Online stock trading is very convenient and seems set to become the new most popular way of trading in a few years – especially now that it’s already possible to trade via many brokers using only an internet connected mobile device.
Here are 8 things every online stock trader should know:
- One of the most common myths about any kind of online trading is that transactions occur instantaneously. While this is often the case (more or less), investors should be aware of the inherent delays associated with this kind of trading. Since order information is transmitted over a series of network devices, any or all of these devices can add latency (delay) to transaction processing. This is usually only a few seconds at most but can grow longer at the worst times due to hardware failures or heavy internet traffic.
- You should find out what options are available to you in the event of a network problem (as above) or in the event that anything prevents you from trading using the typical online means. Most service providers offer some other option but it’s best to know what these are in advance just in case you need to react quickly to some unforeseen event. That isn’t the time to be calling to find out your other options.
- You should be aware that little mistakes can have a big impact. Accidentally clicking a button twice could cause you to buy twice as much stock as you intended – something you may not be able to afford – or try to sell shares you don’t own. Similarly, a typographical error (such as an extra zero) can be disastrous depending on the circumstances – it’s best to double check every transaction before you confirm since it might not be reversible.
- Be aware of the service providers policy on margins. This means it’s a good idea to know what happens if you buy shares on margin (i.e. borrowing money from your broker to purchase more of a stock) and value of the stock goes down too much. Typically, this results in a margin call but the broker may legally sell your shares to recover their own losses – possibility causing you significant loss.
- Find out about the order cancellation process. Since online trades happen very quickly (under normal circumstances) there probably won’t be much time to cancel a trade made in error – unless you spot it right away – but you’ll definitely want to know what the firm’s policies on this are.
- You should take advantage of the features provided by many platforms such as the ability to effectively program your entire trading strategy. You might be able to automate the process of buying low and selling high by setting “limits” on market orders properly.
- Online trading should not make you less careful – as it does many investors – about which stocks you invest in. The same amount of due diligence is required and do NOT rely solely on the information your broker provides when deciding on which stock to buy (unless, of course, you have a personal relationship based on trust with this broker – unlikely in an online trading environment).
- Online trading is a great prospect that saves time and money while being much more convenient. It has grown steadily over the recent years and might eventually completely replace traditional trading methods (filling out forms or calling brokers by phone).
