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The Investment FAQ (part 17 of 20)

( Part1 - Part2 - Part3 - Part4 - Part5 - Part6 - Part7 - Part8 - Part9 - Part10 - Part11 - Part12 - Part13 - Part14 - Part15 - Part16 - Part17 - Part18 - Part19 - Part20 )
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Archive-name: investment-faq/general/part17
Version: $Id: part17,v 1.62 2005/01/05 12:40:47 lott Exp lott $
Compiler: Christopher Lott

See reader questions & answers on this topic! - Help others by sharing your knowledge
The Investment FAQ is a collection of frequently asked questions and
answers about investments and personal finance.  This is a plain-text
version of The Investment FAQ, part 17 of 20.  The web site
always has the latest version, including in-line links. Please browse

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Neither the compiler of nor contributors to The Investment FAQ make
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provided to the user "as is".  Neither the compiler nor contributors
warrant that The Investment FAQ will be error free. Neither the
compiler nor contributors will be liable to any user or anyone else
for any inaccuracy, error or omission, regardless of cause, in The
Investment FAQ or for any damages (whether direct or indirect,
consequential, punitive or exemplary) resulting therefrom.  

Rules, regulations, laws, conditions, rates, and such information
discussed in this FAQ all change quite rapidly.  Information given
here was current at the time of writing but is almost guaranteed to be
out of date by the time you read it.  Mention of a product does not
constitute an endorsement. Answers to questions sometimes rely on
information given in other answers.  Readers outside the USA can reach
US-800 telephone numbers, for a charge, using a service such as MCI's
Call USA.  All prices are listed in US dollars unless otherwise
Please send comments and new submissions to the compiler.

--------------------Check for updates------------------

Subject: Technical Analysis - Information Sources

Last-Revised: 12 Dec 1996
Contributed-By: (Original author unknown), Chris Lott ( contact me )

This article lists some sources of information for technical analysis,
including books, magazines, and courses. 

Books on Technical Analysis:

   * Design, Testing, and Optimization of Trading Systems by Robert
     Pardo.  Published by John Wiley & Sons, Inc. 
   * The Disciplined Trader by Mark Douglas of NYIF - 1990.  ISBN
   * Elliott Wave Principle by A.  J.  Frost and Robert Prechter, New
     Classics Library, ISBN: 0-932750-07-9. 
   * Encyclopedia of Technical Market Indicators by Robert Colby and
     Thomas Meyers, Dow Jones Irwin. 
   * Market Wizards by Jack Swager
   * The Mathematics of Technical Analysis by Clifford Sherry, 1992
     Probus Publishing, ISBN 1-55738-462-2
   * New Market Wizards by Jack Swager
   * Patterns for Profits by Sherman McClellan, Foundation for the Study
     of Cycles, 900 W.  Valley Rd.  Suite 502, Wayne, PA 19087,
   * Proceedings, Second Annual conference on Artificial Intelligence
     Applications on Wall Street, Roy S.  Freedman, Ed.  NYC, April
     19-22, 1993, Pub: Software Engineering Press, 973C Russell Ave,
     Gaithersburg, MD 20879, (301) 948-5391. 
   * Secrets for Profiting in Bull and Bear Markets, by Stan Weinstein,
     Dow Jones-Irwin. 
   * Technical Analysis, by Clifford Sherry, 1992 Probus Publishing,
     ISBN 1-55738-462-2. 
   * Technical Analysis Explained, by Martin J.  Pring, McGraw-Hill, 3rd
     ed.  1991, ISBN 0-07-051042-3. 
   * Technical Analysis of the Futures Markets, by John J.  Murphy of NY
     Institute of Finance, Prentice Hall, 1986, ISBN 0-13-898008-X. 
   * Study Guide for Technical Analysis of the Futures Markets: A
     self-training manual, by John Murphy (the most comprehensive book
     on the subject). 
   * Technical Analysis of Stock Trends, by Edwards and Magee (a serious
     study of classical charting techniques). 
   * The Major Works of R.  N.  Elliott, edited by Robert Prechter, New
     Classics Library. 
     TECHNICAL ANALYSIS, by Weiss Research (a good introductory text for
     those using METASTOCK PROFESSIONAL and want to make money with it). 

Sources for books on technical analysis:
   * TRADERS PRESS, INC., P.O.  BOX 10344, Greenville, S.C.  29603,
     (800)927-8222, (803)-298-0222, FAX: (803)-298-0221.  Offer a 40+
     page catalog, nice folks, great service.  VI/MC/AX accepted. 
   * TRADER'S WORLD, 2508 Grayrock Street, Springfield, MO 65810,
     (800)288-4266, (417) 298-0221.  Puts out a quarterly magazine
     (mostly junk) with discounted Technical Analysis books (usually 10%
     cheaper than elsewhere).  VI/MC/AX accepted. 
   * New Classics Library, Inc., P.O.  Box 1618, Gainesville, GA 30503. 

Books on options pricing:

   * Continuous Time Finance, by Robert Merton
   * The Elements of Successful Trading, by Rotella, Robert P., 1992
   * Options as a Strategic Investment, by McMillan, Lawrence G., New
     York Inst.  of Finance, 2nd edition, 1986, ISBN 0-13-638347-5. 
   * Options Markets, by Cox, J.C and Rubenstein, M., Prentice-Hall,
   * Options: Essential Trading Concepts and Trading Strategies, Edited
     by The Options Intsitute, 1990, Business One Irwin, ISBN
   * Options, Futures, and Other Derivative Securities, by Hull, J.,
     Prentice-Hall, 1989. 
   * Options: Theory, Strategy, and Apllications, by Ritchken, P, Scott,
     Foresman, 1987. 
   * Option Pricing, by Jarrow, R.  A., Irwin, 1983. 
   * Option Volatility and Pricing Strategies, by Natenberg, Shelly
   * Theory of Financial Decision Making, by Ingersoll

Magazines on technical analysis:

   * Technical Analysis of Stocks & Commodities
     4757 California Ave.  SW, Seattle, WA 98116-4499, 800-832-4642,
     (206) 938-0570.  1 yr.  - $64.95 -- 12 issues
     Everything explained at the level of the beginner, however you
     should complete a course before getting this magazine.  Best part
     is building a library by buying the bound back issues -- worth
     every penny. 
   * Futures - commodities, options & derivatives
     800-221-4352 Ext.  1000
     1 yr.  - $39.00 - 12 issues
   * NeuroVe$t Journal
     Pub.  by Randall B.  Caldwell, PO Box 764, Haymarket, VA
     22069-0764, email:
     $75(US)/yr, published bi-monthly
   * Traders Cataloge and Resource Guide
     $39.50 year. 
   * Traders World Magazine
     Published every 3 months, $15 per year

A self-paced course on technical analysis:

The Technical Analysis Course by Thomas Meyers
An introductory course covering: Stochastics, RSI, Trendline/chanels,
Support/resistance, Point and Figure, Oscillators, Moving averages,
Volume & Open Interest, Chart construction, Gaps, Reversal Patterns, and
Consolidation formations.  Easy read for someone new that doesn't want
to be intimidated. 

