The Basics of Online Trading
Soon after the World Wide Web became a regular facet of our lives in the mid-to-late 1990s, one of the first services that became widely available was online stock trading. Almost overnight, it seemed like everybody was suddenly an online trader, buying and selling stocks and bonds on their own without any advice or assistance from a traditional stockbroker. Although mistakes are often made by novice online traders, the concept of online trading remains sound, and thousands of individuals are trading stocks and bonds online responsibly and profitably.
Traditional vs. Online Trading
Traditionally, individuals trade stocks and bonds through a broker, an individual who is licensed to buy and sell investments through an exchange such as the New York Stock Exchange or the NASDAQ. Brokers earn a commission for making these trades and also provide investment advice to individuals about which stocks and bonds they recommend as part of an overall investment strategy.
Online trading allows individual investors to bypass brokers and to trade stocks and bonds themselves by opening an account with an online trading company. The cost of buying and selling investments online tends to be much lower than the fees charged by traditional stockbrokers.
Investors who trade stocks online, however, are usually on their own when it comes to deciding which stocks and bonds to buy and which ones to sell and when. Therefore, most experts say that inexperienced investors and those who aren’t comfortable making investment decisions without input from a professional should probably avoid online trading.
How Online Trading Works
If you’d like to try your hand at online trading, the first step is to establish an account at one of the popular online brokerages. While the details of online trading differ somewhat from one brokerage to the next, the process usually works like this:
- First, you must fund your online trading account, which you can do by depositing a check or making an online or wire transfer of funds into the account.
- Once your account is funded, you can start making trades. Simply select the security and number of shares you want to buy or sell and click the “execute trade” (or similar) button. If you submit a buy order, the shares will be transferred into your securities account and the price deducted from your cash account, and vice versa for a sell order.
Note: Although trades are made online, they still must be processed electronically, so their execution is not immediate. Most trades execute only during the hours when exchanges are open, even if you’re allowed to make trade orders 24/7.
There are two primary types of trade orders: market orders and limit orders. The former executes the trade at the current market price of the security, while the latter executes the trade only if the price reaches a level you specify. If the price doesn’t reach that level, the trade does not go through.
In addition to cash trades, some online brokerages allow investors to buy securities on what is called “margin.” This is essentially buying on credit, with existing stock and cash used as collateral.
Buying on margin can be very risky, however, because the brokerage can issue what’s known as a “margin call” and sell off securities without the investor’s permission or acknowledgment if the portfolio’s value drops too low. Therefore, margin investing is usually not recommended for novice online traders.
Please contact us if you’d like to learn more about online trading. We can help you determine whether trading online or through a traditional broker is the better strategy for you, as well as provide information on other types of investing that may fit with your risk profile.
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