Guide to Online Trading
Online trading allows investors to send trades quickly to the stock exchanges. You'll log into your online account, do some basic research, complete a trade ticket, and usually within seconds you'll get a trade confirmation. Online trading is ideal for the self-directed, do-it-yourself investor who likes to be in charge of his investment portfolios.
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Facts
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Online trading is offered by the wealth management units of most major banks, and by several independent brokers, such as E*Trade. They are known as discount brokerages because their trading fees are usually less than half those of full-service brokerages. They can afford these low fees because they do not offer investment advice, and thus do not need to have full-time research analysts and portfolio managers on staff.
Account
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Open an account. This is usually a simple process. Go to the website of the online broker, fill out an application form, and within a few days you'll receive an account number and a password. From there, it's just a matter of getting to know the online platform, setting up electronic funds transfer (EFT) forms, and then transferring some funds from your bank account so that you can start trading.
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Research
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Do your research. If you are new to the markets, start at the online investing and trading resource centers of the Securities and Exchange Commission. As a self-directed investor, you have flexibility, but you also have responsibility. You'll have nobody to blame if an investment goes sour, because nobody at the online brokerage will advise you to buy or sell anything. The online account will have basic research tools, but you should also visit the website of the company. Unless you are a day trader, you are not buying symbols; you are buying parts of businesses. So, find out about the business first.
Strategy
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Decide on an investment strategy. You will be able to trade stocks and options, at a minimum, and certain kinds of bonds and mutual funds. Your investment style and time horizon will determine your trading. If you are retiring in 30 years, you'll probably be less risk-averse and be overweight in stocks. If you are retiring in five years, you'll be overweight in less-risky, fixed-income assets that pay interest regularly. If you are the type of investor who can't sleep if the stock price moves by a couple of percentage points, then volatile stocks or options are probably not for you. If your work and family obligations do not leave too much time for research, mutual funds or exchange traded funds (ETF) might be the way to go.
Considerations
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You can trade options online. Options are used to hedge, or insure, against price movements. They are also used to speculate. But before doing either, spend some time at the online options learning center of the Chicago Board Options Exchange (CBOE). It will be time well spent. You can also carry out administrative functions, usually for a fee, in your account, such as requesting EFTs to and from your bank account, converting currencies, moving securities between accounts at different brokerages, or swapping securities between tax-sheltered and taxable accounts.
Warning
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Do not confuse online trading with instantaneous or guaranteed trading. Your orders may not be filled at all, or may be filled at a significantly different price, in fast-moving markets. Once you buy or sell a stock, there is almost always no going back. So, be careful.
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References
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