again. They don`t realize that creates a second trade. What if you can`t get through and are trapped in a plunging stock you bought on margin (with money you borrowed from your broker)? You could lose more than your total account value.
Be wary of brokers touting IPOs
Sometimes you get cold calls from brokers about IPOs of unfamiliar companies and are tempted to invest. It`s tough to resist these sales pitches, because you fear you might be missing the opportunity to become a millionaire. So, how can you tell whether they are legitimate? You really can`t.
The National Association of Securities suggests you steer clear if the caller promises big profits with little risk, implies that you are getting inside information, pressures you to invest right away, or fails to answer your questions about the issuing company`s operations and finances. Always request a preliminary prospectus, and be suspicious if the broker says you don`t need the information or it`s not available.
Ask whether the Securities and Exchange Commission has declared the offering effective (i.e., the company has cleared the way for the sale of its stock by disclosing certain facts to the SEC). Don`t send any money before the effective sale date. You don`t have to agree to buy more shares after public trading begins in order to buy the initial shares. There are better ways to invest your hard-earned money than IPOs. I advise you to have your name placed on a "do not call list" to avoid future solicitations.
Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession, and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, contact him at (800) 544-9653. E-mail: Drfinnet@aol.com. Web site: www.dr.hughdoherty.com.