Pros and Cons of Online Trading
According to data from Statista, a little over 14 million households in the United States were signed up with an online trading service. With access to almost any stock, bond or securities online, online trading is a viable option to traditional brick-and-mortar brokerage firms.
What makes online trading, or e-trading, different than using a stockbroker is that with the former the trader is making all the decisions himself, while with the latter there’s input and advice from the broker. Another difference is in the fees, online trading is generally considerably less expensive than using a stock broker to make trades.
Regardless of how you trade, there’s always risk online and offline. While online trading has its benefits, there are some hazards associated with it as well.
The following list outlines the advantages and disadvantages of online trading, from access to robust online tools to the dangers of trading addiction.
5 Pros to Online Trading
- Lower Fees
One of the clearest advantages to online trading is the reduction in transaction costs and high fees of traditional brick and mortar brokerage firm. The going rate of online discount brokerages to buy and sell stocks as well to make EFT trades is anywhere between $5 and $10.
- More Control and Flexibility
Time is of the essence – or can be, when you’re trading stocks. Naturally, this means faster access, i.e. online trading portals, is a benefit to people who know what they’re doing. With online trading, people can execute a trade almost immediately versus going through a broker.
Traditional brick and mortar brokers often require appointments, either online or in-person, just to initiate a trade. This time can be costly in the worst scenarios and just a regular inconvenience in the best ones.
- Avoid Brokerage Bias
One thing you’re sure to eliminate when you take trading into your own hands is brokerage bias. Bias happens when financial advice given by brokers also benefits the broker – often in the form of payment by mutual funds and other companies for pushing their stocks.
This kind of favoritism has even caught the attention of the Securities and Exchange Commission which has called for stricter rules on brokers. What the SEC is pushing for is that brokers and advisers act purely in the interest of the investor. For many people who rely on the advice of brokers, this kind of biased advice can be troublesome and even lead to bad investments.
- Access to Online Tools
Low cost doesn’t necessarily mean a shoddy product in the world of online trading. Many of today’s online trading companies are offering their customers an impressive suite of tools to help them optimize their trades.
Sites like Tradeking, for example, offer a robust selection of tools designed to give customers immediate access to valuable information. Things like interactive charts which show the performance of stocks, ETFs and indices, allow account holders not only to view but also to customize their preference. Tradeking also includse an option to see volatility and trading volumes for many underlying securities.
And that’s just one tool and one site, others like it – Interactive Brokers and Motif, are some of many. So while traders may be sacrificing the input of a broker, this kind of reachable information is decidedly valuable.
- Monitor Investments in Real Time
Many online trading sites make it easy for people to see how their investments are doing in real time with live stream quotes and trade information.
Companies like Scottrader and Tradeking, among others, offer customers access to streaming data. Tradeking gives account holders access to real time quotes along with their last trade, news and more. Scottrader offers immediate detailed quotes which come with financial, fundamental and technical information for the symbols of the customer’s choice.
It’s not tough to imagine how handy this kind of up-to-the-moment data can be for traders. For some, this one-stop convenience trumps picking up the phone and calling a live broker, turning on the television or even going to a different website to get market information.
5 Cons to Online Trading
- Easier to Invest Too Much, Too Fast
Because online trading is so easy – you basically push a button, there is the risk of making poor investment choices and even overinvesting.
The SEC warns investors that it takes just a nanosecond to make a trade, but real investment decisions require time. Investors who aren’t used to fast-moving markets can get caught up in the excitement and, before they know what hit them, end up losing more money than expected.
The SEC recommends that online investors protect themselves by understanding the stocks they’re buying and how to set up safeguards in fast-paced markets. One way to control what and how much you’re buying is to place limit orders; these allow you to set a specific price at which a stock is purchased.
- No Personal Relationships With Brokers
By and large, online traders are on their own. They don’t have the security blanket of a broker to help them navigate the uncertain waters of the stock market. From getting help on how to create an investment strategy to understanding how the results of feedback mechanisms are affecting the market, online traders are left to their own devices to come up with this information. For some, this kind of autonomy can be unsettling.
The number one thing experts advise new online traders to do is: research. Without the help of a broker to guide you, it’s important to learn as much as you can about the companies you’re investing in. One place to start is the Securities and Exchange Commission’s filings. Public companies are required to submit detailed company information to the SEC on a regular basis, which the public can access. This data includes company finances, potential conflicts and risk factors.
- Online Trading Can Become Addictive
Trading stocks is like gambling, in many ways. With stocks, the trader is speculating on the result of something – a company’s performance, let’s say, and then bets money that the speculation will be correct. Like gambling, online traders can experience a certain high, according to a recent study, “Excessive Trading, A Gambling Disorder in Its Own Right? A Case Study on a French Disordered Gamblers Cohort,” published in Addictive Behaviors, a peer-reviewed journal.
The study found meaningful parallels in behavior between people with gambling disorders and excessive traders. Some of these similarities include traders who experienced initial wins of small amounts, who then “chased their losses” and ultimately lost control of their money.
“All of them invested in very risky stocks associated with short-term trading leading to potential large gains, but also with very significant losses. The structure itself of the two activities (gambling and trading) is very close,” the study concluded.
- Bad Connection Can Kill a Trade
The very nature of online trading means that you’re at the mercy, ultimately, of your internet connection. If your connection is too slow or gets interrupted you could lose out on a potentially important or lucrative trade.
The SEC recommends that people have a plan b in case they are cut off from the internet. Find out if your online trading firm has alternatives to making trades on the internet. Many firms will allow customers to use a touch-tone phone ordering system or even provide live brokers to take orders.
- Computer Missteps Lead to Buying Too Much/Not Completing a Trade
Two common problems with online trading is A) assuming a trade was not completed and B) assuming it was. Both of these mistakes can cost you money. What happens to people who believe their trade was not completed is that they make the trade again and end up investing twice as much as they intended.
The second scenario is tricky when traders cancel a trade, receive an electronic cancellation receipt and then assume the trade was, in fact, canceled. The SEC reminds traders that a trade is only canceled if it has not been executed. It’s important to check with your broker on how to verify cancellations.