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Equity Investing in Today's Markets:
Welcome to the ease and convenience of investing online through Merrill Lynch. The Internet can be a powerful tool for managing your finances. Whether this is your first time online or you are a seasoned Internet investor, you should be aware that there are certain risks associated with online investing. However, you can take steps to minimize those risks. We would like to offer the following guidelines to help you better understand the following issues: placing orders, fast markets, price and time limits on orders, confirmations and cancellations, margin trading, and Internet and system reliability. We hope this information will help you in planning your online investing strategies.
Placing an order
When you place an order, whether through a Merrill Lynch Financial Consultant or online, your order generally will be either sent to an exchange, such as the New York Stock Exchange, or handled through the Nasdaq® dealer market. Your order will be executed by being paired with its complement-if you wish to buy a stock, your order will be paired with the order of someone who wants to sell, and vice versa. For over-the-counter (OTC) stocks in which Merrill Lynch makes a market, Merrill Lynch will usually act as market maker, meaning that Merrill Lynch, acting as principal, generally will sell stock to you or buy stock from you.
When you place an order for a stock, look at the stock's quote. Before placing an order to buy a stock, check the ask price (the price at which the security is offered for sale in the market). Before placing an order to sell, you should check the bid price (the price a buyer is willing to pay). Doing so will provide you with an indication of the price that you will pay or receive for the security. The volume of a stock, often provided along with the price quote, will tell you the number of shares traded from the current day's market opening until the reported trade time.
Most stock quotes given in the news and through online-information sources are often delayed for 15 to 20 minutes. This is fine when a stock's price is moving slowly, or if you simply want to get a general sense of the price. When you wish to make a transaction, however, you should obtain a real-time quote, comprised of the current bid and ask quotes and last sale price. You can get real-time quotes by logging in to your account, clicking "Quote" at the top of the screen, and entering the ticker symbol for the stock you want.
It is important to realize that a real-time quote is not a guarantee that your order will be executed at that price. In a quickly changing market, or fast market, the bid and ask prices may change rapidly. Securities of companies that have recently made initial public offerings (IPOs) may be particularly prone to price volatility. If there is a large volume of shares being traded in that stock, there may be a delay in the execution of your order. From the time you obtain a real-time quote and place your order, to the time the order is actually executed, the price may change substantially. For example, if you get a real-time quote that says a stock is selling at $100, and the price moves up to $110 by the time your order is filled, you will pay $110. You should be especially cautious if you place orders during fast markets.
Normally, orders up to a certain size are executed automatically. There may be times, however, when order queues develop, and we may suspend automatic execution. When that happens for stocks in which we are a market maker, your order may be bundled with other orders for execution over a period of time. These orders may receive an execution based on the average price at which we are able to buy or sell during that period.
Placing an order to buy or sell a stock at the current price is known as a market order. When you place a market order (except in the last few minutes of the trading day), you are guaranteed that it will be executed. But as described earlier, you are not guaranteed a specific execution price. In order to handle pricing uncertainties, you may want to place what is known as a limit order.
A limit order lets you specify the price at which you are willing to have the order executed. If you are placing an order to buy a stock, you can set a limit that says you are only willing to buy at or below a specified price. For example, if a stock is trading at $100, but you are expecting the price to rise quickly, you may choose to place a limit order at or near $100. Your order may then be executed if the price remains at $100 or drops lower. If the price moves up, however, your order will not be executed. The advantage of a limit order is that you will be protected from having to pay more than $100 for the stock. The downside is that if the market moves higher, your order will not be executed, and you will not own the stock you wished to purchase.
Although limit orders guarantee a particular price, they do not guarantee that your order will be executed. A market order, on the other hand, guarantees that your order will be executed but does not guarantee a particular price. Depending upon your preferences, limit orders may or may not be an appropriate tool. Additionally, you should always consider whether buying highly volatile stocks is a suitable part of your investment strategy.
You may also place orders with time limits. A day order is one that will expire at the end of the trading day if it is not executed. (If you place the order after market hours, it will expire at the end of the next trading day.) If you place a limit order to buy a stock at $100, for example, and the price does not trade at $100 or less that day, your order may expire and not be executed. If you wish to try again the next day, you will have to place another order.
