» Online Trading
Online trading is the process of buying and selling financial securities, commodities and currencies through the Internet. In order to trade online, investors need to exercise patience and use the right proprietary softwares provided by various brokers.
How to Trade Online
In online trading, orders are implemented with the help of online trading platforms offered by various brokers. Investors place the orders directly on a broker’s site. The broker executes the orders on the stock exchange and makes payments on behalf of his clients. Brokers also provide their clients with market data, news and charts through their online platforms. This is done to help them in taking informed decisions. They charge software usage fees and trading commissions for their services. An investor can trade in more than one product or market through the same account and software.
Benefits of Online Trading
- Transparency: Online traders have complete information from the time of order placement till the final settlement. Every stage of online trading is subject to scrutiny, as this provides transparency to the trading process.
- Best prices: Investors can get the best quotes for securities due to high transparency in the system.
- Added convenience and liquidity: Online trading can be carried out anytime during business hours. This provides liquidity to investors.
- Low commissions: Investors can make transactions frequently, without worrying about the burden of commissions. This makes day trading and short-term trading more feasible.
Dangers of Online Trading
- Technology problems: This includes delays in transactions due to Internet connection outages or power failures.
- A mentor’s absence: Lack of guidance from an experienced broker may lead to formulation of improper trading strategies, resulting in huge losses.
- Overtrading: Online traders generally have a long term strategy before investing. However, the lure of capitalizing on short term movements makes them buy and sell more frequently. The low level of commission in online trading further lures the investors into day trading. This takes the traders away from their well-researched long term trading strategy, causing losses in the long run.
Tips for Online Trading
- Set limit orders on the trading of stocks.
- Avoid overtrading. Do not trade a large number of stocks at once.
- Do not base decisions on daily ups and downs. Observe the long term trends. Avoid trading based on rumors.
Online trading is a good tool to earn a living as well as to supplement regular income. However, before venturing into online trading, an investor should carefully research on the risks associated with it and prepare for them.
Based on the nature of their trades, traders are given various designations, such as:
- Pattern day trader (those who execute four or more day trades in a week).
- Rogue trader (an authorized employee who does unauthorized trading on behalf of his employer).
- Floor trader (a member of an exchange, who makes trades on the floor for his/her own account).
Traders employ trading strategies in order to make effective decisions. Such a strategy is governed by a rigid set of guidelines. A trading strategy is developed after considering factors such as return, risk and volatility. Its workability can be tested by verifying its success in the past through the use of computer programs. Automated trading strategies eliminate the impact of emotions on trading.
Types of Trading
Stocks Trading: A share of stock means a share of ownership in a corporation. An individual or firm trading primarily in shares in the stock markets is called a stock trader. These stock traders usually profit from short term volatility in the prices of stocks. This type of trading may last from a number of seconds to a few weeks.
Futures Trading: Futures are standardized contracts that are traded on a futures exchange. It comprises non-traditional commodities such as foreign currencies, bonds (commercial or government paper) or stock indices (a basket of corporate equity). Futures are bought or sold at the current price for a future date, which is also called as the delivery date.
Options Trading: An option is a contract through which a buyer gets the right to buy or sell the underlying asset at a later point of time on an agreed price. A premium is paid to the buyer for granting such an option. A ‘call’ option is offers the right to buy whereas a ‘put’ option offers the right to sell the underlying asset.
Trading can take place over periods of varied length such as day trading, long term trading, swing trading and intraday trading.
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