Advantages of Online Trading

by FinancialTips4U

Compared to the days before online trading was possible, the stock market is open for business to more traders than ever. This has advantages for everyone.

Advantages of Online Trading

Serious investors can save big trading online

Up until the late 1990's, the only way the average investor could place a stock trade was over the phone, with a personal broker.  Commissions could run as much as 1.5% of total trade amount. Once the internet became a reality, it wasn't used for the average investor, but for the finance industry.

However, internet trading was around as early as 1983, although these trades required direct interaction with a broker.  Only when online brokerage houses appeared, could average investors make a trade entirely on their own, without a broker.  As more and more companies entered the marketplace, commission prices began to drop as everyone fought for market share.  Today, almost all companies offer commissions below $15. For example, the Firstrade online trading site only charges $6.95 per trade. 

Pros and Cons

Anytime a market creates choice it's good for consumers, and stock trading is no exception.  The advantages of online trading are numerous.  For starters, online trading provides all of the most sophisticated tools even a professional investor could need.  For example, some software allows an investor to see exactly how many shares are being offered to buy or sell at any given price.  They permit a trader to postulate different buy/sell scenarios in order to minimize risk and maximize return.  Tools that permit a trader to perform Technical Analysis on stocks are available -- a kind of analysis that looks at how a stock performs relatives to itself in terms of price, momentum, velocity and volume, among many other things.  Most importantly, online trading allows for instantaneous executions, which can become important in times of market volatility.  

A full-service broker has numerous disadvantages in comparison to a discount online broker.  For starters, commissions are much higher.  Service is much slower.  Whereas an online trade can be entered and executed within seconds, manual trading by phone can take up to five minutes. Tools available to online traders are frequently not available.  The idea is that your broker will guide you to suggested investments.  This further assumes that your broker has your best interest in mind, can keep you straight with all his other clients, and isn't trying to sell you other products in the meantime.

Taking Advantage of the Advantages

The best advice to find the best brokerage.

Find what suits your needs

There are dozens of online brokerages.  Some go for ultra-low trade prices but offer few extras.  Others have higher prices but offer all the tools a professional investor would ever need.  Some brokerages have all the services any regular bank would, such as wire and EFT transfers, check writing, and the ability to purchase CDs. 

My Advice:  First decide what your priorities are, then shop around.  It will help eliminate a lot of brokerages early, saving you time.

Keep track of your fees

After trading with your chosen brokerage for a year, look to see where you got hit with fees.  Then shop around again, to see how much your trading and other behavior would have cost at another brokerage.

My Advice:  Don't switch just to save a few dollars.  The hassle involved isn't worth it.  You should save at least 10-15% to make a change worthwhile.

Tips & Tactics

Some useful advice once you've made your decision.

  • Pay attention to how you are treated when you call customer service.  You should be treated with the utmost courtesy and respect.  The field is too crowded with competition to put up with rudeness and inefficiency.
  • Ask yourself if the interface you are using works for you or not.  If you aren't whipping around the website like a pro within 6 months, there may be better options.
Updated: 10/28/2011, FinancialTips4U
 
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