Stock trading online reduces the role of the middleman and lowers the cost of participating in the market. For those with knowledge on how the markets work, the lower costs make it the most efficient way to buy and sell stocks.
Buying and selling stocks online should not be confused with day trading. While this is a way to make money online for many, it is not investing for growth over time. Stocks that are bought and sold in day trading are purchased solely to make a profit between the buying and selling price and are rarely held overnight. However, trading online can also be used as a way to purchase stock with lower fees and an eye on longer-term growth.
The advantages and disadvantages of trading online
Regardless of if a stock is purchased online or not, it is still necessary to go through a brokerage to purchase it. The difference is whether the trading is done with an online (discount) broker or through a person with more traditional brokerage services. Therefore, before looking at the mechanics of stock trading online, it is a good idea to look at its relative merits and demerits to decide if it is right for you.
Costs: As discount brokerages often point out, trading online offers significant cost advantages. While the cost will depend on the service, account and order, orders will generally cost under $10. This is much less than traditional brokerages and can up to hefty savings for those who make more frequent trades.
Lower error rates: When orders are inputted verbally through another party, the chances of potently costly errors increases. When trading online, the clients can input their orders directly. On the other hand, those who do not have much experience with stocks may make mistakes when placing orders on their own.
24/7: Although the ability to trade 24/7 may not make much difference to the average investor, it is still nice to have. Please note that even online trades are not executed immediately, and there will always be a delay from the time the order is placed until when it is carried out. Still, orders will generally be executed faster when trading online.
In addition, with online trading, it is easier to get a history of transactions and other information about one’s account at any time.
More knowledge and control: People work hard for their money, and it is not always a good idea to outsource decisions on how it is invested to others. Nobody is going to put more thought and care into how money is invested than the person who earned it. In addition, taking the time to read and learn about ways to invest your money can be a growing experience.
On the other hand, some people just do not have the time and interest to learn about investing, or they simply do not have the confidence to be comfortable making investment decisions. In these cases, a full-service broker,mutual funds or EFTs will likely be the way to go.
Getting started in trading online
Anyone getting started in online trading needs to consider the following when deciding on an account:
- The amount that will be invested: Different accounts have different investment minimums and will offer different rates. Therefore, the suitability of an online broker will vary greatly with the amount invested.
- Experience: Different brokerages will offer various levels of assistance, and needs vary with investor experience.
- Frequency of investing: Obviously, an investor who will make more frequent trades will likely want to go with a broker that charges the lowest amount per trade. On the other hand, those who will not be making many trades need to keep in mind that some brokerages will charge a fee for longer periods of account inactivity.
- Services: They type of services needed will vary with the type of online trading investors intend to do. In addition, some brokerages will have other services to include those typically offered by banks such as mortgage loans.
- Real-time stock quotes: Generally, the stock trading prices and market indices given by brokerages have a 15-minute delay. The brokerages do this to avoid having to pay the fees stock exchanges will charge for lives prices. While the typical investor with the eye on the future will probably not need real-time quotes, those who do will have to pay more for them.
Types of accounts
Some of the different types of brokerage accounts include:
Cash account: Cash in this basic type of account can be used to buy stock, bands, ETFs, mutual fund and other types of investments.
- Individual, joint or custodial accounts: Married people might want to go with joint accounts, and it is possible to open custodial accounts for children.
- Retirement accounts: These have tax advantages for people who can put the money away until they retire.
- Margin and option accounts: Margin accounts allow users to borrow against the money they have in their accounts while options accounts enable options trading. These accounts are geared more for advanced investors and traders.
Before trading online
Some other things to consider before every putting any money down includes:
- Be sure to understand the investment and terminology thoroughly. Do not just take anyone’s word for it. Like earning money, investing it also requires some labor. However, once this is accomplished it becomes possible to make the money work as hard for you as you did for it.
- Be sure the broker is properly licensed.
- Watch out for scams. Thieves and manipulators have various tricks to profit illegally. For example, in pump-and-dump schemes, people will send out spam emails pretending to be giving out news and tips on hot stocks. If people fall for it and buy the stock, the stock prices rises. Those who sent out the emails then sell their shares at a profit, but those who bought stock will see the price plummet since it is no longer being promoted.
Selecting a brokerage
E-Trade, Scottrade and Ameritrade are some of the best known, but there are others in the field. Those looking for a broker can start with the following reviews.