Limit Orders

I wanted to do a quick post for those of you who may not know what a limit order is. This is a very important term for if you are going to buy stocks or ETF's.

Most brokerages should offer you limit orders for Free - if they don't, then you want to find another place to buy your stocks. This does not include sharebuilder, because they have a different way of buying stocks.

Limit Order lets you set a price that you want to pay for a stock (or sell a stock at) without you having to watch the market and time the buy/sell correctly. Who has the time to do that anyways?

For example, say you want to by share of GE and the current price is $19, but you have seen it fluctuate over the last few days. So you decide you only want to pay $18.50 per share. You set that as your limit order and just set it as Good until Canceled. Then the brokerage (well, their computers) do all the work - as soon as it gets to that price, it will buy it for you - even if it was only that low for like 3 minutes....

Yesterday, the market started off low and I had some limit orders in for some ETF's in our Roth IRA, It bought those at the low price before I even got out of bed, and by the time I was out of bed, the stock market had gone back up. That is why Limit Orders can help save you a lot of money!

The same can go for when you want to sell - in fact, is is about the ONLY way I would sell stocks. Say you own GE (just to keep the same stock example) but you think it will go to $20 and it is only $19. Set your sell price at $20 and as soon as it hits that, if only for a moment, then you will get your stocks sold at the price YOU want - you are sure of the amount of money you will make for that sale.

So be sure to use limit orders when buying (except for sharebuilder) or selling stocks/ETF.

ETF

I have a new love of my financial life and they are ETF's.

The company we used for our Roth IRA (and our Roth 401K, but I have no control over what funds I can buy in there), Fidelity, recently started offering a few ETF's commission free, so it costs you nothing to buy them... and it is not just because they each have made me 3% in the week I have owned them (it was a good week), but that always helps :)

ETF stands for Exchange Traded Fund. They trade like a stock, but are like a mutual fund in that they hold a basket of stocks in one fund. You can buy them at anytime during the day, like a stock, but they are like a mutual fund in that they to follow a certain index or sector. There is usually no minimum because you buy the shares like you would any single stock. It is a great way to diversify over an index or sector instead of buying individual stocks without having the minimums that most mutual funds require.

The most important thing about them is that they have a VERY LOW expense ratio! I sold about 3/4 of one of the mutual funds we held in our IRA to buy 4 different ETF's (a large cap, a mid cap, a small cap, and a foreign based ETF's) Large, medium, and small cap, just refers to the size of the companies are involved in that index. The expense ratio for the iShares S&P500 (large cap) one I bought is a measly .09% and already has a YTD performance of a little over 7% (the mid and small cap ones I bought so far have a YTD 12% return! I have only owned them a couple of weeks though)

To put that in perspective, the fund that I sold had a .75% expense ratio. So in a year, let's say I had 10,000 in it, to make it even numbers. I would pay $75 in expenses compared to only $9 with the ETF. $66 a year - or if that money was invested (and you never added anything to that initial 10,000 and it was consistently $66 more a year for the more expensive fund), it would come to a little over $8300 in 30 years!

That is why expense ratio is so important and you should look for funds with good returns and LOW expense ratios (less than 1% is ideal, but as you can see, the lower you can get it and still get a good fund/return, the more overall you will earn) FYI- foreign funds often have higher expense ratios than other funds - but they usually have great returns (But are riskier) and you should have them as part of your overall portfolio - I'll talk about foreign funds more in another post