--------------------Check for updates------------------

Subject: Technical Analysis - MACD

Last-Revised: 25 Nov 1998
Contributed-By: (Original author unknown), Chris Lott ( contact me ),
Jack Hershey (jhershey at

The Moving Average Convergence/Divergence (MACD) was invented by Gerald
Appel sometime in the sixties and comes in various flavors, but most are
based on a technique developed by McClellan (which he based on a
technique developed by Haurlan).  The technique is to take the
difference between two exponential moving averages (EMA's) with
different periods.  This produces what's generally referred to as an
oscillator.  An oscillator is so named because the resulting curve
swings back and forth across the zero line. 

Appel's version used the difference between a 12-day EMA and a 25-day
EMA to generate his primary series.  This series was plotted as a solid
line.  Then he took a 9-day EMA of the difference and plotted that as a
dotted line.  The 9-day EMA trails the primary series by just a bit, and
trades are signalled whenever the solid line crosses the dotted line. 

For more volatile markets, you may want to shorten the periods of the
EMA's.  I seem to remember one trader that used an MACD on futures data
with 7-day and 13-day for the primary series and a 5-day EMA of that for
the trailing curve.  I also know a fellow who runs an MACD on the adline
(advancing issues minus declining issues). 

--------------------Check for updates------------------

Subject: Technical Analysis - McClellan Oscillator and Summation Index

Last-Revised: 23 Dec 1997
Contributed-By: Tom McClellan

In 1969, Sherman and Marian McClellan developed the McClellan Oscillator
and its companion tool the McClellan Summation Index to gain an
advantage in selecting the better times to enter and exit the stock
market.  This article gives a brief overview of the McClellan Oscillator
and Summation Index. 

Every day that stocks are traded, financial publications list the number
of stocks that closed higher (advances) and that closed lower
(declines).  The difference between these numbers is called the daily
breadth.  The running cumulative total of daily breadth is known as the
Daily Advance-Decline Line.  It is important because it shows great
correlation to the movements of the stock market, and because it gives
us another way to quantify the movements of the market other than
looking at the price levels of indices. 

Another indicator is called the daily breadth.  Each tick mark on a
daily breadth chart represents one day's reading of advances minus
declines.  In order to identify the trend that is taking place in the
daily breadth, we smooth the data by using a special type of calculation
known as an exponential moving average (EMA).  It works by weighting the
most recent data more heavily, and older data progressively less.  The
amount of weighting given to the more recent data is known as the
smoothing constant. 

We use two different EMAs: one with a 10% smoothing constant, and one
with a 5% smoothing constant.  These are known as the 10% Trend and 5%
Trend for brevity.  The numerical difference between these two EMAs is
the value of the McClellan Oscillator. 

The McClellan Oscillator offers many types of structures for
interpretation, but there are two main ones.  First, when the Oscillator
is positive, it generally portrays money coming into the market;
conversely, when it is negative, it reflects money leaving the market. 
Second, when the Oscillator reaches extreme readings, it can reflect an
overbought or oversold condition. 

While these two characteristics are very important, they merely scratch
the surface of what interpreting the Oscillator can reveal about the
stock market.  Many more important structures are outlined in the book
Patterns For Profit by Sherman and Marian McClellan, available from
McClellan Financial Publications. 

If you add up all of the daily values of the McClellan Oscillator, you
will have an indicator known as the McClellan Summation Index.  It is
the basis for intermediate and long term interpretation of the stock
market's direction and power.  When properly calculated and calibrated,
it is neutral at the +1000 level.  It generally moves between 0 and
+2000.  When outside these levels, the Summation Index indicates that an
unusual condition is taking place in the market.  As with the
Oscillator, the Summation Index offers many different pieces of
information in order to interpret the market's action. 

Among the most significant indications given by the Summation Index are
the identification of the end of a bear market and the confirmation of a
new bull market.  Bear markets typically end with the Summation Index
below -1200.  A strong rise from such a level can signal initiation of a
new bull market.  This is confirmed when the Summation Index rises above
+2000.  Past examples of such a confirmation have resulted in bull
markets lasting at least 13 months, with the average ones lasting 22-24

The McClellans publish a stock market newsletter called The McClellan
Market Report.  Sherman McClellan and his wife Marian McClellan were the
originators of the McClellan Oscillator; Tom McClellan is their son. 

For more information, please contact Tom McClellan at (800) 872-3737, or
visit the web site at . 

--------------------Check for updates------------------

Subject: Technical Analysis - On Balance Volume

Last-Revised: 27 Feb 1997
Contributed-By: Y.  D.  Charlap, Scott A.  Thompson (satulysses at

On Balance Volume is a momentum indicator that relates volume to price
changes.  It is calculated by adding the day's volume to the cumulative
total when the security's price closes up, and subtracting the day's
volume when the price closes down.  The scale is not of any value; only
the slope (i.e., the direction) of the line is of value. 

The theory is that the trend of this indicator precedes price changes. 
This indicator was pioneered by that famous (?) market maven Joseph

--------------------Check for updates------------------

Subject: Technical Analysis - Relative Strength Indicator

Last-Revised: 17 July 2000
Contributed-By: (Original author unknown), Chris Lott ( contact me ), C. 
K.  Krishnadas (ckkrish at

The Relative Strength Indicator (RSI) was developed by J.  Welles Wilder
in 1978.  This indicator is one of a family of indicators called
oscillators because it varies (oscillates) between fixed upper and lower
bounds.  This particular indicator is supposed to track price momentum. 

Wilkder's relative strength indicator is based on the observation that a
stock which is advancing will tend to close nearer to the high of the
day than the low.  The reverse is true for declining stocks. 

