What Is Online Trading? Everything You Should Know
Technological advancement brings many blessings, and one of the greatest is the overall ease of doing business. Traditional processes have evolved with the times, and this change is also reflected in the way we invest.
As most people are working to attain financial independence, new ways to invest or manage investments have created room for everyone to give trading a try. What’s more, smartphones allow us to track our investments and make decisions on the go.
“What is online trading?” you might be wondering. Well, brace yourself for a journey into the world of online trading, as we explain everything you need to know.
People of all generations deserve a shot at achieving their financial goals seamlessly. Unfortunately, saving alone is often insufficient to sustain wealth, so learning about investing could be a wise choice.
On the plus side, we have trading options today that do not require a lot of technical know-how. Most of the processes have been simplified to make it easier for practically anybody to invest and grow their portfolio.
Online Trading Definition
Online trading simply refers to buying and selling financial securities over the internet, usually through an online broker. Thanks to trading innovations, this process has been simplified to eliminate the bulky paperwork: All you need to do is click a few buttons, and you’re good to go.
Online trading can be short-term (for a few weeks), medium-term (for a few months), or long-term (for years). The duration depends on your available funds, risk tolerance (high, medium, or low), and financial goals, as they all contribute to your success.
You can trade stocks, cryptocurrencies, ETFs (Exchange-Traded Funds), bonds, and other financial commodities.
Online Trading for Beginners
If pictures of Wall Street brokers shouting in a crowded room terrify you, we’re happy to tell you that there’s no cause for panic. Trading online allows anyone to purchase and sell securities from wherever they’re most comfortable, and it’s become simple enough that you don’t have to be a stock-market expert to trade online.
First, you need to research the types of investments available, assess your relationship with money, and determine if you want to go for low-risk, medium-risk, or high-risk options.
After that, you need to decide on what asset you’ll trade and choose the appropriate broker. It would be advisable to learn how online brokerages work before opening an online trading account. After all, even if the market is accessible to just about anyone, and you do not need to have a fortune to become an investor, expertise always gives you an edge.
As a beginner, staying updated and constantly learning about the market and its latest trends is key. Reading financial articles and books, watching trading tutorials online, or consulting a robo-advisor will build your knowledge and help you make informed trading and investment decisions.
We often hear people ask: “What is online market trading?” Thankfully, it’s just another term for online trading and its different types.
Day trading is one of the most common forms of short-term trading. It involves buying and selling off securities on the same day. With the right strategy, this is a quick way to make significant gains within a short period.
This is a long-term trading variety where the trader buys securities at the beginning of a market trend, when the prices are lower, and sells them off when their prices peak.
When we first mentioned stock trading, we explained that it should always be based on studying market trends. Swing trading makes the most of this information by taking advantage of the price swings occurring during certain stages of a market movement to maximize gains once a trend gathers momentum. Successful swing trading hinges on predicting a trend’s performance and benefiting from its volatility.
This short-term strategy exploits the small price gaps created by the bidding-asking spread. Here, you make profits by selling securities at an asking price greater than the buying price.
To be successful at any of these forms of trading, you need to learn how to analyze market charts, practice trading, and test different strategies.
What Is an Online Trading Account?
An online trading account is an account an investor opens to buy or sell securities online. Before online trading was a thing, you would have had to contact a stockbroker to trade on your behalf, as they were the only ones with the experience and the tools needed for trading.
Now, however, you can become an investor with nothing but your smartphone and an online trading account. Trading has become as seamless and effortless as shopping for groceries online.
The most important thing about online trading accounts is their features. They should enable you to:
- Buy and sell securities on any authorized platform
- Get real-time information about companies and their offers
- Place an order
- Get real-time trading options
- Access expert recommendations about the market
You can open an online trading account from your phone without making a physical appointment at a trading firm. Fill in an online form, upload the required documents, and you will be allowed to trade as soon as you’re verified. Most brokerage companies now have mobile investment applications, offering real-time access to your investments and providing quick support or counsel where necessary. This presents an easy way to start trading, for beginners in particular.
Assets You Can Trade Online
Some securities have been sold for a long time, while others only became popular with recent technological developments. Traders sometimes buy assets and leave them for years to appreciate in value before trading them, or they study market trends and buy during the “bear” season (at low prices), only to quickly sell off during the “bull” season (at higher prices). Asset examples include:
Before we thoroughly discuss and go deep into the stock-trading process, let’s first clarify what stocks are. Stocks, also known as equity, represent the ownership of a fraction of a publicly traded company. Corporations often put up company shares for sale on the stock exchange, where individuals or other companies can trade them.
