<THE FOOLISH FOUR>

Back to Basics
by Robert Sheard

LEXINGTON, KY. (August 21, 1998) -- Many of our readers, especially in the Fool's School, are new or first-time stock investors, so today will be a Back to Basics session. All you veteran traders out there will probably want to ignore me today. If you're just getting started with the Dow stocks, there's a basic question that you may be afraid to ask: "Just how do I make that first set of trades? I mean, exactly what do I need to tell my broker?"

I can still recall the fear of making trades for myself the first few times. What if the prices change before my order gets executed? What if I calculated wrong? What will I need to tell my broker? What about commissions?

One piece of advice I generally tell new investors is to set your account up as a margin account, even if you never plan to borrow any money to add leverage to your account. It serves as an excellent safety feature when you do place your purchase orders. (Alas, IRA accounts are not marginable. More on that anon.)

Here's what you'll need: the list of stocks you're going to buy, a dollar amount you wish to invest in each stock, the price you'll pay per trade, and a calculator. Let's assume you're placing the orders on the phone. After your broker asks you for your account number, you'll have to tell him or her what you want to do (place a few purchase orders).

First, give the broker the ticker symbol and the name of the stock you want to buy and ask for a current quote. The broker will give you two prices, the bid and the ask. The higher price (the ask) is the price you'll pay when you buy, so use that one in your calculation. For example, if you're going to invest $2,000 into Eastman Kodak <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: EK)") else Response.Write("(NYSE: EK)") end if %> and you're paying $8 per trade, you would divide $1,992 by the price of the stock you're quoted. Let's say Kodak's current asking price is $85. You can afford 23.4 shares ($1,992/85 = 23.4), but since you must buy in whole-share amounts, you would instruct your broker to buy 23 shares "at the market." (A market order means you want your order executed now at the prevailing market price.)

Then follow the same procedure for your other stocks. When all your orders have been executed, you'll probably find you still have a small cash balance (from those fractional share amounts). But if one of the prices goes up before your orders are executed, it's possible that you'll have overspent by a few dollars. If that happens and your account is not set up to handle margin, you'll have to overnight-mail a few bucks to cover the difference -- what a pain! If you have a margin account, your broker simply lends you the difference automatically and your first dividend check or two pays off the small balance.

In an IRA, though, you don't have the luxury of sending a few extra bucks in or letting your margin account cover the balance. What I do to avoid the possibility of this happening is to place all of my orders "at the market" but one. After the other orders have all filled and I know exactly what my cash balance is, I place the final order and specify a limit price (using whatever the current quote is from my broker). My order is virtually guaranteed to get executed since I'm using the current ask price and these are very liquid stocks, but I know I won't be overspending because I've specified that I won't pay a higher price than my "limit." This method keeps me from having to scramble to clean up any mistakes or surprises.

That's really all there is to it. You need to tell your broker (or type into your website connection) the stock you want to buy or sell, the number of shares, the type of order you want (market or limit), and if the order is a limit order your limit price. You'll still be nervous the first few times, but don't let the brusque nature of a busy broker daunt you. It's your money; take your time and make sure you're placing the orders you want to place.

Current Dow Order | 1998 Dow Returns

[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]

08/21/98 Close
Stock  Change   Last 
 -------------------- 
 UK   +   7/16  46.81 
 IP   -1  1/16  41.31 
 MO   +   5/8   43.75 
 EK   -1  5/16  84.75 
  
 
 
                    Day   Month    Year 
         FOOL-4   -0.49%  -2.00%  11.70% 
         DJIA     -0.90%  -3.94%   7.91% 
         S&P 500  -0.95%  -3.52%  11.41% 
         NASDAQ   -1.90%  -3.99%  14.47% 
  
     Rec'd   #  Security     In At       Now    Change 
  
  12/31/97  206 Eastman Ko    60.56     84.75    39.94% 
  12/31/97  291 Union Carb    42.94     46.81     9.02% 
  12/31/97  276 Philip Mor    45.25     43.75    -3.31% 
  12/31/97  289 Int'l Pape    43.13     41.31    -4.20% 
  
  
     Rec'd   #  Security     In At     Value    Change 
  
  12/31/97  206 Eastman Ko 12475.88  17458.50  $4982.63 
  12/31/97  291 Union Carb 12494.81  13622.44  $1127.63 
  12/31/97  276 Philip Mor 12489.00  12075.00  -$414.00 
  12/31/97  289 Int'l Pape 12463.13  11939.31  -$523.81 
  
  
                              CASH    $754.73 
                             TOTAL  $55849.98