It's easy to confuse Wilder's relative strength indicator with other
relative strength figures that are published.  Wilder's indicator
compares the price performance of a stock to that of itself and might be
more appropriately called an "internal strength index".  Other similarly
named indicators compare a stock's price to some stock market index or
to another stock. 

This indicator has evolved into several forms, but Wilder's RSI is
generally regarded as the most useful.  The oscillator is indexed from 0
to 100, and like all oscillators it indicates overbought and oversold
readings.  The RSI oscillator is most useful in a trading channel,
especially those with deeply pronounced crests and troughs.  Trending
prices tend to distort overbought and oversold signals because indicator
readings will be skewed off-center from a neutral reading of "50". 

Very basically, "buy" signals are considered to be readings of 30 or
less (the security is considered oversold) and "sell" signals are
considered to be RSI values of 70 or greater (the security is considered
overbought).  Depending on the technician and price volatility, there
are various other qualifiers and nuances that can be incorporated into a
signal.  For example, in very volatile markets, the bounds of 20 and 80
might be used to judge oversold and overbought conditions. 

Another aspect of this indicator that is commonly varied is the period
over which the indicator is calculated.  Wilder began with 14 periods,
but other values are common (e.g., 9 and 25). 

The formula is as follows:
                        Average price change on up days         
    Relative Strength = ---------------------------------
                        Average price change on down days               
The indicator (RSI) is calculated from the RS value as follows:
    RSI  =  100 -  ------
                   1 + RS
Now that you have the general idea, you probably want to calculate some
RSI values for stocks you're following.  Perhaps the easiest way is to
visit one of the web sites shown at the end of this article.  But if
you're really determined to compute it yourself, here's one way to do
    RS  =  P / N    

    P   =  PS / n1                    N   =  NS / n2

    PS  =  Total of PCi values        NS  =  Total of NCi values

    PCi =  positive price change      NC  =  negative price change
           for period i                      for period i

    Pp  =  previous value of P        Np  =  previous value of N
           (initially 0)                     (initially 0)

    n1  =  number of times the price changed in the positive 
           direction in the last n periods.   There will be n1 PCi 
           values to add together to get PS. 

    n2  =  number of timee the price changed in the negative 
           direction in the last n periods.    There will be n2 NCi 
           values to add together to get NS. 

    n   =  n1 + n2  (the number of periods in the RSI calculation)
Basically you can calculate both PCi and NCi for every day.  One or both
of PCi and NCi will be zero.  This makes it fairly straightforward to
enter the computation in a spreadsheet.  To make it easy to count the
values in a spread sheet, use an "if" statement for each that will yield
blank if appropriate.  Then use Excel's count() macro, which counts only
cells with numbers and ignores blanks.  Here are the formulas; of course
you will have to replace "this_price" and "previous_price" by approprate
cell references. 
   * PCi:
     IF( this_price - previous_price > 0, this_price - previous, "" )
   * NCi:
     IF( this_price - previous_price < 0, this_price - previous, "" )
The first non-zero period of PS and NS is computed by doing a simple
moving average of the PC and NC of the previous n periods according to
Wilder's formula. 

Remember to skip the first n points before starting the RSI
calculations.  Also remember that the first time PS and NS are
calculated, they are simple moving averages of the last n PC's and NC's
respectively.  That's where most mistakes are made. 

Here are some resources on RSI. 
   * The May 2000 issue of AAII Journal included a 5-page article about
     RSI with examples (they have a two-week free trial membership).
   * BigCharts offers a free interactive charting feature that includes
     (among many others) RSI.
   * The original book by J.  Welles Wilder
     New Concepts in Technical Trading Systems

--------------------Check for updates------------------

Subject: Technical Analysis - Stochastics

Last-Revised: 25 Nov 1998
Contributed-By: (Original author unknown), Chris Lott ( contact me )

This article gives the formula for stochastics.  The raw stochastic is
computed as the position of today's close as a percentage of the range
established by the highest high and the lowest low of the time period
you use.  The raw stochastic (%K) is then smoothed exponentially to
yield the %D value.  These calculations produce the original or fast
%K = 100 [ ( C - L5 ) / ( H5 - L5 ) ]
where: C is the latest close, L5 is the lowest low for the last five
days, and H5 is the highest high for the same five days
%D = 100 x ( H3 / L3 )
where: H3 is the three day sum of ( C - L5 ) and L3 is the 3-day sum of
( H5 - L5 )

--------------------Check for updates------------------

Subject: Trading - Basics

Last-Revised: 1 Jan 2004
Contributed-By: Chris Lott ( contact me )

This article offers a very basic introduction to stock trading.  It goes
through the steps of buying and selling shares, and explains the
fundamental issues of how an investor can make or lose money by buying
and selling shares of stock.  This article will simplify and generalize
quite a bit; the goal is to get across the basic idea without cluttering
the issue with too many details.  In some places I've included links to
other articles in the FAQ that explain the details, but feel free to
skip those links the first time you read over this. 

You may know already that a share of stock is essentially a portion of a
company.  The stock holders are the owners of a company.  In theory, the
owners (stock holders) make money when the company makes money, and lose
money when the company loses money.  Once there was age of internet
stocks where companies lost lots of money but the shareholders still
made lots of money (and then lost money themselves), but let's just say
that the main trick is to buy only stocks that go up. 

