I remember the first time I started to trade online. It was just before the tech bubble of the late 1990’s and the internet was still something new for most people. Purchasing the now forgotten company was easy, and I made a few dollars on that trade. It was so excitingly simple.
Flash forward a couple of years and I have made and lost my share of money. While still ahead of the game, I learned a few things about online stock trading. Freedom is great, but it comes at a cost. Lets have a look at the benefits and the trade offs of online stock trading:
The Benefits of Online Stock Trading
Low commissions – for most people, this is the number 1 benefit of investing online. For $9.99 or less, you can buy and sell your favorite stock. Full service brokerage fees are usually over $100. If you are an active trader, that can start to eat up your profits very quickly. For every $10 000 you invest, you have to make 2% ($200 - $100 to buy and $100 to sell) just to break even.
Quickly act on price moves – another great benefit of online stock trading is being able to quickly act on price moves. With the click of a couple of buttons, you are able to take advantage. With a full service brokerage, you’ll have to call first, explain what and why you want to trade that stock and then wait to see what price you were filled it. Odds are, you may have missed the best entry point, and paid 10x the commission for that privilege.
No middle men – No justifying why you want to trade, no having to have someone suggest that a stock might be too risky. You call the shots.
Information – at your fingertips online stock trading can bring much needed and real time info that can help you when to buy and when to sell. Technical charts, real time prices and information sharing can be easily accessed online.
The Drawbacks of Online Stock Trading
No middle men – while I just listed this as a benefit, its also a drawback. The majority of my losses were from stocks that did not meet my investment plan but were simple stocks that were being pumped and hyped up. Often, you end up buying a stock that is moving higher, and end up having to sell at a loss. When you trade at a discount broker, there is no stopping you from making a mistake. With a full service brokerage, your financial planner can help filter out the bad plays from the smart ones. This advice alone can more than make up for commission fees.
Investment Plans – online stock trading doesn’t automatically come with an Investment Plan. Why are you buying a stock? What is your exit plan if things don’t go right? Will you use margin? Will you buy penny stocks (and if so, what percentage of your portfolio will be at risk)? A full service broker can help create an investment plan. Trading outside of your risk tolerance is one of the biggest risks your portfolio will face.
The best suggestion I can make for you is to look at a combination of both. Trade stocks online, but talk to an investment planner, develop an investment and trading plan first. While you may have to pay for his time, your trading plan will help you to avoid unnecessary risk when you on online stock trading.