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 tradingplatforms 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.
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