Online stock trading has opened the way for both ordinary and small investors to trade the stock market easily and cheaply. Sadly, (or is it sad) we usually get what we pay for. In using an online broker, we obtain lower transaction costs but there are trade-offs. The investor has to evaluate the total situation for himself as to whether he will gain from using an online broker.
Universal Investment Strategies | The advantages are:
Transaction costs are lower
The online trader is in complete control.
The online trader can select the exact time of a trade, rather than place an order with a large broker and wait his turn. This can cost money during a rapid fall in the market. I have had this experience and it cost me dearly. This can also be useful if you aim to be a very quick trader such as with day trading, as with a full service broker, the commission you would pay would negate any profit you may have made.
I wanted to sell a particular stock as soon as an adverse report came out and many were exiting the stock. I decided it was in my interests to sell as well, but by the time my order was placed by the full service broker, the stock had fallen substantially. I still made a profit but it was nowhere as large as it could have been if the order had been processed quickly.
Another advantage is that the online trader can change his mind easily to cancel the order or amend it if seems advisable to do so. This is not so easy where a traditional broker is concerned.
Another feature I like about online stock trading is that I can track the course of sales in real time on my computer. At any given time I can see the actual price movements and I can adjust my orders to suit the current price movements.
Universal Investment Strategies | What are the disadvantages?
The online trader is usually unable to access full research on any stocks. While I do not place blind faith in a mainstream broker, I use his resources and research tom help in stock selection.
In my view, any trader, whether with a full service broker or trading online, should make his own judgment before buying and selling and be fully convinced in his own mind what is the best course of action for him to follow.
Once I make the decision to buy or sell, it is because I have made the decision and the responsibility then rests with me.
An advantage is that I can track price movements as they actually occur, but this has a downside. If I particularly want to trade a stock, I can watch the price fluctuations and if I choose to place a limit, I may place my limit too high or too low, thus not able to make the trade.
I believe that placing an order ‘at best’ is probably the safest way to go. This means I do not miss the transaction, but I may not get the best price. Watch the price movements and then act.
However, when selling I can make use of my online brokers automatic stop loss function. This means I can plan my exit soon after I enter a trade.
To sum up, online share trading can allow a very small trader to participate in the stock market in small amounts. This is because the brokerage is usually so small that is does not add significantly to the price per share (in a purchase) so a profit can be made with even small price movements. The low brokerage also allows low cost stock portfolio management because you can cheaply trade in an out of stocks.
For more information on online stock trading
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