Next we will walk through a stock purchase and sale to illustrate how
you, an investor in stocks, can make money--or lose money--by buying and
selling stocks. 
  1. One fine day you decide to buy shares of some stock, let's pick on
     AT&T.  Maybe you think that company will soon return to being the
     all-powerful, highly profitable "Ma Bell" that it once was.  Or you
     just think their ads are cool.  So now what?
  2. Although there are many ways to buy shares of stock, you decide to
     take the old-fashioned route of using an old-fashioned stock broker
     who has an office in your town and (imagine!) takes your phone
     calls.  You open an account with your friendly broker and deposit
     some good old-fashioned cash.  Let's say you deposit $1,000. 
  3. You ask your broker about the current market price quoted for AT&T
     shares.  Your broker is a good broker, and like any good broker he
     knows that AT&T's ticker symbol is the single letter 'T'.  He
     punches T into his quote request system and asks for the current
     market price (supplied from the New York Stock Exchange, where T is
     primarily traded), and out pops a price of 20.25 (stocks were once
     quoted as fractions like 1/4 but are now done with decimals). 
     Looks like your $1,000 will buy almost 50 shares, but because this
     is your very first stock trade, you decide to buy just 10 shares. 
  4. You ask your broker to buy 10 shares for you at the current market
     price.  In the lingo of your broker, you give a market order for 10
     shares of T.  Your broker is a nice guy and only charges a
     commission on a single stock trade of $30 (not too bad for someone
     who takes your phone calls).  Your broker enters the order, and his
     computer then figures the price you will ultimately pay for those
     10 shares, which is 10 (the number of shares) times 20.25 (the
     current price for the shares on the open market) for a total of
     202.50, plus 30 (the broker's commission, don't forget he has to
     eat too), for a grand total of $232.50. 
  5. Then magic happens: your broker instantly finds someone willing to
     sell you 10 shares at the current market price of 20.25 and buys
     them for you from that someone.  Your broker takes money from your
     account and sends it off to that someone who sold you the shares. 
     Your broker also takes his $30 commission from your account.  In
     the end, your hard-earned money is gone, and your account has 10
     shares of AT&T.  A (very small) fraction of the company, as
     represented by those 10 shares, is now in your hands!
     Now it's time for a few details, which you can safely skip if you
     choose.  The person who sold you the shares was a specialist
     ("spec") on the NYSE; for more information, look into the NYSE's
     auction trading system .  Roughly, a specialist is a type of
     middleman and a member (like your broker) of the financial services
     industry.  After you give the order, the shares do not appear
     instantly; they appear in your account three business days after
     you gave the order (called "T+3").  In other words, trades settle
     in three business days. 
     Please pardon a fair amount of oversimplification here, but the
     trade and settlement procedures involved with making sure those 10
     shares come to your account can happen in many, many different
     ways.  You're paying that commission so things are easy for you,
     and indeed they are: for a relatively modest fee, your broker got
     you the shares. 
     It may be important to point out here that AT&T, that big company
     from Bedminster, New Jersey, did not participate in this stock
     trade.  Sure, their shares changed hands, but that's all.  Shares
     of publicly traded companies that are bought on the open market
     never come from the company.  Further, the money that you pay for
     shares bought on the open market does not go to the company.  Sure,
     the company sold shares to the public at one point (an event called
     a public offering), but your trade was done on the open market. 
     After the trade settles, then what? Your broker keeps some of the
     $30 commission personally, and some goes to the company he works
     for.  The shares are in your brokerage account.  This is called
     holding shares "in street name." If you really want to hold the
     stock certificates, your broker will be happy to arrange this, but
     he will probably charge you about another $30.  Since you feel
     you've paid your broker enough already (and you're right), you
     decide to leave the shares in your account ("in street name"). 
  6. The next day, AT&T shares close at a price of 21, which is a rise
     of $0.75.  Great, you think, I just made $7.50.  And in some sense
     you're right.  The value of your holdings has increased by that
     amount.  This is a paper gain or unrealized gain; i.e., on paper,
     you're $7.50 wealthier.  That money is not in your pocket, though,
     and you do not need to tell the IRS.  The IRS only cares about
     actual (realized) gains, and you don't have any, not yet. 
  7. The following day, AT&T shares close at a price of 22.  which is
     another rise over the price you paid and a rise over the previous
     day.  Fantastic, you think, boy can I pick them, today I made
     another $10! At this point, you have a paper gain of 10 times 1.75
     which is 17.50.  Not too bad for two days. 
  8. That evening you decide that maybe AT&T really isn't such a great
     wireless phone company after all and it's time to sell.  You make a
     call the next morning, and although your broker is a bit surprised
     to hear from you again so soon, he's obliging (after all, it's your
     money).  Again your broker asks for a quote of the current market
     price for 'T.' The current market price for AT&T on the NYSE is
     22.50 (wow, another rise).  Your broker accepts your order to sell
     T at the market.  Again his computer figures the money you will
     receive from the sale: 10 (the number of shares) times 22.50 (the
     current market price) for a total of 225, less his commission of
     30, for a grand total of 195. 
  9. Magic happens again: instantly your broker finds someone willing to
     buy the 10 shares of AT&T from you at the current price, and sells
     your shares to that someone.  That someone sends you $225.  Your
     broker deducts his commission of $30 from the proceeds of the sale,
     so eventually the shares of AT&T disappear from your account and a
     credit of $195 appears.  Note again that the company did not
     participate in this trade, although shares (and fractional
     ownership of the company represented by those 10 shares) changed
     As explained above, that someone was a person at the NYSE called a
     specialist ("spec"), a member of the financial services industry. 
     The trade will be settled in exactly 3 business days (upon
     settlement, the shares are gone and you have the cash).  Again I
     apologize for the oversimplification here. 
  10.  So you calculate the result.  Gee, you think, the stock went up
     every day..  and I paid $232.50..  but I only received $195..  and
     pretty quickly you come to the inescapable conclusion that you lost
     $37.50, even though you had a paper gain every day.  This is the
     problem with commissions: they reduce your returns.  You paid over
     15% of your capital in commissions, so although the share price
     rose about that much in just a couple of days, you lost money
     because the commissions exceeded the gains. 
  11.  Eventually you do your taxes.  You have a short-term capital loss
     of $37.50 from this pair of trades.  Depending on your tax
     situation, you may be able to deduct your loss from your gross

Now you should understand the basic mechanics of buying and selling
shares of stock, and you see the importance of commissions. 

Just for comparison, let's run the numbers if you had bought 50 shares
instead of just 10 (maybe you found another few dollars).  The purchase
price of (50 * 20.25) + 30 is 1042.50.  The sales price of (50 * 22.50)
- 30 is 1095.  The difference is $52.50 in your favor.  What this says
is that commissions can really hurt the small investor, and is a good
reason for really small investors to consider investing via no-load
mutual funds or direct investment plans (DRIPs) . 

--------------------Check for updates------------------

Subject: Trading - After Hours

Last-Revised: 12 Feb 2004
Contributed-By: John Schott (jschott at, Chris Lott (
contact me ), P.  Healy, James Owens

After-hours trading has traditionally referred to securities trading
that occurs after the major U.S.  exchanges close.  Until 1999,
after-hours trading in the U.S.  was mostly restricted to big-block
trading among professionals and institutions.  Much of this sort of
trading was supported by electronic trading networks (ECNs).  One of the
oldest and best known ECN is Instinet, a network operated by Reuters
that helps buyers meet sellers (there's no physical exchange where
someone like a specialist works).  Another is Island ECN, a relatively
new network that (interestingly) has applied to the SEC to be a new
stock exchange.  With the advent of these ECNs where trades can take
place at any hour of any day, time and place have taken on a reduced

Anyhow, until summer 1999, individual investors had no access to these
trading venues.  And it was only natural that some investors clamored
for equal access to what the professionals had.  Perhaps individuals
felt that they would be able to pick up bargins in the after-hours
trading as news announcements filter out and before stocks reopen on the
following day.  While that is highly unlikely (prices fluctuate after
hours just as they do during the regular trading day), their wishes for
equal access have been granted. 

