The Handy Investing Answer Book. Paul A Tucci
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What is a “stock split”?
A stock split happens when a publicly traded company decides to divide its outstanding stocks in half, or split (doubling the number of shares outstanding), while cutting the price of the shares in half. Investors usually view this as a favorable indicator for the company’s stock, and normally will wish to acquire more shares at a more favorable price. It also indicates the company’s belief in its own future prospects. Some experts discount the perception that stock splits are generally beneficial for the company or investor, as a company has inherent value no matter how many shares are available.
What is a “reverse stock split”?
A reverse stock split occurs when a company decides to consolidate its outstanding shares. If a company has two million shares outstanding, it may wish to consolidate these shares down to one million by doubling the price of each share. So instead of having two million shares trading at $50, the company now has one million shares trading at $100. Companies normally decide to engage in reverse splits when they have a depressed stock price, and that decision generally is not seen by the investment community favorably.
What are stock or share “buybacks”?
Yet another strategy that companies may employ is share “buybacks,” or the purchasing back of shares from the open market. Since the earnings of a company are often calculated on a per share basis, a company can make its earnings per share radically improve if there are fewer shares on the market. An important way to tell if a company is in fact buying back its shares is to scrutinize its quarterly reports, and find the line item “shares outstanding.” From here, you may compare past quarters or years to see if any buybacks have occurred.
What is another strategy that a company might employ to make its stock attractive to potential investors and current shareholders?
Another strategy that companies might use to distinguish their stock from all others is by paying dividends or distributing the earnings of the company either on a regular quarterly basis or, in some cases, as a one-time event. Normally, a company announces the record date, which is the date that any shareholder must own stock prior to the payment of dividends, and distributes the dividend, usually shortly thereafter. When a company has amassed a lot of cash, it may pay out a special dividend to shareholders of record. Companies that regularly pay dividends tend to be large, predictable, and profitable companies, such as many companies listed in the Dow Jones Industrial Average.
What is a “market order”?
When you purchase a stock, you may request your broker or online brokerage interface to enter a market order. A market order is an order to purchase or sell a stock at the best available price. Even if the order is executed immediately, it does not necessarily mean that you will get the last traded price, as prices change every second, and the price you receive may be quite different from the price you originally wanted.
A lot of people still picture stockbrokers shouting out orders to buy or sell stock, but these days computer transactions make the process a lot more quiet.
Why is there a difference in price from the time that I want to buy or sell a stock and the time that I actually buy or sell that stock?
When you call a broker or click the “execute” button on an online interface, your trade ultimately goes to an intermediary, who must determine to which market to send the order. The stock orders may or may not be packaged together with many other orders to be fulfilled at the most favorable price. According to the SEC, there are no current regulations making brokerage firms execute trades within a certain time, only that the firm cannot deceptively advertise its ability to trade, and must meet its promises to its clients.
What is a “limit order”?
A limit order allows an investor to buy or sell a stock at a specific price. If the limit order is a “buy” limit order, it may be executed at the stipulated price or better. If the limit order is a “sell” limit order, the brokerage firm or site must execute this trade at the limit price or higher, so that the client receives the most money in exchange for his shares at the time of order execution.
Why are limit orders good to use?
For investors who are buying or selling positions, limit orders help ensure that the investor is getting the best price for his transaction, and does not pay more or sell for less than a predetermined amount. Limit orders provide investors with some protection against volatile price movements of securities while trades are moving through various electronic systems. Limit orders may be more expensive to execute than market orders, so experts generally assert to check with your brokerage firm regarding its fees.
What other types of special orders may help investors when executing trades?
In addition to market and limit orders, there are a few other special orders that may be available to the investor, either at a brick-and-mortar brokerage firm or an online brokerage site. A stop order or stop-loss order is used when you want to buy or sell a stock at a specific price, also called the stop price. A buy-stop order is executed at a stop price somewhere above the recent market price. A sell-stop order is executed at a stop price below the current market price. Investors like to use buy-stop and sell-stop orders to limit losses and to protect profits when executing trades. You should check the specific rules at your brokerage firm (whether full service or online) regarding at what price your order will be executed. Some firms use current quoted prices, while other firms use the last-sale price to determine the stop or buy limit price to be executed.
What other special orders can investors use to help secure a certain price or limit a potential loss?
Investors may use other order instructions to help protect their profits or limit potential losses. “Day orders” mean the order is to be fulfilled during the trading day. “Good-til cancelled” means the order is in the system for whatever time it takes for the order to be fulfilled and transacted. “Immediate or cancelled order” means an order must be transacted immediately, or it must be cancelled. Check with your firm to discover how it defines the word “immediate.” Other special orders may include a “fill-or-kill” order, when an order for stocks must be filled in its entirety, and an “all-or-none” order, in which the trading order to either buy or sell must be executed in its entirety immediately. If it is not executed immediately, an “all-or-none” order will remain active unless it is executed or cancelled by the investor.
What if I want to buy or sell a stock after regular market hours?
Normally, if you wish to buy or sell a stock after regular trading hours, the transaction is settled at the next opening price. However, the timing of these trades depends upon the brokerage firm, so check with your firm for additional information.
What types of factors affect my ability to execute a trade when I want?
There are many different situations that may cause a trade not to execute at the exact price, or the precise time we want. Some situations that influence your order execution may be the volume of Internet traffic at the very moment you are making a buying or selling order, the volume of orders for the security that may be taking place simultaneously, and limits to the technology of the individual trading platform the firm is using. Even when you are given notice that an order was received by your broker, it does not necessarily mean your order was executed. It may just be an order confirmation, so please check with your brokerage firm about its notification procedures.
What are some common myths or beliefs that limit what I may earn as an investor?
Experts at both Investopedia and NASDAQ believe potential investors may have certain inaccurate beliefs about investing that may cause problems when you first invest. One belief is that stocks that plummet in price eventually will bounce back, which is not necessarily true. The reasons why a stock drops in value may be complex in origin, and good research on the investor’s part