Making An Investment Order: A Step-By-Step Guide

Investing is the act of allocating resources, usually money, with the expectation of earning an income or profit. Before placing an investment order, it is important to understand the basics of investing and the different types of investment accounts. There are several ways to place an investment order, including through an investment firm, a brokerage firm, or online banking. When placing an order, it is crucial to ensure that there are sufficient funds in the account to cover the value of the order and any associated service costs. Different types of orders include market orders, limit orders, and stop orders, each with its own advantages and use cases.

Know the basics of investment accounts

Before placing an investment order, it is important to understand the basics of investment accounts. There are several types of investment accounts, each with its own advantages and considerations. Here are some key points to consider:

• Employer-Matching Contributions in Your Retirement Plan: If your employer offers matching contributions to your retirement plan (such as a 401(k)), this should be a priority. Taking advantage of employer matching contributions is like receiving free money. Be sure to understand the "vesting schedule," which outlines how long you need to stay with the company to keep the matching contributions.
• Employee Stock Purchase Plan (ESPP): If you work for a publicly traded company, they may offer an ESPP that allows you to purchase company stock at a discount. This can be a good opportunity to receive a gain, especially if there are no restrictions on when you can sell the stock. However, be mindful of the tax implications when selling.
• Roth IRA: A Roth IRA is a tax-efficient account where contributions are made on an after-tax basis. Any growth in the account is tax-free as long as you meet certain age and time requirements. Contributing to a Roth IRA helps reduce the uncertainty of future tax brackets.
• Traditional IRA: A Traditional IRA is suitable if you want to delay paying taxes. Contributions are generally made on a pre-tax basis, but you will owe taxes when you withdraw money in retirement. It's important to check your eligibility and understand the deduction limits for Traditional IRA contributions.
• Additional Retirement Plan Contributions: Even if you've maximised your employer's match, you can still contribute more to your retirement plan. Regular/Traditional 401(k) plans offer tax benefits similar to a Traditional IRA, while a Roth 401(k) offers benefits similar to a Roth IRA.
• 529 Education Savings Plan: This plan is ideal if you want to save money for your children's or grandchildren's education in a tax-efficient manner. Contributions are made on an after-tax basis, and any growth is generally not subject to federal or state tax when used for qualified education expenses.
• Health Savings Account (HSA): An HSA is a great option if you want to save money for future health-related expenses. HSAs offer a triple tax benefit: tax-deductible contributions, tax-deferred growth, and tax-free withdrawals for qualified medical expenses. Be sure to check your eligibility for an HSA, as you must be covered under a qualified high-deductible health plan.
• Taxable/Non-IRA Investment Account: If you've maximised your options in tax-efficient accounts and want to invest additional funds, a taxable/non-IRA investment account may be suitable. This type of account is also useful if you need access to your money for non-retirement, education, or health-related expenses. Consider using tax-efficient investments within this account, such as index exchange-traded funds (ETFs) or tax-free municipal bonds.

Understanding these basic investment account types will help you make informed decisions about where to allocate your money and how to place your investment orders effectively.

Understand the different types of orders

Understanding the different types of orders is crucial when you are investing. Here is a detailed overview of the main types of investment orders:

Market Order

Market orders are the most common type of investor order. They are an instruction to buy or sell a security immediately at the best available price. This type of order provides the most certainty that your order will be executed because it is not tied to any restrictions. A market order generally will execute at or near the current bid or ask prices in the marketplace during normal trading hours (9:30 a.m. to 4 p.m. Eastern Time). However, the price you pay may not match the quoted price, especially in fast-moving markets.

Limit Order

Limit orders are an instruction to buy or sell a security at or better than a specified price (the "limit price"). Limit orders are for investors who know the price they want and want to manage market risk. While market orders can leave you exposed to price changes, limit orders allow you to decide the price you want to buy or sell at. A buy limit order can only be executed at or below the limit price, and a sell limit order can only be executed at or above the limit price. This means you are guaranteed to get your limit price or a better price. However, there is a chance your order may not be executed at all if the market price does not match or beat your limit price while the order is active. Limit orders generally have higher execution costs than market orders.

Stop Order

Stop orders, also known as stop-loss orders, are an instruction to buy or sell a security once the price reaches a specified price (the "stop price"). When the stop price is reached, the order automatically turns into a market order and is executed as soon as possible at the current market price. There are different types of stop orders, including sell stop orders, buy stop orders, stop-limit orders, and trailing stop-loss orders. Investors use stop orders as a tool to manage market risk and limit losses or protect profit positions.

Additional Order Types

Other types of orders include immediate or cancel (IOC) orders, which must be executed very quickly, and good 'til canceled (GTC) orders, which remain active until they are executed or canceled. Take-profit orders are also used to lock in profits when a trade reaches a specific profit level.