As of early 2003, there are basically three types of before-hours and
after-hours markets, as follows. 

U.S.  exchange after-hour markets
     The NYSE and ASE provide crossing sessions in which matching buy
     and sell orders can be executed at 5:00 p.m.  based on the
     exchanges' 4:00 p.m.  closing prices.  The BSE and PSE have
     post-primary sessions that operate from 4:00 to 4:15.  CHX and PCX
     operate their post-primary sessions until 4:30 p.m.  Additionally
     CHX has an "E-Session" to handle limit orders from 4:30 to 6:30p.m. 
Foreign exchange after-hour markets
     Several foreign exchanges also trade certain NYSE-listed stocks. 
     Hours are governed by those individual markets. 
ECN after hour markets. 
     Electronic communication networks (ECNs) have allowed institutions
     to participate in after-market trades since 1975; individuals
     joined the party in 1999.  Typically, extended-hour trades must be
     done with limit orders. 

A short list of typical brokers that offer ECN access and the extended
hours available is listed below.  This list is meant to be illustrative,
not exhaustive. 
   * Ameritrade (via Island ECN)
     Hours: 8am-8pm Eastern; limit orders only during extended hours. 
   * E*Trade (via Archipelago ECN)
     Hours: 8am-8pm Eastern; limit orders only during extended hours. 
     Note that eextended-hours orders can be placed even during regular
     market hours; these orders may be filled during normal or
     extended-trading hours. 
   * Fidelity (via Redibook)
     Hours: 7:30-915am and 4:15-8:00pm EST; restrictions on order types. 
   * Harris Direct (via Redibook ECN)
     Hours: 8-9:15am and 4:15-7pm Eastern; limit orders only; round
   * Schwab (via Redibook ECN)
     Hours: 7:30-9:15am and 4:15-8pm Eastern, Monday - Friday; limit
     orders only. 
   * TD Waterhouse (via ???)
     Hours: 7:30-9:30am and 4:15-7:00pm EST

Most of the after-hours markets function as crossing markets.  That is,
your order and my opposing order are filled only if they can be matched
(i.e., crossed).  In an extreme example, the new Market XT requires ONLY
limit orders. 

The concept of trading after exchange hours seems attractive, but it
brings with it a new set of problems.  Most importantly, the traditional
liquidity that the daily market offers could suffer. 

I want to digress into a quick review of the mechanisms on the NYSE and
NASDAQ that provide for liquidity and buffering, mechanisms that are
mostly absent on the ECNs.  In the case of the New York exchange, the
specialist ("specs") there are required to act as buffers by buying and
selling for their own accounts.  This serves to smooth out market
action.  (Whether they do in times of stress is doubtful, but that's
another matter entirely.) In the case of the NASDAQ, an all-electronic
exchange, many firms may offer to "make a market" in a specific stock. 
They post buy and sell offers on a computer system and when there is a
matching counter offer, the trade is made.  Meanwhile, onlookers can see
the trading potential of all available bid and ask quotations - a
decidedly different situation than on the NYSE.  But note that the
NASDAQ system has no buffering built in (no market maker is required to
buy or sell). 

Now, in the new, non-exchange operations with limited information,
limited participation, and what is effectively unbuffered,
person-to-person trading, it's quite reasonable to expect that liquidity
will be poor.  Unlike the NYSE's specialist system and the NAQDAQs
market-maker system, where the daily market can readily accomodate small
orders, the after-hours market will be quite different -- operations are
quite literally in the dark.  What we can see is effectively a reduction
in apparent liquidity in normal trading as we slide down the trading
scale (from the NYSE to the after-hours ECNs).  On the NYSE there
theoretically is always a bid and ask about the present market price,
but may not be the case in less liquid markets.  Ultimately, as seems to
be the case on some ECNs today, we get to the basest market - you and I
trading privately.  Either we agree or there is no transaction.  It can
get to be a jungle. 

Furthermore, Instinet, Island and all the other ECNs don't have a common
reporting structure as do NASDAQ and NYSE.  That is, the prices and
volumes on one ECN might be different from that on another ECN.  Since
only a few of the biggies have access to multiple ECNs there can be a
chance for arbitrage, which means buying in one place at one price and
selling substantially the same thing somewhere else for a different
price, all in essentially the same time frame in the case of ECNs. 

The effect is widened spreads, irregular trading, and a chance for the
unwary (read you and me) to get slightly whacked. 

There are other issues as well, of course.  At night, the information
resources and public attention that the established exchanges offer
today will be operating at a low level.  Today, Microsoft, Intel, or
Dell likely make important announcements during the quiet hours after
the exchanges close.  That gives the investment community time to access
and evaluate the news.  Now drop the same announcement into an
environment of several uncoordinated after-hours exchanges.  Favorable
news may create such demand that it overwhelms the supply offered by now
reluctant sellers.  Prices could zoom, only to crash back as more
sellers show up.  Lack of full information and considered analysis could
make the daily gyrations of hot stocks like and new IPOs look

Making things yet less transparent, if I understand it correctly, trades
made on these markets are not part of the reported closing prices you
see in the newspapers.  The data is apparently reported separately, at
least on professional-level data systems. 

Finally, consider the effect on both the industry and private traders
who now face an extended trading day.  Presumably the extended day will
offer even less time for reflection, research, and consideration.  Do
the pros stay glued to the tube while eating carryout? Do they employ a
night shift to babysit things? And what about the day workers who now
come home to an evening of trading stress? Thus expanded market hours
may not be the blessing that some expect, only another hazard in today's
stressful life. 

Meanwhile the SEC is pushing for some rules and regularity.  To get the
blessing as a recognized exchange, expect that the SEC will insist on a
public ticker system (ultimately Id expect ONE unified quote system
incorporating all of todays exchange's and the ECNs.) Logically, this
leads to expectation of a unified market, and represents a significant
threat to existing markets like the NYSE. 

