Enter Stock Orders Like a Pro – Learn the Terminology


River2If you want to trade like a pro, you need to learn the different types of orders when buying or selling a stock.  Believe it or not, there is a lot of different ways to buy or sell a stock.  Each has its use.  Here is a review of the different types of orders:

Buy – An order to buy a security.

Sell – An order to sell a security.

Market Order – An order to buy or sell a security at the current market price.  Because the market price includes a Bid price (the price someone is willing to pay for a security) and an Ask price (the price at which someone is willing to sell), a market order to buy will pay the ask price, and an order to sell will sell at the bid price.  The difference between the Bid and the Ask is called the Spread.

Limit Order – An order in which a price is set as a threshold for the sale.  For example, a buy order with a limit of $50 would execute when the Ask price of the stock was at $50 or lower.

Stop– An order to buy or sell a stock if it passes through a specific price.

All or None – An order which is executed only if all the shares can be bought or sold in one lump.

Good ‘Til Canceled (GTC) – An order that will stay open for a month after it is entered.  Normal orders are only open for the trading day and must be reentered if not executed on that day.

The above can be combined.  For example, one would say “Buy 100 XYZ at the market” to buy 100 shares of XYZ corporation at the market price.  One could say “Buy 100 XYZ, limit of $50 or better, GTC” to put out an order that would stay open for a month in which 100 shares of XYZ corporation would be bought if the Ask price dropped to $50 or lower.

Now that you know the different types of orders, here’s how I would put them to use:

With the strategy I’m proposing with this blog we’re looking to invest for the long-term and make a lot of money with each successful trade.  We’d like the stock to go up 1000% or more over the time period that we hold it.  Because of the long time period involved, we are not that concerned with getting a few extra pennies per share on a trade.  For this reason, I generally use a market order when buying.  This will cause the order to be filled within the next few trades (we may need to wait a few trades if there are people ahead of us with market orders).  On a stock that trades a lot, said to be “liquid,” market orders are generally fine.  Also, when I’m looking to get out because I’ve made a good profit and I’m worried it may evaporate, I find that it is best to use a market order and get out.  I’ve had the experience before when a gain turned into a loss because I set a limit and it didn’t fill before the bottom dropped out.

If I’m in the process of accumulating shares and I feel that the stock has good long-term prospects but there is probably nothing to cause it to shoot up in the near-term, I may set a limit order and wait.  I may also enter with a market order to get some shares, and then place a limit order a little lower to buy more shares if the price then dips.  (Note with a limit order I also tend to use Good-Til-Canceled since it may take a few days to execute.)  When setting a limit, I pick an odd amount (for example, $20.16 per share or better) because there will generally be other people with limit orders in and people tend to like round numbers.  With a limit order, the first in line at the price gets the shares.  If the stock is thinly traded, or illiquid, I will never place anything but a limit order.  This is because if there are only a few buyers or sellers, the price may easily change by 10% or more between trades.  Looking at the typical spread for the stock (difference between the bid and the ask price) and the volume is a good way to tell if the stock is illiquid.   I also always use a limit order when selling stocks short or covering a short position, generally setting the limit slightly above the ask price in the latter case to make sure it executes rapidly, but giving me protection from radical price movements.

Stop orders, often called “stop loss” orders, are sometimes recommended as a way to limit losses.  For example, you buy 100 shares of xyz, and then set a stop loss order at $36 so that if the stock drops by 10% you’ll get out automatically.  I generally don’t recommend stop loss orders for two reasons.  The first is that the market will set all kinds of prices based on rumors, news, and just fluctuations driven by trading (the stock goes down a little so more people jump out, causing it to continue down).  These fluctuations really mean nothing about the underlying business, and we don’t want to get out of a good company just because it becomes temporarily unpopular.  The second reason is that various traders use stop loss orders to make profits and get shares at lower prices.  A stock may move down temporarily, hit your stop causing you to sell your shares, and then shoot back up, leaving you behind.

One case where I may use a stop order is when a stock has gone up a lot and I’m looking to take some of the money off of the table and move it somewhere else (the stock has gone up enough that I don’t want to risk the loss).  In that case I may set a stop loss a few dollars below the current price, and then move the stop up if the stock rises until it eventually hits.  This is nice psychologically since you don’t feel like you’re selling a stock that is a winner and will climb higher, but in general I’ve found I end up just losing a couple of dollars when my stop gets hit and I should have just put in a market order and sold the shares.

