No less than the Chairman of the SEC has indicated, changes in the cost and ease of trading stocks should not lull investors into a false sense of security or encourage them to trade too quickly or too often. He also recommended the use of limit orders rather than market orders when submitting a trade in a “hot” stock. The Chairman also described the risks inherent in margin purchases, especially for “hot” stocks in volatile markets.
A study for the National Association of State Securities Administrators (NASSA) concluded that the “risk of ruin” for day-trading accounts, that is, the probability that an investor could lose all of his or her trading capital was close to 70%. While not many on-line are day traders, trading on-line compounds the risks associated with monitoring the price where investors may believe they have current prices but in fact do not.
Frequent problems customers encounter with on-line trading include the following:
- Order Failure – where orders are not executed. Failure to obtain a proper “fill” of the order and market orders that are executed extraordinarily far above the price expected; and/or
- Excessive Volume Problems – Where the on-line firm cannot properly handle the volume of business.
Margin accounts are given often indiscriminately to older customers with inadequate risk disclosures. NASD notice to members 99-33 requires limitations on the availability of margin for certain stocks and accounts.
The marketing of on-line trading makes many promises that the technology is not yet available to keep. The firms tout “high-quality trade executions”, “savings on margin rates”, and “market orders executed and confirmed electronically within seconds”.
Investors rely upon these promises. Unfortunately, what is delivered is often quite less than meets the eyes of the customer. The moral of the story is that on-line trading is not for everyone.Call for a Free Consultation!
From its offices in Connecticut and Florida, the Law Offices of Howard M. Rosenfield has been representing investors nationwide in securities arbitrations and mediations for over 30 years. Please call now, toll free, for more information if you believe that you suffered an investment loss: (860) 677-4334.