Certain indications suggest that extended hours will become even more
extended (possibly approximating a 24 hour market) in the foreseeable,
though perhaps remote, future.  In the past few years, market forces
have constricted efforts to further extend trading hours, but a strong
enough future bull market would almost certainly reverse that trend. 

Finally, the term "after-hours" trading is becoming rapidly out of date. 
Consider DCX (Daimler-Chrysler), which is traded in identical form on 11
worldwide exchanges in Asia, Europe, and the Americas.  For this stock,
the winding down of the day's trading in New York seems an anticlimax to
a day that's already over in Tokyo. 

Here are a few more resources with information. 
   * Instinet runs a site with some information about their operations.
   * The Wall Street Journal gave an update on Friday, 27 August 1999 on
     the front page of the Money and Investing section. 

--------------------Check for updates------------------

Subject: Trading - Bid, Offer, and Spread

Last-Revised: 1 Feb 1998
Contributed-By: Chris Lott ( contact me ), John Schott (jschott at

If you want to buy or sell a stock or other security on the open market,
you normally trade via agents on the market scene who specialize in that
particular security.  These people stand ready to sell you a security
for some asking price (the "offer") if you would like to buy it.  Or, if
you own the security already and would like to sell it, they will buy
the security from you for some price (the "bid").  The difference
between the bid and offer is called the spread.  Stocks that are heavily
traded tend to have very narrow spreads (as little as a penny), but
stocks that are lightly traded can have spreads that are significant,
even as high as several dollars. 

So why is there a spread? The short answer is "profit." The long answer
goes to the heart of modern markets, namely the question of liquidity. 

Liquidity basically means that someone is ready to buy or sell
significant quantities of a security at any time.  In the stock market,
market makers or specialists (depending on the exchange) buy stocks from
the public at the bid and sell stocks to the public at the offer (called
"making a market in the stock").  At most times (unless the market is
crashing, etc.) these people stand ready to make a market in most stocks
and often in substantial quantities, thereby maintaining market

Dealers make their living by taking a large part of the spread on each
transaction - they normally are not long term investors.  In fact, they
work a lot like the local supermarket, raising and lowering prices on
their inventory as the market moves, and making a few cents here and
there.  And while lettuce eventually spoils, holding a stock that is
tailing off with no buyers is analogous. 

Because dealers in a security get to keep much of the spread, they work
fairly hard to keep the spread above zero.  This is really quite fair:
they provide a valuable service (making a market in the stock and
keeping the markets liquid), so it's only reasonable for them to get
paid for their services.  Of course you may not always agree that the
price charged (the spread) is appropriate!

Occasionally you may read that there is no bid-offer spread on the NYSE. 
This is nonsense.  Stocks traded on the New York exchange have bid and
offer prices just like any other market.  However, the NYSE bars the
publishing of bid and offer prices by any delayed quote service.  Any
decent real-time quote service will show the bid and offer prices for an
issue traded on the NYSE. 

Related topics that are covered in FAQ articles include price
improvement (narrowing the spread as much as possible), stock crossing
by discount brokers (narrowing the spread to zero by having buyer meet
seller directly), and trading on the NASDAQ (in the past, that
exchange's structure encouraged spreads that were significantly higher
than on other exchanges). 

--------------------Check for updates------------------

Subject: Trading - Brokerage Account Types

Last-Revised: 23 Jul 2002
Contributed-By: Rich Carreiro (rlcarr at, Chris
Lott ( contact me ), Eric Larson

Brokerage houses offer clients a number of different accounts.  The most
common ones are a cash account, a margin account (frequently called a
"cash and margin" account), and an option account (frequently called a
"cash, margin, and option" account).  Basically, these accounts
represent different levels of credit and trustworthiness of the account
holder as evaluated by the brokerage house. 

A cash account is the traditional brokerage account (sometimes called a
"Type 1" account).  If you have a cash account, you may make trades, but
you have to pay in full for all purchases by the settlement date.  In
other words, you must add cash to pay for purchases if the account does
not have sufficient cash already.  In sleepier, less-connected times
than the year 2002, most brokerage houses would accept an order to buy
stock in a cash account, and after executing that order, they would
allow you to bring the money to settle the trade a few days later.  In
the age of internet trading, however, most brokers require good funds in
the account before they will accept an order to buy.  Just about anyone
can open a cash account, although some brokerage houses may require a
significant deposit (as much as $10,000) before they open the account. 

A margin account is a type of brokerage account that allows you to take
out loans against securities you own (sometimes called a "Type 2"
account).  Because the brokerage house is essentially granting you
credit by giving you a margin account, you must pass their screening
procedure to get one.  Even if you don't plan to buy on margin, note
that all short sales ("Type 5") have to occur in a margin account.  Note
that if you have a margin account, you will also have a cash account. 

An option account is a type of brokerage account that allows you to
trade stock options (i.e., puts and calls).  To open this type of
account, your broker will require you to sign a statement that you
understand and acknowledge the risks associated with derivative
instruments.  This is actually for the broker's protection and came into
place after brokers were successfully sued by clients who made large
losses in options and then claimed they were unaware of the risks.  It's
my understanding that otherwise an option account is identical to a
margin account. 

Please don't confuse the type of account with the stuff in your account. 
For example, you will almost certainly have a bit of cash in a brokerage
account of any type, perhaps because you received a dividend payment on
a share held by your broker.  This cash balance may be carried along as
pure cash (and you get no interest), or the cash may be swept into a
money market account (so you get a bit of interest).  Presumably if you
have a margin account, the cash will appear there and not in your cash
account (see below for more details).  It's an unfortunate fact that the
words are overloaded and confusing. 

Margin accounts are the most interesting, so next we'll go into all the
gory details about those. 

Access to margin accounts is more restrictive when compared to cash
accounts.  When you ask for a margin account, your broker will (if he or
she hasn't already) run a credit check on you.  You will also have to
sign a separate margin account agreement.  The agreement says that the
broker can use as collateral any securities held in the margin account
whenever you have a debit balance (i.e., you owe the broker money). 
Note that if you have a cash account with the same broker, securities
held in the cash account (often non-marginable securities) do not help
(nor can the broker sell them) if you have a debit balance in the margin
account.  Conversely, securities in the cash account do not count
towards margin requirements. 

