I frequently point out to new DIY investors that buying an index fund is typically simpler than buying something off of Amazon. Generally it is a matter of clicking a "trade button", putting in a ticker symbol and figuring out the number of shares. This merely requires dividing the dollar amount to invest by the share price.
The process is made straightforward and simple for a good reason. The brokers want you to trade.
But a part of the process that may seem a little tricky at first is the type of order. Most orders are put in "at the market". This means that whatever the price is at the time of the trade that is what the buyer or seller will get.
It is good practice though when getting set to do a trade to eyeball the bid and ask prices for whatever you're buying, whether it is a stock or an exchange traded fund. For example, as this is written the exchange traded fund SCHX, a Schwab large cap index fund has a bid-ask spread of $57.03 - $57.05. This spread is usually given as part of the info from the quote box.
This spread means you can buy SCHX at $57.05/share or sell it at $57.03/share. If you are buying a few hundred shares you'll likely pay $57.05share but if you have a few hundred shares to sell you'll get $57.03/share.
If you're thinking this is like a used car dealer you've got the idea. The used car dealer gives you $4,000 for your car and then wants to sell it to me for $6,000. Thankfully the bid- ask spread in financial markets are not this big!
Sometimes you'll want to buy for less than the ask price. For example, maybe you would like to buy at $57.00. Here you would put in a"limit order" at $57.00. You could leave it as an open order or make it good for the day. I always just do a day order. I don't want to be on vacation 6 months from now, long after I've forgotten about the particular Fund or stock and see the order get executed.
The big deal in putting in a limit order for the day or as an open order is that you may not get it done. This is worth thinking about because typically a few ticks are not a big deal. If you're a long term investor and you pay $57.05 versus $57.00 isn't really significant. In fact, you may not get the trade done and 2 days later you give in when the Fund is trading at $57.50.
Been there, done that!
Thoughts and observations for those investing on their own or contemplating doing it themselves.
If you are seeking investment help, look at the video here on my services. If you are seeking a different approach to managing your assets, you have landed at the right spot. I am a fee-only advisor registered in the State of Maryland, charge less than half the going rate for investment management, and seek to teach individuals how to manage their own assets using low-cost indexed exchange traded funds. Please call or email me if interested in further details. My website is at http://www.rwinvestmentstrategies.com. If you are new to investing, take a look at the "DIY Investor Newbie" posts here by typing "newbie" in the search box above to the left. These take you through the basics of what you need to know in getting started on doing your own investing.
Friday, May 12, 2017
Types of Orders
Posted by Robert Wasilewski at 12:21 PM
Labels: DIY investor newbie, investment mechanics
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