How Online Trading Works
Online stock trading is a method of investing in stocks, mutual funds and other exchange-traded securities through an Internet-based stock brokerage service. A stock brokerage is a company that makes stock trades on behalf of its clients. Online stock trading services allow users to place trades using a Web-based interface without interacting with an actual stock broker.
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Function
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Online stock trading services work like other online financial accounts, such as Web-based savings accounts. To start trading online, you must typically set up an account at the website of an online stock broker and then link an external checking account to the stock trading account. You can then transfer funds from the checking account to the online stock trading account, which can in turn be invested in the stocks and other investment opportunities available through the service.
Benefits
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Online stock brokers have several benefits. First, it allows you to invest on your own time without interacting with human brokers. This can be attractive for knowledgeable investors who want to direct their own portfolio. Another benefit is that trades placed through an online service are often cheaper than making trades through a traditional broker. For instance, popular online trading services such as Sharebuilder, Scottrade and TD Ameritrade offer stock trades for less than $10.
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Drawbacks
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Online stock trading services may be dangerous for inexperienced investors. When you place stock trades through a traditional broker, he can give you advice about trades and help shape your stock holdings to mitigate risk. When you choose your own investments, you might make bad decisions or pursue an undisciplined investment strategy. For instance, online trading allows you to buy and sells stocks at any time, which might tempt you to make transactions too frequently. Day trading (trading a stock more than once over the course of a day) is a highly risky practice.
Time Frame
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Investments made with an online stock trading service have the potential to increase or decrease in value on any given day. One of the best ways to avoid the impacts of daily price fluctuations is to hold onto investments for long periods of time.
Considerations
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The more often you place trades, the more often you will incur transaction fees. It is better to make a few large transactions than many small ones to avoid incurring transaction fees.
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