On another note, there is what is called a stop market and a stop limit.  A stop market will sell the shares at the market price if the stop price is reached.  The stop limit will put in a limit order at the stop price if the stop is reached.  Never use a stop limit because if the stock falls below your limit price, the order will not be executed and you will still own the shares.

Finally, I may use an all-or-none order for a thinly traded stock to avoid getting a few shares and having to pay minimum commissions on more than one trade.

Hey, I sure don’t know it all.  Help make this site better by leaving a comment!

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.   

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Would You Give Up Social Security to Set Your Children Free?


SmallIvy

The returns on Social Security are dismal. Spend just a little time with an interest rate calculator and you’ll find that you should be getting five to ten times each month in benefits from Social Security if it were invested as a proper pension fund than you get under the current system. In fact, if your Social Security contributions were invested in a private account in a target date retirement fund, you would not need to put any other money away for retirement. But if you did try to live on the payments Social Security provides currently, somewhere between $1000 and $2000 per month, you would be living in poverty.

People would be far better off investing themselves in a target date fund. The issue with the existing system is that the money is not invested. The government takes your contributions, pays out money to those already retired, and then spends the rest of the money however they wish. Despite the terrible returns, the system is still going bankrupt because there are more people retiring today than in the past, plus there are lots of people on perpetual disability. The disability portion is already set to run out of money this year, but has been given a little more life by a shift of funds intended for the retirement portion over to Social Security disability with the latest budget deal going through Congress. The retirement portion isn’t in that great a shape either, being set to run out of money within a decade unless benefits are cut or contributions increased still more. Shifting money from the retirement portion to the disability portion will cause this demise even faster.

The issue with trying to get to a private system is that there are people currently receiving benefits or who are close to retirement that would get really upset if those benefits were eliminated. But if everyone started putting money into private accounts today, there would be no money available to pay benefits. (Why can’t we just open the lock box Al Gore talked about? The trouble is it is just full of IOUs, and without a source of funding to redeem those IOUs, they are just a bunch of theoretical paper.) A transition would be needed.

We could actually transition by allowing people put a portion of their money into a private account based on their age. Someone who was 55 or older, say, could put 100% into a private account invested entirely in bank CDs, meaning that the individual would have a few years worth of Social Security payments sitting there for them to withdraw when they reached 65. The regular Social Security system could then take over from there if they lived beyond 69 or so. Someone between the age of 40 and 55 might be able to put half of their money away into a target date retirement fund and send half into the standard system to pay for the benefits of those who were older. They would then have a decade or more worth of payments in their private account when they were ready to retire. This would continue until you reach people in their twenties who might put 25% in a private account and 75% in standard Social Security. Even at this amount, they would have more for retirement in their private accounts when they were ready than they would have had under the current system. In fact, they would likely have nothing under the current system, given that it is going bankrupt. Once everyone has a big enough private account to replace Social Security payments, everyone would then get to contribute to private accounts only and the transition would be complete.

Now understand I haven’t done the detailed calculations to verify the percentages above. The details would need to be worked out, but I guarantee there is a payment scheme that would allow us to ween people off of Social Security within about 30 years. But what if you wanted to move people off faster? Well, here is a way to accelerate things.

What if you could agree to continue to pay into the system at your current rate, and not withdraw anything from the system in the future, in exchange for letting your children invest their money in private accounts? If you are currently retired but have a good pension or ample retirement savings, you might be willing to give up Social Security if it meant a child or grandchild could invest privately.  If you are in your forties at this point, you have already paid in a lot, but you can see the writing on the wall and know that Social Security won’t be there for you now anyway. If it is there, it will only be because the contributions are raised still more, meaning perhaps you’ll be contributing 10% of your salary and your boss will be contributing another 10%, such that 20% of your paycheck will be going into the system. You will also probably need to work longer before you can collect, meaning you’ll be contributing more for longer and receiving less.  So giving up your benefits would probably save you money in the long run, plus it would let your children avoid having to contribute money that would be lost.

So what do you think? Would you pay the ransom to set your children free?

Your investing questions are wanted. Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Get Ready for Retirement Without a 401k


blackberriesPeople are funny when it comes to saving for retirement, college, and medical care.  For whatever reason, they allow the arbitrary limits set by the government on what can be deducted from taxes and other factors dictate how much they put away.  If you can put $2000 in an IRA account, they put just $2000 away for retirement.  If their employer only matches the first 3% they put into a 401k plan, they put away on 3%.

