SECTION 3: TRADING
53: The more you trade, the lower your returns are likely to be. The more often you buy and sell, the better your portfolio has to perform to compensate for the higher trading costs. Think you'll outsmart the market with your clever ideas? A study showed that pension fund managers would have increased their returns by not trading at all. If frequent trading hurts the professionals, chances are it will hurt you too.
54: How to buy stocks without a broker. Hundreds of companies sponsor direct investing plans, or DIPs, which allow you to buy shares from them without paying a brokerage commission. Even more companies offer DRIPs, or dividend-reinvestment plans, which plow your dividends back into stock purchases. Info abounds on the Web at sites like netstockdirect.com.
55: How buying on margin works. You borrow money from your broker -- paying interest -- to buy more stock than you could on your own. That gives you a shot at bigger profits -- and bigger losses. If your stock falls below a certain level, your broker will issue a margin call, requiring you to repay some or all of the loan immediately. Buying on margin is a risk most investors should avoid.
56: How short-selling works. A short-seller borrows shares from a broker and sells them, hoping the price will fall so he can buy them back later at a lower price. The costs are high, the potential losses enormous, and even lousy stocks can rise for remarkably long periods before coming back down to earth. This is another strategy most investors should shun.
57: The difference between a market order and a limit order. When you place a market order with your broker, you're asking to buy or sell shares at whatever price is available. A limit order directs the broker to buy or sell at a specific price, which can be useful protection in a volatile market. If the stock doesn't reach that price, no trade occurs.