Another key feature of the margin account agreement is the
"hypothecation and re-hypothecation" clause.  This clause allows the
broker to lend out your securities at will.  So the ability to borrow
money always comes with the trade-off that the broker can lend out
("hypothecate") securities that you hold to short-sellers.  Although you
will pay the brokerage when you borrow money from them, the brokerage
house will *not* pay you (or in fact even notify you) if they borrow
your shares.  This seems to be just the way things work.  Also see the
article elsewhere in this FAQ about short selling for more information. 

As a general rule, a margin account will have all marginable securities,
and a cash account will have all non-marginable securities.  At some
brokerage houses, non-marginable securities can be held inside a margin
account (Type-2); however, those securities will not be included in the
calculation of margin buying power.  The insidious element here is that
even though the non-marginable securities contribute nothing of value to
the margin calculation, those same securities -- if there is even $1 of
debit balance in the margin account -- will become registered as
"type-2" by virtue of simply residing within a Type-2 acount, and, thus,
can be made lendable to brokers for clients wishing to short-sell the

Having a margin account makes it possible to take a margin loan.  You
can use a margin loan for anything you want.  The primary uses are to
buy securities (called "buying on margin") or to extract cash from an
equity position without having to sell it (thus avoiding the tax bite or
the chance of missing a run-up).  Some brokers will even give you debit
cards whose debit limit is equal to your maximum margin borrowing limit
(which is determined daily). 

The terms under which you borrow the money (i.e., the interest rate you
must pay and the payment schedule) are determined by your portfolio. 
Subject to various rules on the amount you can borrow (discussed later),
you just buy some securities and a loan will be automatically be
extended to you.  Or if you need cash, you just tell your broker to send
you a check or you can use your margin account debit card.  The interest
rate charged is rather low.  It is usually 0-2% above the "broker call
rate" (which is usually at or below prime) quoted in the WSJ and other
papers.  It can change monthly, and possibly more often, depending on
the details of your margin account agreement.  It is probably lower than
the rate on any credit card you'll be able to find.  Further, there is
no set payment schedule.  Often, you don't even have to pay the
interest.  However, your margin account agreement will probably say that
the loan can be called in full at any time by the broker.  It will
probably also say that the broker can demand occasional payments of
interest.  Your agreement will also give the broker the right to
liquidate any and all securities in your margin account in order to meet
a margin call against you. 

The interest rate is so low because the loan is fairly low-risk to the
broker.  First, the loan is collateralized by the securities in your
margin account.  Second, the broker can call the loan at any time. 
Finally, there are rules that set your maximum equity to debt ratio,
which further protects your broker.  If you fall below the requirements,
you will have to deposit cash or securities and/or liquidate securities
to get back to required levels. 

So you probably understand that it could be useful to get cash out of
your account without having to sell your holdings, but why would you
want to borrow money to buy more securities? Well, the reason is
leverage.  Let's say you are really sure that XYZ is going to go up 20%
in 6 months.  If you put $10000 into XYZ, and it performs as expected,
you'll have $12000 at the end of six months.  However, let's say you not
only bought $10000 of XYZ but bought another $10000 on margin, and paid
8% interest.  At the end of 6 months the stock would be worth $24000. 
You could sell it and pay off the broker, leaving you with $14000 minus
$400 in interest = $13600 which is a 36% profit on your $10000.  This is
significantly better than the 20% you got without margin. 

But keep in mind what happens if you are wrong.  If the stock goes down,
you are losing borrowed money in addition to your own.  If you buy on
margin and the stock drops 20% in 6 months, it'll be worth $16000. 
After paying off the debit balance and interest you'd be left with
$5600, a 44% loss as compared to a 20% loss if you only used your own
money.  Don't forget that leverage works both ways. 

The amount you can borrow depends on the two types of margin
requirements -- the initial margin requirement (IMR) and the maintenance
margin requirement (MMR).  The IMR governs how much you can borrow when
buying new securities.  The MMR governs what your maximum debit balance
can be subsequently. 

The IMR is set by Regulation T of the Federal Reserve Board.  It states
the minimum equity to security value ratio that must exist in your
account when buying new securities.  Right now it is 50% of marginable
securities.  This number has been as low as 40% and as high as 100%
(thus preventing buying on margin).  What this means is that your equity
has to be at least 50% of the value of the marginable securities in your
account, including what you just bought.  If your equity is less than
this, you have to put up the difference. 

The definition of marginable stock varies from one brokerage house to
another.  Many consider any listed security priced above $5 to be
marginable, others may use a price threshold of $6, etc. 

Let's look at an example.  If you have $10000 of marginable stock in
your account and no debit balance [thus you have $10000 in equity --
remember that MARKET VALUE = EQUITY + DEBIT BALANCE, a variant of the
standard accounting equation ASSETS = OWNER'S CAPITAL + LIABILITIES],
and buy $20000 more, your market value including the purchase is $30000. 
Your initial required equity is 50% of $30000, or $15000.  However, you
only have $10000 in equity, so you have a $5000 equity deficit.  You
could send in a check for $5000 and you'd then be properly margined. 

Let E and MV be equity and market value immediately after the purchase,
respectively (but before you make arrangements to be properly margined). 
Let the equity deficit ED be the difference between the required equity
(which is MV*IMR) and current equity (E).  Let E1 and MV1 be equity and
market value, respectively, after making arrangements to be properly
margined.  The initial requirement means that E1/MV1 >= IMR.  Let C, S,
and L be the amount of a cash deposit, a securities deposit, and a
securities liquidation, respectively. 

  1. You deposit cash:
     E1 = E + C
     MV1 = MV
     So you need to solve (E+C)/MV >= IMR for C. 
  2. You deposit securities:
     E1 = E + S
     MV1 = MV + S
     So you need to solve (E+S)/(MV+S) >= IMR for S. 
  3. You sell securities:
     E1 = E
     MV1 = MV - L
     So you need to solve E/(MV-L) >= IMR for L. 

Using ED [which we previously defined as (IMR*MV - E)], the answers are:
  1. C = ED
  2. S = ED/(1-IMR)
  3. L = ED/IMR

If ED is negative (you have more equity than is required), then that
makes C, S, and L negative, meaning that you can actually take out cash
or securities, or buy more securities and still be properly margined. 