Bonds are financial instruments issued by the government or corporations in exchange for a loan; when they buy bonds, investors lend their money for a specified period, with a fixed rate of returns.
The latest assets for trading are digital currencies. They are usually decentralized and highly volatile, so cryptocurrency trading comes with significant risk, but can give great rewards.
Other assets include ETFs, currencies, metals, indices, agricultural commodities, options, etc.
Online Stock Market 101
When you hear “online trading,” stock trading is the first thing that comes to mind as one of the older forms of trading assets. As mentioned earlier, a stock is a type of financial security that shows that you own a fraction of a company. Stock shares are traded publicly, and as an investor or “shareholder,” you are investing in the company's future.
The stock market is where all that magic happens, and now it’s an online platform as well, allowing you to buy or sell shares with little to no hassle. Still, that availability is only one part of the equation; knowing how to play the stock market is the other. Investing in stocks is considered high risk because stock prices are extremely volatile and vary according to economic conditions, company performance, investor attitudes, and even public opinion.
When a corporation goes public and makes stocks available for investors for the first time, this is called an Initial Public Offering (IPO). An IPO is often a way to raise funds to run a business effectively.
However, shareholders do not own the company - they only own its shares. Depending on the type of shares you bought, you may be entitled to some additional assets, company earnings, or a seat on the board of directors.
How Does Stock Trading Work?
Stock trading for beginners is no longer as tedious as it used to be. In the past, before you could trade stocks, you would have to contact a brokerage firm or someone with a license to trade stocks, i.e., a stockbroker. You would then put in a request to buy stocks, and the broker would place an order for you in the stock exchange once they set up your account and approve your request. This required a lot of time, as well as a broker’s fee.
Today, online trading platforms and investment apps let you trade stocks by yourself, from the comfort of your own home. Learning about stock trade has been simplified, so that you can participate even if you aren’t an expert.
Of course, not all stocks are the same: Common splits are between income and growth stocks, as well as common and preferred stocks. Income stocks provide owners with bonuses known as “dividends” when the company turns a profit. Growth stocks do not come with dividends: Rather, the profits are reinvested to grow the business. Common stocks give you the right to vote at shareholders’ meetings, while preferred stocks do not, but they pay out faster and bigger than common stocks.
All of these can be traded online: When you place an order at one of the stock markets using an online trading platform, the data is saved and used to present you with all the possible options matching your demands. If you see an opportunity you like, you can confirm the order. Once both parties validate the process, the next step is to make or receive payments within the stipulated time frame.
These days, online brokerages offer stock analysis and additional stock market information to help you make informed decisions.
How to Trade Online
Now that we’ve answered the ultimate question - “What is online trading?” - it’s time to learn how to actually get some trading done. Earlier, we mentioned that, as a beginner, you have to perform your due diligence by researching and educating yourself before investing any money. This is important because it ensures that you know what you’re doing. Below, we’ve outlined our recommended set of steps for beginner traders.
Find an Online Broker
The first step is choosing the online broker to trade with, so you know where to open your trading account. A little research will tell you what online trading site is best for you: Compare the offers and their terms of service. You’ll want to find a broker with the lowest possible fees, preferably with a one-time fee, if there is one at all, rather than an ongoing commission on your transactions. You also want to ensure that you’ll have adequate support with useful resources at hand for a hassle-free experience. Once you make a choice, you can proceed to create your online trading account.
Create and Fund Your Trading Account
Earlier, when we answered the question “What is an online trading account?” we mentioned that there were a few things you should know. For example, most online brokers make you choose between a cash account and a margin account. A cash account means you need to have sufficient funds in the account to purchase stocks. With a margin account, you don’t necessarily need to have the total value of a trade in your account; you can borrow from the brokerage, using the equity of the stock you already have as collateral (just like a loan). However, you still need to provide at least 50% of the value of the stocks you wish to purchase.
Decide on a Trade Strategy
Once you know the stock-trading basics and know the type of stocks you want to trade, it’s time to devise a plan of action. You need to have a goal and also weigh the advantages and disadvantages of the strategies we mentioned before, such as day trading, scalping, etc. If need be, you could consult a financial advisor, robo-advisor, trade expert, or read a traders’ guide before proceeding.
Practice With an Online Trading Simulator
This can help you get familiar with the technical aspects of the stock market and boost your confidence, helping you avoid mistakes during proper trading.
