The Pros and Cons of Online Trading

September 23rd, 2008

Advantages of Trading Online

Low Commissions
Before the days when it was possible to trade online, anyone who wanted to invest in the stock markets needed to retain the services of a broker—something that still exists today, regardless of the fact of whether or not you are trading over the internet.  Brokers in the real world are able to charge their customers quite large commissions based on trades executed. So, unless you are trading or others on your behalf are trading in a large volume of stock, the net cost of the commission means that it is not economically viable for you to trade small volumes of shares.
The introduction of the Internet changed all this.  It is now possible to offer customers online trading services with far lower commissions, sometimes as low as $5.00 or sometimes at no cost whatsoever.

Limitless Available Information
When it comes to investing in the stock market, knowing the right moment to buy or to sell a stock is what separates the winners from the losers. In the real world, you would have to research the information yourself, or have someone else provide it. Past experience certainly helps and luck is the always the lady. With internet trading, an online stock trading software program provides technical charts, such as bar charts and line charts; technical analysis indicators, such as the Bollinger band: real time stock trading prices.  With all this information, you should be able to make an educated decision whether or not to invest in a particular stock.

You Decide When You Want to Invest
Choosing a stock via the internet is a choice only you make without any outside interference. You are in full control and can choose any investment vehicle, 24 hours a day, 365 days a year.

Disadvantages of Trading Online

Investors Have Little or No Investment Experience
Statistics show that 80% of new online stock traders will have a lose from day one. In addition, the new trader has no understanding of how technical indicators and stock charts work, will not know to diversify his portfolio, and will not know when to make the right stock trade.

Lack of Information Service
In the real world, brokers provide their customers with investment information in the form of a monthly bulletin or some other publication.  Since online traders do not normally receive this information, it is more difficult for investors to make informed investment decisions.

Limited Access to Market
It is more difficult to execute trades on many bourses.  Most trades on multiple exchanges will be within the USA—such as both the NYSE and NASDAQ. In addition, there is limited “real-time” stock ticker-tape prices, and the quotes on many screens relayed to traders are time-delayed prices. By the time you come to sell the stock, the bid/ask price of the stock could well have changed.

No Exit Plan
An exit plan is an instruction you give to your broker to the effect that if the share hits a high of “x” amount, the broker is required to sell the stock. Alternatively, if the stock hits a low of “y” amount, the broker is required to sell the stock.  Because trading online is instantaneous, it is not always possible to provide a broker with your instructions.

Last 5 posts by David Maxwell

• Dow Jones Sinks 514 Points While Dollar Reaches 2-Year High - October 28th, 2008
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• Play the Market—Enjoy Virtual Stock Trading - August 13th, 2008
• Leave Wall Street behind and go Virtual… - August 3rd, 2008
• Online Virtual Stock Trading – A Beginners Guide Part III - July 12th, 2008

Entry Filed under: Stock Trading Investing Basics