A Guide To Online Stock Trading

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In the past, personal investing was done primarily through the use of a stockbroker or financial adviser. This was because stockbrokers had the best access to corporate financial statements, industry research and other pertinent market information.

However, with the rise of the internet, financial information is no longer confined to industry insiders. Almost limitless financial information is now at your fingertips with the click of a mouse. As a result, many people are cutting out their reliance on the middleman and making the move into online trading.

If you have been thinking about getting into online investing, this article will give you a helpful overview of the components of online trading.

What Are The Benefits Of Online Trading?

  • It’s Cheaper: The first and most obvious benefit is that online trading can save you money. By cutting down on the fees you pay to your stockbroker or financial adviser, you will have more money to invest. While many online trading companies charge fees to use their trading platforms, these fees often pale in comparison to those charged by stockbrokers.
  • It’s Efficient: Online trading is also efficient. Trades can be executed at a moment’s notice without having to worry wasting time calling your broker.
  • You’re In Control: A third benefit of online trading is that it gives you, the investor, more control or ownership over your personal investment strategy and performance. For many, taking on a more active role in one’s personal finances can be a rewarding experience. It can also help you to stay on top of your personal financial situation because you are in control of your investment decisions.

What Is Your Investment Strategy?

Before starting to trade online, you need to decide what kind of trading strategy you want to pursue. Given the significant volatility in stock prices, trading stocks is a relatively risky investment strategy. However, different kinds of stock trading involve varying degrees of risk.

  • Day Trading: Day trading is the buying and selling of the same stocks or stock indices in a single day. It is a high risk high reward strategy because of the significant volatility involved in daily stock price movements. It is also time consuming because it requires you to constantly monitor stock price changes throughout the day as well as keep up to speed on the latest stock research.
  • Short Term Trading: Short term trading involves holding a stock for several days. It is less time consuming than day trading but is still relatively risky given the short time frame of holding the stock.
  • Long Term Trading: Long term trading involves holding a stock for longer periods of time. This is often done with the view that a company’s value will increase over time. Long term trading requires less time than day trading or short term trading.

You can choose one type of trading strategy or mix and match from all three types. Just remember that, all things being equal, your risk increases as your stock holding time frame decreases.

What Is Your Risk Management Strategy?

No matter which trading strategy that you choose, you need to decide how much risk you are willing to take and then take the proper measures to adequately manage your risk to the desired level.

Make sure that your investment strategy takes advantage of both up and down cycles in the market.

It is also wise to set a floor on how much loss on a particular stock you are willing to take before getting out of a position.

Having a prudent risk management strategy is the only way to successfully make money over the long term.

Choose Your Trading Platform

The next step is to choose your online trading platform.

  • Day Trading: If you plan on day trading, you will need a platform that provides up to date financial information and can execute trades in an efficient manner. Fees for this type of platform will be relatively more expensive than those used by occasional traders.
  • Short And Longer Term Trading: Longer term traders can opt for discount brokers where speed and efficiency are less crucial.

Make sure to research and choose a reputable online broker with a strong history of satisfied customers. This means a solid track record of trade execution and up to date financial information. It is also advisable to shop around for brokers with competitive fees.

Choose Your Investments

Now that you have a trading strategy and an online broker, the next step is choosing which stocks or indices to invest in. The best way to do this is to do research. An educated investor is a smart investor. Get up to speed on the companies and industries that you want to invest in. Newspapers and online research companies like Morningstar are great sources of financial information. Try to find companies or indices that you believe are undervalued. This will allow you to buy low and sell high. Always remember that past stock performance is not necessarily indicative of future stock performance.

Review Your Portfolio

Finally, make sure to regularly evaluate your investment performance. If your current investment strategy is not earning the returns that you hoped for, consider changing course. If you need help, you can always consult an investment professional for advice. While this will cut into the savings aspect of online trading, it is always better to be well informed when engaging in stock trading.

Now that you know the benefits of online trading, you can get to work on your online stock portfolio. Remember that trading stocks always involves taking on financial risk. Consider consulting a financial professional for investment advice.

Last Updated: December 30, 2011
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About Michael Diaz Michael Diaz is a contributing author for CanDoFinance.com.

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