BUYING STOCK

To a seasoned investor, buying a stock seems so obvious. But one of the most basic aspects of buying a stock, actually paying for it, is a question many new investors have. Can you use credit card? How long before you have to pay for it? Do I need money in the account first? Here are some answers.

When you first open an account, it will most likely be a cash account. That means you settle trades in cash. A stock trade settles three days after the trade date, or the day you actually enter the order and buy a stock.

But you may not be able to enter an order to buy a stock without having money in your account first. That's because you don't have a track record of paying for stock with the broker. If your credit is outstanding and can be demonstrated through a credit check, you'll probably be allowed to buy up to a certain amount of stock, say up to $2500 or so. But most people will have to deposit the amount of money they'd like to invest before they enter an order to buy a stock.

That means you have to send a check (the most common way of paying for stock) to your broker or deliver it in person if there is a branch nearby and have that check clear before you can buy a stock. You'll earn interest on your deposit on the day you hand over the check so you won't lose any interest income on your funds. Once the check is cleared and the money is free and clear in your brokerage account, you can enter an order to buy a stock for up to the amount of money you've deposited.

You may find a broker who isn't this cautious and will allow you to enter an order with no money in your account, but that is the exception. Again, you are not known to the broker so you must establish a pattern of payment for your stocks. That's why it's important to make sure you have the funds in your account before you do the trade. Then, as you do more trades and you have some securities in your account, you'll be able to enter buy orders without putting money in your account first. Then it's important that you pay the future purchases on time.

This part can't be emphasized strongly enough. Make sure your payments for your trades, usually checks, are made by the third business day after you purchase a stock. Don't mail the check on the settlement day or even the day before. The check has to be in the broker's hands by settlement date.

That's because someone has sold the stock to you, and that party is looking for its money, just as you would if you sold a stock. So if the broker doesn't have your money to give to the selling broker, it has to pay the money from its own account. Brokers hate to do that (just as you and I do when we have to "cover" for someone else's commitments). That's why you have to have the money in your account by settlement date. Brokers don't want to have to write a check from their own account for you. They want your money because you entered the order and are now responsible for the trade. Conversely, when you sell a stock, and you want your money on settlement date, you will receive it, whether or not the broker has received it from the person to whom the stock was sold. It works both ways.

If you don't pay for your purchases on time, your account becomes restricted. That means you can only buy securities if the money is in the account before you enter the trade. A restricted account can be a real pain, especially if you want to take advantage of a market dip. By making sure your checks are in by settlement date, you won't have to worry about having your account restricted.

And once in a while, an investor will not respond to a broker's calls to pay for stock. By the way, that's why you're not allowed to use a P.O Box in your application. The broker has to be able to reach you. You have to give an address and a phone number. When the broker is ignored after repeated tries to the client, the stock is sold out of the account. If there is a loss, the client is responsible for it. If there is a profit, the client must first pay for the stock before receiving the profit. And then the account is closed.

There's been some talk of using a credit card to buy stock, and some firms have offered this to highly credit worthy investors. But in general, it has not been widely used. Even if you have the opportunity, don't use your credit card to pay for stock. The interest on the borrowed money is at least 18% and if you make that in a year on a stock, you're doing very, very well. Also, there is always a fee for taking a cash advance which is what buying a stock is. And finally, you're borrowing money to buy something that might go down. Imagine owing the credit card and having a stock that's worth less than the debt. If this option is available, don't use it.

Buying stock is easy. You just have to keep certain dates in mind and develop a good pattern of paying for them. It makes buying and selling stocks in the future much easier

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