The Disadvantages of Online Trading
Investing in stocks, mutual funds and other financial growth vehicles once required investors to place trades through live stockbrokers over the phone, but modern traders have the option of placing trades using online stock trading services. Trading stocks online can be advantageous for experienced investors who know what they want, but it can also have some major drawbacks, especially for less experienced investors.
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Professional Advice
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One of the advantages of investing using a traditional stockbroker or through a financial adviser is that a live financial professional can give investment advice and help you avoid making costly mistakes. When you trade online, you don't have a professional looking over your shoulder to make sure you aren't making a beginner mistake. This can result in poor investment decisions that can cost more than it would to pay an adviser to invest on your behalf.
Time
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Another potential drawback of investing online is that it requires the individual investor to spend the time and energy figuring out which investments to choose and when to change investments. Busy professionals may not have the time to keep on top of their investments, and may prefer to defer the responsibility to a financial adviser.
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Trading Delay
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One of the purported advantages of investing online is that traders can place "real-time" trades. While you may be able to execute fast trades using an online brokerage, trades may not execute instantaneously. According to the U.S. Securities and Exchange Commission (SEC), high Internet traffic, limitations on the speed of the investor's Internet connection and other technical issues on the broker's end can cause delays in transactions. This can result in purchases and sales that do not execute at the price that the trader expected when making the trade. The SEC recommends that online investors do not assume that a trade did not go through if it doesn't appear immediately.
Ease of Trading
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Online brokerages make it easy to trade stocks and other investments, but this ease presents some disadvantages. Every time you place a trade you will pay a transaction fee; making trades frequently due to the ease of making trades will cause you to incur more fees. In addition, investments that you hold for less than a year are taxed at the short-term capital gains rate, which can be much higher than the long-term rate. The ability to trade at any moment may make it difficult for some investors to maintain financial disincline and hold onto long-term investments.
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