Make Your Trade
It’s time to learn how to invest in stocks online: Once you check all the boxes above, you are ready to make a trade. First, you need to get a stock quote from your brokerage, displaying the real-time prices of the stocks in the market and their availability. After that, you have to choose between placing market orders or limit orders for your trade. A market order executes your trade at the current market price of the stock you ordered, and it is usually performed almost immediately. A limit order executes your order at a pre-set value of the stock or even at a better price; most times, limit orders don’t go through immediately.
When learning stock trade, beginners are advised to trade with limit orders, as opposed to market orders. When you submit a market order, you buy at the best available price of the stock, which can be the highest price, and the same applies to selling. On the other hand, limit orders execute your trade at the exact price point you put down, or a better one. If the price doesn’t reach the limit you set, your trade won’t be executed. This gives you better control and makes it easier to prevent losses. Most stock markets with online trading platforms offer additional options for traders, too.
This order executes when the stock price falls under a specific “stop price.” Once the stop price is reached, the stop order becomes a market order, conducted at the current price.
These orders combine a stop order with a limit order. First, you choose a stopping point when the order becomes a limit order, to be executed at the limit price or better. Of course, there is no guarantee that the limit will be reached, so the order might not be completed.
Trailing Stop-Loss Order
Set the maximum percentage of loss you can bear during a trade, and if the stock value moves in your favor, the stop price moves with it, but otherwise stays in place.
If you’re wondering, “What is the best online stock trading site for a beginner?” here’s what to look for:
- The brokerage has to be licensed by the necessary regulatory bodies such as FINRA, SIPC, or the authorized regulatory body of your country.
- The platform has to offer a seamless user experience and be easy to navigate.
- The platform has to have excellent customer support.
- The user reviews should be predominantly positive; focus on those talking about the platform itself, not the success of the user’s trading.
- The platform needs to be properly insured and offer some sort of guarantee against fraud.
- You need to be safe when online trading, meaning that your platform of choice has to guarantee that your data and personal information are encrypted and secure.
- The trading site you choose should either charge a low commission or have a zero-fees policy.
- The platform should provide excellent tools to make the trading process easy.
As you might imagine, different trading sites come with various offers and options. Proper research will help you figure out which one suits your needs.
The Pros and Cons of Trading Online
So far, we have tackled the ultimate question - “What is online trading?” We have also talked about how to trade and what to expect from a broker. Now it’s time we share the advantages and disadvantages of online trading for the whole picture.
- Online trading can serve as an extra source of income.
- It can be done on your mobile device, wherever you are.
- You do not need to be an expert to trade.
- Online trading doesn’t require an enormous sum of money to start.
- It consumes very little time.
- You have control over your trades and portfolio.
- You can trade whenever you please.
- You learn a lot in the process.
- Trading, especially for beginners, can be quite risky and can cause significant losses.
- The process can become addictive, and you may find yourself constantly checking your trades and portfolio.
- Beginners often make the mistake of overinvesting.
- Errors often result in great losses, sometimes even financial ruin.
Summary: Is Online Trading Worth It?
As we can see, online trading poses some risks but also comes with obvious advantages. When done correctly, it’s fairly safe and worth the hassle. You just need to research different online brokers, learn about the stock trading process, develop a trading plan, and you’ll be good to go.
If your research leaves you feeling overwhelmed, perhaps it’s not the option for you. On the other hand, trading can be a straightforward way to attain your financial goals. In the end, the choice of whether or not to trade depends on you.
Frequently Asked Questions
What are the benefits of online trading?
Online trading’s primary advantages are that it allows you to manage your trades at your convenience, serves as an extra source of income, and you won’t need a trust fund or a massive amount of money to get started.
What are the disadvantages of online trading?
First of all, it can be volatile, so trading for beginners - and even veterans - can be quite risky and cause sizable losses. What’s more, it can become addictive, you risk over-investing, and the threat of financial doom looms over your errors.
Is online trading safe?
Yes, it is. You just have to research and choose an online brokerage that is licensed and has your interest at heart.
Which app is best for online trading?
Some of the best apps for online trading in 2021 include Acorns, Ally, RobinHood, and SoFi.
What is online trading, and how does it work?
Online trading is the same as trading at a physical stock exchange, except it’s done through an online broker. You place an order and choose from the available trading options. If you see something you’d like to invest in, confirm the order. Once the other party does the same, it’s time to pay up or receive your compensation.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
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