A good-till-canceled (GTC) order, on the other hand, is good for 30 days and will remain in force until it is executed, or until you choose to cancel it. If you place the same limit order as described above, and the price does not trade at $100 or less that day, the order will remain open until the price does hit $100 or less. (Note that if the order is not renewed within 30 calendar days, it will be systematically canceled at the end of the trading day indicated on the order. All orders with Saturday or Sunday expiration dates expire at the end of the previous trading day.)
Merrill Lynch also allows you to place other types of time limits on your orders:
- Immediate or cancel (IOC): execute as much of the order as possible immediately and cancel the remainder.
Be aware that submitting a trade through the Internet is not the same as having that trade executed. When you submit a trade, you will receive a confirmation number saying that we have received the order and transmitted it to the market. Then, you can look at all your open trades on the Trading: View/Change Orders screen to see whether your order has been executed. (You may need to click the "Reload" or "Refresh" button on your browser to make sure you are seeing the most current status of your orders.)
Also, please note that in rare circumstances, your order can be rejected at the exchange, in which case it will not be executed. It can also be rejected by Merrill Lynch for a number of reasons, including insufficient funds in your account, or because you are trying to sell short a hard-to-borrow security that is not approved by our stock loan department. For stock and mutual fund orders, you can check the Trading: View/Change Order screen to see whether your order has been executed. Fixed income trades will appear on the Accounts: Holdings screen on the next business day.
If you should ever choose to cancel an order, make sure that it was not already executed. Although Merrill Lynch may confirm receipt of your cancellation request, this does not mean it was canceled. To see whether your cancellation did occur for stock and mutual fund orders, go to the Trading: View/Change Orders screen. Your order will be marked "Cancel," with the additional notation of "Cancel Confirmed."
A Merrill Lynch margin account gives you the following advantages:
- You can increase your profit potential by leveraging your margin eligible securities. You can also earn more profits/dividends by purchasing additional securities on credit.
- You can sell short securities. This is an investment strategy in a margin account whereby you sell a security you do not own in anticipation of a decline in the price of the security. A profit can be realized if the security sold decreases in value and is bought back at a lower price on some future date.
- You can borrow money against fully paid-for securities that you deposited.
Margin trading also carries with it particular risks:
- Your potential losses are greater due to leverage if there is adverse market movement.
- If the market value of your securities declines, maintenance calls must be met on specified dates or Merrill Lynch will liquidate your securities to meet the call. The timing of such a sale could be unfavorable.
- The potential loss on short sales is without limit because there is no ceiling on the price of stock.
The Funds Due Detail Screen in the Accounts Info section will inform you of the status of all funds due in your account. The total outstanding commitment indicates the total funds due in your account, and if met will satisfy all open obligations.
The Internet has increased the ease and convenience of placing orders for securities. You should not assume, however, that it will always be available. Any computer system, whether it is yours, your Internet Service Provider's, or your brokerage's, can experience unscheduled outages or slowdowns for a variety of reasons. Although Merrill Lynch has taken precautions to help our systems handle heavy use in fast markets, neither we nor any other online brokerage can promise complete reliability under all circumstances. If you experience problems, you can always place an order by calling your Merrill Lynch Financial Consultant or the Merrill Lynch Online Helpdesk at 888-ML-ONLINE (656 - 6546).
Information available on the Internet, such as on investor bulletin boards and chat rooms, can be inaccurate or false. It is rarely a good idea to take investment action based on tips, rumors or unknown Internet sources. Consult Merrill Lynch's research opinion, if any, or read Dow Jones News Service or Standard & Poor's Stock Reports that may be available on Merrill Lynch OnLine before you make trades based on information you obtain on the Internet. You may also wish to call your Merrill Lynch Financial Consultant.
There is no substitute for wise planning when making investment decisions. Understand the companies that you are buying and selling, and know what your goals are for each investment. Most of all, understand your own risk tolerance and the risks involved with each of your investments.
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Any information presented about tax considerations affecting client financial transactions or arrangements is not intended as tax advice and should not be relied upon for the purpose of avoiding any tax penalties. Neither Merrill Lynch nor its Financial Advisors provide tax, accounting or legal advice. Clients should review any planned financial transactions or arrangements that may have tax, accounting or legal implications with their personal professional advisors.
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