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What is Online Stock Trading?

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In the olden days, you had to call a broker to trade stocks. (In the olden olden days, you could even write a letter!) Now you can buy or sell stocks as fast as you can click a mouse (as long as you have the funds in your account to cover it.) The speed at which you can execute a trade may not matter to you personally, but the speed at which anyone can make a trade has changed the way people invest.

What is Online Stock Trading?

Online stock trading is a model where you can enter your trades directly into your broker's system and let their computers buy and sell for you. This is a disintermediation of the traditional model of stockbrokers; there may not be another human involved. Log on to your broker's web site or use their mobile app and you're off and running.

Trading stocks online has three specific characteristics:

  1. You pay a discounted commission on all trades
  2. Your brokerage gives you access to unfiltered research information
  3. You are in charge of your trades, on your schedule

With the Internet pervasive in businesses and homes, and with mobile devices and applications giving you access to your online brokerage anywhere you have network access, buying and selling stocks, bonds, commodities, currencies, funds, or whatever is easier and faster than ever. (Is it better than ever? Hold that thought.)

Not only has the Internet reduced the amount of time between you wanting to make a trade and your broker being able to make that trade, the pervasive use of electronic trading platforms has reduced the amount of paperwork and manual labor required to prepare, execute, and record a trade. It's all electronic now. That cuts costs, improves speed, and allows lots of discount brokers to provide better service at lower prices.

Online Trading versus Day Trading

The ability to trade stocks anywhere, anytime has allowed a lot of people to become day traders. A day trader might spend all day tracking the semi-random ups and downs of various stock prices, making trades here and there to make 1% here, 2% there, and hopefully end up with more money at the end of the day than the start. (Do day traders make money? Some do. Is it worth their effort? Depends if you want to be tied to a computer all day, tracking dozens of stocks online, hoping to get the timing right. Of course there's also mobile day trading, but how much information can you get from a little screen? Are your thumbs nimble enough to manage the details of intraday trading?)

That trading has little to do with the underlying value of the stocks. Instead it focuses on finding and exploiting pricing inefficiencies in the market. The goal is to find a bargain, get in fast, and get out as fast as possible. Speed is the name of the game.

Online trading makes day trading possible, but not all online trading is day trading. You can use online trading to make one or two trades a year and have a very successful investing career—if you pick the right stocks. Online stock trading lets you decide what to buy and when, to your taste and on your schedule.

Again, this comes down to the question of trading versus investing. Are you trying to predict what other people will do in the short term, or are you looking for good businesses which will grow and make you money over the long term?

Does it Make Sense to Trade Stocks Online?

In the glory days of full service brokers, your broker probably made recommendations about what to buy and when. Your broker didn't necessarily have your own best interests at heart. (Did your broker ask you about your financial goals? Before every trade?)

Your broker also probably charged you fees just for handling your account.

To be a successful day trader, you need a lot of free time, the desire to read financial statements, a great insight into human psychology, and a lot of money to lose (or tremendous luck)—but the average person can make money in the stock market by learning a few things about how to invest in stocks and following a safe strategy.

Even if your investment strategy is to put money into an index fund once or twice a year, doing so through an online broker is fast, cheap, and easy. The effort and money you will save will pay off for you year after year. Online investing makes this possible at your schedule, at your own pace.

Should You Use Internet Stock Trading?

If you're more comfortable with investing and want to diversify beyond the simple index fund strategy, you should take the time to explore the stocks, bonds, and ETFs you can trade through a discount broker. If you have the money to invest and the time to learn how to trade stocks online, start by setting up a brokerage account. If you do your research right, you can even find free online trades for the first month or 90 days (though you may have to roll over an existing investment account).

A few hours every few months will give you the knowledge you need to find good stocks. That's not much time for a great annual rate of return to allow you to double your investment every five to ten years. Online securities trading is the only game in town if you're at all interested in actively managing your portfolio.

Remember, though, that as with any investment you can lose money. If you're careful, however—if you're in it for the long term—you're almost always better off managing your own investments by buying what you understand and what you're comfortable with.