Choose between Guided Investing and Self-Directed Investing

Guided Investing and Self-Directed Investing are two distinct approaches to investment that offer different levels of control, expertise, and costs. So, which one is right for you?

With Guided Investing, you will have access to experts who will manage your chosen fund. They will help you consider your options, set investment goals, and find the right risk profile and mandate. This option is ideal if you want to invest part of your money and have experts handle it on your behalf. Guided Investing provides a more hands-off approach, allowing you to benefit from the knowledge and experience of professionals. The fees tend to be higher with Guided Investing, as you are paying for their expertise and advisory services.

On the other hand, Self-Directed Investing gives you more control and autonomy over your finances. You decide what to invest in and when to buy or sell. This approach usually involves lower costs than managed brokerage accounts, and you can get started with online guidance. However, it requires more time and effort, as well as a strong understanding of financial markets and investment strategies. Self-Directed Investing also carries higher risks, as you are solely responsible for your investment decisions.

Both options have their advantages and considerations. Guided Investing may be preferable if you want expert advice and a more hands-off approach, while Self-Directed Investing offers more control and lower costs but requires more time and knowledge. Ultimately, the choice depends on your level of investment knowledge, the amount of time you want to dedicate to investing, and your risk tolerance.

Ensure sufficient funds in the settlement account

When making an investment order, it is crucial to ensure that your settlement account has sufficient funds to cover the value of your orders and any associated service costs. A settlement account is typically your Investment Savings Account or current account, and it serves as the source from which funds are deducted when placing orders.

The importance of maintaining adequate funds in your settlement account becomes even more evident when setting up periodic orders. For each period, there must be enough money in the settlement account to execute the periodic deposit. If there are insufficient funds during a particular period, the periodic deposit for that time is not carried out. However, if the settlement account has sufficient funds in the following period, the periodic deposit resumes as usual.

To avoid potential issues, it is recommended to plan ahead and maintain a balance in your settlement account. This proactive approach increases the likelihood of having the necessary funds to pay for purchases on the settlement date. Additionally, it reduces the risk of your trades being rejected due to insufficient funds and helps prevent restrictions from being placed on your account as a result of committing trading violations.

By following these guidelines and ensuring sufficient funds in your settlement account, you can confidently place investment orders, knowing that you have the financial backing to cover your transactions and associated costs.

Understand tax implications and benefits

Capital gains tax

Capital gains tax is levied on the profits from the sale of an asset, such as shares of stock, a piece of land, or a business. This is generally considered taxable income, and the rate you pay depends on how long you held the asset before selling. For assets held for more than a year, the tax rate is typically 0%, 15%, or 20%. For assets held for less than a year, capital gains taxes correspond to ordinary income tax rates, which are usually higher.

To minimize capital gains taxes, you can use a strategy called tax-loss harvesting, where you offset gains with losses. For instance, if you sell a stock for a $10,000 profit and another at a $4,000 loss in the same year, you will only be taxed on a capital gain of $6,000.

Dividend tax

Dividends are usually taxable in the year they are received and are considered ordinary income. There are two types of dividends: non-qualified and qualified. Non-qualified dividends are taxed at the same rate as your regular income tax bracket, while qualified dividends are usually taxed at a lower rate of 0%, 15%, or 20%, depending on your taxable income and filing status.

To minimize dividend taxes, consider holding investments for a certain period to qualify for lower tax rates. Additionally, setting aside cash for tax payments can help avoid a cash crunch when the tax bill arrives. Alternatively, holding dividend-paying investments inside a retirement account can defer taxes.

Taxes on investments in a 401(k)

With a traditional 401(k), you don't pay taxes on contributions or investment gains while the money is in the account. Taxes are only due when you make a withdrawal, and the money is taxed as regular income. Withdrawing before the age of 59 ½ may incur a 10% penalty on top of regular taxes, unless you meet specific exceptions.

On the other hand, with a Roth 401(k), you pay taxes upfront, and qualified distributions in retirement are not taxed.

Tax on mutual funds

Mutual fund investments may be subject to taxes on dividends and capital gains distributed by the fund, as well as capital gains taxes when you sell the fund shares.

To minimize taxes on mutual funds, consider holding the shares for at least a year to benefit from potentially lower capital gains tax rates. Additionally, holding mutual fund shares inside a retirement account can defer taxes on interest, dividends, or gains distributed by the fund. Tax-loss harvesting and choosing funds less likely to distribute taxable income are other strategies to reduce your tax burden.

Tax on the sale of a house

When you sell your primary residence, you may be able to exclude up to $250,000 of capital gains if you're single or $500,000 if you're married and filing jointly. To qualify for this exclusion, you must meet certain criteria, such as having owned and lived in the home for a specified period.

Frequently asked questions