Online trading is the act of buying and selling financial products on the Internet. The trader purchase and sells using an online trading platform. Online trading may include trading in bonds, stocks, futures, international currencies, and other financial instruments. Online trading is also known as e-trading or self-directed investing.
Online trading has proven to be both a blessing and a curse for the investors all around the world. By allowing them to buy and sell financial assets from virtually anywhere on the planet, it has effectively revolutionized the way business is done in the 21st century, even though this does not come without its own share of troubles. Trading has become faster and more accessible than ever, although at a great price in terms of security and finances.
The modern incarnations of currency, equity and derivatives markets have given people from around the world the opportunity to participate in what was once limited to the privileged few. All that is needed to enter today’s most popular financial venues is risk capital, computing power and internet connectivity.
The biggest markets in the world conduct the lion’s share of their business operations online. Listed below are a few of the most prominent:
Led by established exchanges and over-the-counter (OTC) entities, the majority of stock trade is conducted online. However, traditional financial centers such as the New York Stock Exchange (NYSE) maintain a physical floor others such as the Euronext depend on a solely digital substructure.
By far the biggest market in the world, the forex is responsible for upwards of US$5 trillion in value per day. Currency trading on the OTC forex is easily conducted through an online brokerage firm thru software trading platform.
Over the past decade, the online trade of futures and options has flourished. Dating back to its origins at the Dojima Rice Exchange, and remaining until the 1990s, the trade of derivative products has been conducted through the open-outcry auction system. Nowadays, the world’s biggest derivatives marketplaces operate online. The CME Group, Eurex and Intercontinental Exchange (ICE) are the industry leaders.
Whether one is a small retail trader pursuing profit in the market, or an institutional player looking to manage a vast portfolio of holdings, online trading is usually the vehicle by which these undertakings are managed.
Before you start doing online trading you should read advantages and disadvantages of online trading.
Advantages of Online Trading
1. Lower Fees
When it comes to online trading, you merely need to open a trading account by internet and you’re ready to go. You’re not bound by time and place as long as you have an internet connection. Hence, online trading is convenient and available from anywhere with limited hassle. It also saves time.
2. It is cheaper
In online stock trading, the stock broker fee which you will have to pay is lower when compared to the commission charged by traditional method. If you trade in an adequately big volume of stocks, it is feasible for you to be able to negotiate your broker’s fees.
3. You can monitor your investments anytime
Time is often of the essence when you trade stocks, so the speed of using online trading portals is an advantage to a lot of investors. By online trading, you can execute a trade almost immediately. Traditional brick-and-mortar brokers may require appointments, either online, over the phone or in person, just to initiate a trade. The time involved in such transactions is an inconvenience in the best of conditions — and can actually cost you money in the worst scenarios.
4. Investor has greater control
Online traders can trade whenever they wish to. On the other hand, in traditional trading, an investor might be stuck until he or she is able to contact their broker or when the broker is able to place their order. Online trading enables almost instantaneous transactions.
Furthermore, investors are able to review all of their options rather than relying on a broker to tell them the best bets for their money. They’re able to monitor their investments, make choices and purchase/sell stock on their own without any outside interference; thus, giving them greater control over their investment.
5. Faster Transactions
Online banking is fast and efficient. Funds can be moved between accounts nearly instantly, particularly if the two accounts are held at the same banking institution. All it takes to be able to buy or sell stocks is a single click of the mouse. Through this, a faster exchange can be made which may also make sure faster earnings.
6. Option to monitor investments in real time
A lot of online trading sites offer stock quotes and trade information that make it easy for people to see how their investments are doing in real time. Companies like Scottrade, for example, offer customers access to streaming data.
You get real-time quotes, stock market news and more. For some traders, this one-stop, at-a-glance convenience trumps picking up the phone and calling a live broker, turning on the television, or even going to a different website to get market information.
Disadvantages of Online Trading
1. Easier to invest too much too fast
Because online trading is so easy — you mostly push a button — there is the risk of making poor investment choices or overinvesting.
Online investors can defend themselves by understanding the stocks they are purchasing and setting up safeguards in fast-paced markets. Placing a limit order on your account is one way to control what you purchase and how much of it.
2. Technical Problems
Online trading platform are merely as good as the underlying servers and software. High volumes on volatile trading days can slow processing speeds and information flow. You could experience substantial losses if you couldn’t place the required buy and sell orders, particularly in fast-moving markets.
Software bugs can lead to suspensions in getting price quotes and information on order status. This also could outcome in trading losses, because you may enter orders based on incorrect price quotes or late order-execution reports
3. Customer Service
Online brokers have a lean price structure, which enables them to offer discounts on commissions. You may have to wait a long time to place a phone trade, particularly in volatile markets, because trained and certified traders cost money.
You might need to place certain trades over the phone if your online portal malfunctions or your Internet connection is down. In addition, you might not be able to place certain types of orders over the phone, such as spread orders involving options.
4. Addictive nature
Online traders can incur a certain high when trading that is similar to what people incur when gambling, according to a latest study on excessive trading published in the journal Addictive Behaviors. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks offering the potential for large gains but also important losses.
5. Feedback Mechanisms
Online trading means that you are your own investment manager, but this independence comes at a price. You do not have the benefit of a professional feedback loop, such as a reliable sounding board for your investment choices. Online brokers usually do not provide buy-sell recommendations.
You have to set aside time for study, such as reviewing financial statements on corporate investor relations websites and price charts on financial websites. You should consider mutual funds, which offer professional management and diversification at a reasonable cost, if you do not have the time for sufficient due diligence.
6. Buying errors because of computer missteps
With online trading, to only assume a trade was not completed can cost you money. Investors who believe their trade was not completed might make the trade again and end up investing two times as much as they intended. Assuming a trade was completed without seeing validation of the fact also is a mistake. Make sure you understand how to verify trades and review statements before you start using an online investing system.
Online trading has an extensive list of advantages and disadvantages, well eclipsing the topics covered by this article.
Online trading is not always easy and there are no assurances of profits in all situations. One of the more obvious ways to find success on a more reliable basis is to organize trading activities beforehand and plan strategies for minimizing trading losses and additional trading costs, while maximizing potential gains.
This will include setting sufficient risk-reward ratios through use of stops and limits. Traders will also want to minimize other costs paid, such as commissions, and plan ahead for tax preparation to guarantee that minimum tax amounts are paid on trading activities.
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