You wouldn’t do this with food.  If you had a food account that only let you put $500 into it per year and deduct that $500 from your income for taxes, you wouldn’t just put away $500.  You would put away however much you needed for food and just pay taxes on the amount over $500.  You let the need dictate how much you save, not tax laws.

But wait, it gets worse.  In her article, The 401K Crisis is Getting Worse, Katrina Combs talks about how people in industries such as the food service industry don’t put away anything for retirement because many of the jobs don’t offer a 401k plan.  She quotes Tim Egan who says that he  has almost no savings for retirement at age 56 who says, “The restaurant business is what I’m good at, but few owners, especially of small places, offer retirement benefits, no matter how much money you help them earn.”  So….  She also quotes IRS statistics: “Only 8 percent of taxpayers eligible to set aside money in an IRA or Roth IRA did so in 2010, according to the IRS.”

So basically, because people are working for companies that don’t offer a 401k plan, people are not saving for retirement.  (And don’t even get me started on people who work for companies that offer a 401k plan who choose not to use it, or who cash out their 401k plans to do something foolish like a kitchen upgrade or pay for a wedding.)  When you work for a company, they are paying you based on what your skills are worth to them.  Whether they choose to pay it all out in salary, or pay it out in salary and benefits, is really immaterial.  In fact, if they pay you entirely in salary, it gives you the freedom to spend the money as you choose rather that take the benefits offered.

If they give you a salary of $50,000, you can choose to put $5000 away into an IRA, or even into a set of mutual funds in a taxable account.  No one is stopping you.  Why should your employer need to give you $45,000 and then match your contributions up to $5000 (still $50,000 for them)  into a 401k for you to think about your own retirement?  Are we so weak-willed that we need an incentive to prepare for something we all will need someday?   Put on your big boy pants and do what you need to do so that you won’t end up eating Alpo at age 70.

The same holds true if your employer doesn’t offer a match for their 401k at all, as many have stopped doing since about 2008.  Just because they aren’t matching your contributions anymore doesn’t mean you can now spend your whole paycheck and not worry about tomorrow.  This is why it is wise to put away 10%-15% of your paycheck regardless of what match your company provides.  If you put away 7% because you get a 3% match, and then they stop matching, you would then need to find another 3% of your paycheck somewhere to put towards your retirement.   This is difficult to do if you’ve already gotten a set of payments that eclipses all of your take home pay as most people do.  It is easier to start out without the money in the first place.

So now that we’ve dispelled the notion that you need a 401k plan to save for retirement, or even that you need to worry about deductibility of your savings, what is a plan for retirement?  Well, I would follow these steps:

1.  Determine how much you need for retirement.  A good way to do this is to figure out how much you’ll need in today’s dollars per year to enjoy the lifestyle you want and put that into an interest rate calculator at 5% for the time between now and retirement.  Then, take that number and multiply by 30.  That is the account balance that will provide the income you need to generate the income you want at retirement.  If this is too difficult, just plan on putting away 15% of your gross salary.  If you have a pension plan at work, reduce your yearly income needs based on the payment you will get from the pension (ask HR to calculate for you).

2.  If you have a 401k plan at work, plan to put away whatever percentage of your salary the company will match.  For example, if they match the first 5%, you’d put 5% there.

3.  Next, start an individual IRA and put away as much as you can there ($5500 per year currently).  If you don’t have a 401k from work, you would just start your retirement investing with the IRA.

4.  Next, if your 401k plan at work offers low-cost mutual funds (less than 1% fees and broadly diversified funds), return to the 401k and up your contributions to the limit you are allowed to contribute or the amount you plan to invest  for retirement(10-15%), whichever is less.

5.  If your 401k plan at work really stinks (fees of 3% on all of the funds and they are really limited, or you only can invest in company stock, for example), or if you still have money left over after maxing out your 401k, open a taxable mutual fund account and invest in index funds.

So there you have it.  If your company offers a plan and especially if they have a match, take advantage so that you can get all of the money that the company offers.  Also, take advantage of tax savings by using the 401k plan and an IRA if you can.  If there is no 401k plan, still take advantage of the tax advantages, but don’t stop saving just because you can’t deduct past a certain contribution amount.  Don’t let the government or your employer dictate how much you save for retirement.  Save and invest based on your needs for retirement.  It is up to you to plan for your own future.

Hey, I sure don’t know it all.  Help make this site better by leaving a comment!

Got and investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.   

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.