Volatility can be an important measure of investment risk both market-wide and for an individual stock. If a stock has a relatively large price range over a short time period, it is considered highly volatile and may expose customer to increased risk of loss, especially if you sell for any reason when the price is down.
Things you should know when trading in a volatile market
System & Quote
- Online trading has inherent risk due to system response and access times that may vary due to market conditions and volatility, system performance, and other factors. An investor should understand these and additional risks before trading. Stay alert and consider your risk tolerance. Carefully consider the investment objectives, risks, charges and expenses before investing. All investments involve risk and losses may exceed the principal invested. Past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns.
- System response and access times may vary due to market conditions, system performance, and other factors. Orders entered during fast market conditions, communication outages or delays, when the stock is trading in a locked, crossed, or halted market, or orders stopped for price improvement are ineligible. Orders entered during communication or other system interruptions at Firstrade or the market center where the order was routed for execution do not qualify.
- During periods of high volume, illiquidity, fast movement or volatility in the marketplace, the execution price received may differ from the quote provided on entry of an order, and customer may receive partial executions of an order at different prices.
- The price quotes generally are for only a small number of shares as specified by the marketplace, and larger orders are relatively more likely to receive executions at prices that vary from the quotes or in multiple lots at different prices.
- Firstrade is not liable for any price fluctuations.
- Execution price, speed, and liquidity are affected by many factors, including market volatility, size and type of order and available market centers. Fast market conditions can cause an execution price to deviate from the quote displayed at order entry. There is no guarantee for prices on market orders.
Market orders vs. limit orders in volatile markets
- Market order:
To execute market orders fully and promptly without regard to price and that, while a customer may receive a prompt execution of a market order, the execution may be at a price significantly different from the current quoted price for that security. To avoid buying a security at a higher price and possibly exceeding the margin buying power, please review “limit order”. The limit orders may not be executed at any particular time, or at all, if there is not sufficient trading at or better than the limit price specified by customer and are only good until the end of the trading day in which they are entered.
- Limit order:
The limit order will be executed only at the specified limit price or better and that, while the customer receives price protection, there is the possibility that the order will not be executed.
Risks of stop orders in volatile markets
- Stop prices are not guaranteed execution prices.
A “stop order” becomes a “market order” when the “stop price” is reached and firms are required to execute a market order fully and promptly at the current market price. Therefore, the price at which a stop order ultimately is executed may be very different from the investor’s “stop price.” Accordingly, while a customer may receive a prompt execution of a stop order that becomes a market order, during volatile market conditions, the execution may be at a significantly different price from the stop price if the market is moving rapidly.
- Stop orders may be triggered by a short-lived, dramatic price change.
During periods of volatile market conditions, the price of a stock can move significantly in a short period of time and trigger an execution of a stop order (and the stock may later resume trading at its prior price level). Investors should understand that if their stop order is triggered under these circumstances, they may sell at an undesirable price even though the price of the stock may stabilize during the same trading day.
- Sell stop orders may exacerbate price declines during times of extreme volatility.
The activation of sell stop orders may add downward price pressure on a security. If triggered during a precipitous price decline, a sell stop order also is more likely to result in an execution well below the stop price.
- Placing a “limit price” on a stop order may help manage some of these risks.
A stop order with a “limit price” (a “stop limit” order) becomes a “limit order” when the stock reaches the “stop price.” A “limit order” is an order to buy or sell a security for an amount no worse than a specific price ( i.e., the “limit price”). By using a stop limit order instead of a regular stop order, a customer will receive additional certainty with respect to the price the customer receives for the stock. However, investors also should be aware that, because brokers cannot sell for a price that is lower (or buy for a price that is higher) than the limit price selected, there is the possibility that the order will not be executed at all. Customers should be encouraged to use limit orders in cases where they prioritize achieving a desired target price more than getting an immediate execution irrespective of price.
Margin Risk & Margin Liquidation
Margin trading involves interest charges and risks, including the potential to lose more than deposited or the need to deposit additional collateral in a falling market. Before using margin, customers must determine whether this type of trading strategy is right for them given their specific investment objectives, experience, risk tolerance, and financial situation. For more information, please see Margin Disclosure Statement, Margin Agreement, FINRA Investor Information. These disclosures contain information on our lending policies, interest charges, and the risks associated with margin accounts.
Firstrade or Apex retains absolute discretion to determine whether, when, and in what amounts, will require additional collateral. In some situations, Apex may find it necessary to require a higher level of equity in your account. For example, Apex may require additional collateral if an account contains:
- Only one security or a large concentration of one or more securities; or
- Low-priced, thinly traded securities; or
- Volatile securities; or if
- Some of your collateral is or becomes restricted or non-negotiable or non-marginable. Firstrade or Apex also may consider market conditions and your financial resources.
The higher margin requirement stock list is subject to change without prior notice and margin requirements may change without this list being updated.
For Firstrade and Apex protection against credit risks and other conditions, we may, without prior notice, decline to accept your orders or instructions or we may place restrictions on your account. You acknowledge that any order you place which Firstrade, in its sole discretion, deems to be disruptive to the securities markets, unusual in size, type or credit risk or which exceeds Firstrade's usual authorized limits may be subject to rejection, cancellation or modification.
Additional information, please review:
- Special Margin Requirement
- Trading in Fast Market Condition
- Firstrade Margin Agreement
- Firstrade Margin Disclosure Statement
- Firstrade Day-Trading Risk Disclosure Statement
- Firstrade Account Agreement