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October 12, 1998

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Subject: Re: Waterhouse Trading Options
Author: RheS

marvinq wonders: "I just signed up with Waterhouse and I have a few questions on to actually start trading."

tiger22 replied, "Do yourself a BIG favor - Start reading some books about stocks...."

Yeah, Marvin has some pretty basic questions. And he probably needs more background than we can fit in the little reply box. But it might be nice to answer his specific questions, anyway. Here goes.

"...in the sites quote system there is a column called 'Ask' What does 'Ask' mean?"

It's the "asking price," that is, the price that people who have a specific stock for sale are asking. The "Bid" price is the price that people who are willing to buy are offering. You'll notice that there is a slight difference between the two... when a buyer matches the ask price, or a seller will take the bid, then there's a sale. What this normally means is that one buys at the ask, and sells at the bid. The two prices shift up and down essentially together as new orders arrive at the market.

Having both bid and ask prices gives you a slightly better picture of what's going on this instant with a particular price. When you only hear one price, you might guess that it's the price of the last actual trade, but you can't be sure unless there's more clarification.

"...sell short' and 'buy to cover'?"

These both have to do with short sales. A short sale is selling stock you don't have (you borrow some from your broker), and then buying it back later (to repay your broker with). This works if you buy it for less than you sold it. It's considered somewhat more risky (because what if it goes way up... you must buy it eventually!), but you'll find that the Fool approves of the technique, at least occasionally. There's a chapter about it in the The Motley Fool Investment Guide, and you'll find one in the online "13 Steps" as well.

Anyway, selling short is asking your broker to loan you some shares, and "buy to cover" is buying shares to "cover the short" and pay the broker back. Your broker will require a margin agreement before they let you sell short... loaning you shares is just as risky for them as loaning you money (margin), so they want to ask more questions. Sometimes there's an additional agreement specific to shorting, as well.

"Shares at Waterhouse? Yes or No... What does selecting yes here mean?"

I'm not a Waterhouse customer, and haven't seen the Waterhouse web site, so I'm not 100% sure about this, but it's probably asking if the shares (for a sale of stock) are already being held by Waterhouse for you. If not, you have 3 days (until the "settlement date") to get them there. Some brokers (especially the most discount ones) require that the shares already be in your account before they sell them, or the money be in your account before they buy for you. This is probably a good idea anyway, unless you can hand deliver, or are willing use some expensive method faster than the Postal Service.

Let me add that you probably want your broker to hold your shares, unless you're participating in a DRIP, or have some other special reason (like Berkshire Hatheway's directed charity donation program, which requires you to own the shares in your own name) to take delivery of the stock certificates. Yes, the certificates are interesting looking, but your broker has pretty massive insurance against losing them, whereas if you lose them, it's a big pain. Some brokers charge a fee for delivering certificates (although I think Waterhouse does not).

Back to generalities

Marvin, I've just looked at your profile, and noticed that you've been working your way forward asking fairly general questions. I can see progress through broker selection, and now your account is open, and you're getting close to the big, scary day. Since you've said you're interested in the F4 strategy, you must be reading some of the Fool's material. But I think it might be helpful to you to reread either (or both of) The Motley Fool Investment Guide book, or the Fool's School at

http://www.fool.com/school.htm

which covers the "13 Steps to Investing." Your short sale question, for example, is covered in Foolish step 11. Like I said, I know you've been in there some, because you've gotten to the Foolish Four, but now that you've got the Waterhouse paperwork and web site in front of you, give it another scan. It will all be clearer.

But we'll still be here to try and help, if you need us. Although we'll be expecting you to join in soon, and help the next newbie.

Best wishes, and good investing,

Dick Smith


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