Pros and Cons of Online Trading

Pros and Cons of Online Trading

Online trading is convenient for any traders as they can buy and sell right from the comfort of their homes, and access a wide variety of security types. It can be a practical alternative to using a traditional brick-and-mortar brokerage firm.

With online trading, traders make all their decisions themselves. Such an approach differs from using a stockbroker, as the broker typically offers input and advice. Nevertheless, the risk will always be present no matter how they trade.

Regardless of how you trade, there’s always risk online and offline. Thus, if you want to invest, you have to get over your fear of investing. To better decide whether this form of investing is right for you, understand the pros and cons of online trading.

Pros of Online Trading

  1. Lower fees

One of the clearest advantages of online stock trading is the reduction in transaction costs and high fees associated with traditional brick-and-mortar brokerage firms.  As you can imagine, personal brokers charge high fees. Brokers’ fees vary greatly depending on their level of expertise and years of experience. Typically, you’ll pay between $5 and $9 to buy and sell stocks and exchange-traded funds at online discount brokerages.

Basically, low fees are a huge pro for online investors as web-based trading platforms charge a mere fraction of what personal brokers charge their clients and online trading can lead to higher returns.

  1. More control and flexibility

Time is often of the essence when you trade stocks, so the speed of using online trading platforms is a pro to many investors. With online trading, you can execute a trade almost instantly. Traditional brick-and-mortar brokers might require appointments, either online, over the phone or in person, just to start off a trade.

See also: Who controls the stock market?

  1. Ability to Avoid Brokerage Bias

By taking trading into your own hands, you can get rid of brokerage bias. Bias sometimes occurs when a broker gives financial advice that benefits the broker, such as in the form of a commission for selling specific mutual funds and other products. This kind of biased advice can be difficult for any investor and might even lead to investment decisions that are good for the broker but bad for you. You can avoid ethically questionable, biased broker advice by using online trading, which lets you invest without having to get advice from a broker.

See also: What to Consider When Choosing an Online Broker

  1. Access to Online Tools

In the world of online trading, a lower cost does not necessarily mean a careless product. Many of today’s online trading companies offer customers an impressive suite of tools to help optimize trades.

  1. Option to Monitor Investments in Real Time

Many online trading sites offer stock quotes and trade information that make it easy for people to see how their investments are doing in real time. You get real-time quotes, stock market news and more. For some traders, this one-stop, at-a-glance 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.

Cons of Online Trading

  1. Easier to Invest Too Much Too Fast

Since online trading is so easy, traders basically push a button — there is the risk of making poor investment choices or overinvesting.

Online investors can protect themselves by understanding the stocks they are buying and setting up protections in fast-paced markets. Placing a limit order on your account is one way to control what you buy and how much of it.

  1. No Personal Relationships with Brokers

From getting help on how to create an investment strategy to understanding how the results of feedback mechanisms affect the market, online traders are left to their own devices. For some, this kind of self-sufficiency can be disturbing. Experts often stress the importance of research, particularly for new traders. You need to learn as much as you can about the companies in which you invest.

  1. Addictive Nature

Online traders can experience a certain high when trading that is similar to what people experience when gambling, according to a recent study on excessive trading. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks offering the potential for large gains but also significant losses.

  1. Internet-Dependent

The nature of online trading means that, eventually, you’re at the mercy of your internet connection. If the internet connection is too slow or is interrupted, you can lose out on a potentially important or lucrative trade.

  1. Buying Errors due to Computer Missteps

With online trading, to simply assume a trade was not completed could cost you money. Investors who believe their trade was not completed might make the trade again and end up investing twice as much as they intended. Assuming a trade was completed without seeing confirmation of the fact also is a mistake. Make sure you understand how to verify trades and review statements before you begin using an online investing system.

See also: Learning Demo and Live Trading

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