So, now you know how much you can borrow to buy securities.  Having
bought securities there is now a MMR you have to continue to meet as
your market value fluctuates or you pull cash out of your account.  The
MMR sets the minimum equity to market value ratio that you can have in
your account.  If you fall below this you will get a "margin call" from
your broker.  You must meet the call by depositing cash and/or
securities and/or liquidating some securities.  If you do not, your
broker will liquidate enough securities to meet the call.  The MMR is
set by individual brokers and exchanges.  The MMR set by the NYSE is
25%.  Most brokers set their MMR higher, perhaps 30% or 35%, with even
higher MMRs on accounts that are concentrated in a particular security. 

The MMR calculations are very similar to the IMR calculations.  In fact,
just substitute MMR for IMR in the above equations to see what you'll
have to do to meet a margin call.  However, here a negative ED does NOT
necessarily imply that you can make withdrawals -- the IMR rules govern
all withdrawals (though the Special Memorandum Account (SMA) adds some

For more details and examples of margin accounts, see the FAQ article
about margin requirements . 

--------------------Check for updates------------------

Subject: Trading - Discount Brokers

Last-Revised: 26 Jul 1998
Contributed-By: Many net.people; compiled by Chris Lott ( contact me )

A discount broker offers an execution service for a wide variety of
trades.  In other words, you tell them to buy, sell, short, or whatever,
they do exactly what you requested, and nothing more.  Their service is
primarily a way to save money for people who are looking out for
themselves and who do not require or desire any advice or hand-holding
about their forays into the markets.  This article focuses on brokers
who accept orders for stock, stock option, and/or futures trades. 

Discount brokering is a highly competitive business.  As a result, many
of the discount brokers provide virtually all the services of a
full-service broker with the exception of giving you unsolicited advice
on what or when to buy or sell.  Then again, some do provide monthly
newsletters with recommendations.  Virtually all will execute stock and
option trades, including stop or limit orders and odd lots, on the NYSE,
AMEX, or NASDAQ.  Most can trade bonds and U.S.  treasuries.  Most will
not trade futures; talk to a futures broker.  Most have margin accounts
available.  Most will provide automatic sweep of (non-margin) cash into
a money market account, often with check- writing capability.  All can
hold your stock in "street-name", but many can take and deliver stock
certificates physically, sometimes for a fee.  Some trade precious
metals and can even deliver them!

Many brokers will let you buy "no-load" mutual funds for a low (e.g. 
0.5%) commission.  Increasingly, many even offer free mutual fund
purchases through arrangements with specific funds to pay the commission
for you; ask for their fund list.  Many will provide free 1-page
Standard & Poor's Stock reports on stocks you request and 5-10 page full
research reports for $5-$8, often by fax.  Some provide touch-tone
telephone stock quotes 24 hours / day.  Some can allow you to make
trades this way.  Many provide computer quotes and trading; others say
"it's coming". 

The firms can generally be divided into the following categories:

  1. "Full-Service Discount"
     Provides services almost indistinguishable from a full-service
     broker such as Merrill Lynch at about 1/2 the cost.  These provide
     local branch offices for personal service, newsletters, a personal
     account representative, and gobs and gobs of literature. 
  2. "Discount"
     Same as "Full-Service," but usually don't have local branch offices
     and as much literature or research departments.  Commissions are
     about 1/3 the price of a full-service broker. 
  3. "Deep Discount"
     Executes stock and option trades only; other services are minimal. 
     Often these charge a flat fee (e.g.  $25.00) for any trade of any
  4. Computer or Electronic
     Same as "Deep Discount", but designed mainly for computer users
     (either dial-up or via the internet).  Note that some brokers offer
     an online trading option that is cheaper than talking to a broker. 

Examples of firms in all categories:

Full-Svc.  Discount Discount Deep Discount Computer
Fidelity Aufhauser Brown Datek
Olde Bidwell Ceres E-broker
Quick and Reilly Discover National E-trade
Charles Schwab Scottsdale Pacific JB Online
Vanguard Waterhouse Stock Mart Wall St.  Eq. 
  Jack White Scottsdale  
The rest often fall somewhere between "Discount" and "Deep Discount" and
include many firms that cater to experienced high-volume traders with
high demands on quality of service.  Those are harder to categorize. 

All brokerages, their clearing agents, and any holding companies they
have which can be holding your assets in "street-name" had better be
insured with the S.I.P.C.  You're going to be paying an SEC "tax" (e.g. 
about $3.00) on any trade you make anywhere , so make sure you're
getting the benefit; if a broker goes bankrupt it's the only thing that
prevents a total loss.  Investigate thoroughly!

In general, you need to ask carefully about all the services above that
you may want, and find out what fees are associated with them (if any). 
Ask about fees to transfer assets out of your account, inactive account
fees, minimums for interest on non-margin cash balances, annual IRA
custodial fees, per-transaction charges, and their margin interest rate
if applicable.  Some will credit your account for the broker call rate
on cash balances which can be applied toward commission costs. 

You may have seen that price competition has driven the cost of a trade
below $10 at many web brokers.  How can they charge so little?
Discounters that charge deeply discounted commissions either make
markets, sell their order flow, or both.  These sources of revenue
enable the cheap commission rates as they profit handsomely from trading
with your order or selling it to another.  Market making is the answer. 

In contrast, Datek is one of a kind.  Datek owns the Island, an
electronic system that functions as a limit order book that gives great
order visibility and crosses orders within it as well as showing them to
the Nasdaq via Level II.  Datek charges a fee from Island subscribers to
enter orders into their system.  Island is their outside revenue, and is
far superior to selling order flow.  Island is good for the customer,
selling order flow like the others is not. 

Here are a few sources for additional information:
   * The links page on the FAQ web site about trading has links to many
     brokerage houses.
   * "Delving Into the Depths of Deep Discounters," The Wall Street
     Journal , Friday, February 3, 1995, pp.  C1, C22. 
   * A free report on a broker's background can be requested from the
     National Association of Securities Dealers; phone (800) 289-9999
   * An 85 page survey of 85 discount brokers revised each October and
     issued each January is available for $34.95 + $3.00 shipping from:
     Andre Schelochin / Mercer Inc.  / 379 W.  Broadway, Suite 400 / New
     York, NY 10012 / +1 (212) 334-6212

--------------------Check for updates------------------

Compilation Copyright (c) 2005 by Christopher Lott.

User Contributions:

Gerri Pisciotta
My employer accidentally advised the company handling the 401k investment that I had been terminated, when in fact I had not. As a result, withdrawals discontinued from my pay and I missed a couple years of contributions. Since I never withdrew from the plan, is my employer liable for making up these contributions? If I made a lump sum catchup contribution,could they do the same?
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