With online trading, traders make all their decisions themselves. Such an approach differs from using a stockbroker, as the broker generally offers information and advice. No matter how you trade, there is always risk involved. Here are five pros and cons of online trading.
E-commerce continues to grow in popularity. More than 14 million households in the United States are registered with an online trading service, according to data from Statista, a statistics company.
With online trading, or e-trading, traders make all their decisions themselves. Such an approach to trading differs from using a stockbroker, as the broker generally offers information and advice.
However you trade, there is always risk online and offline. The following list outlines the pros and cons of online trading.
5 advantages of online trading
1. Fee reduction
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One of the most obvious benefits of online trading is the reduction in transaction costs and high fees associated with traditional brokerage firms. Typically, you’ll pay between $5 and $10 to buy and sell stocks and exchange-traded funds at online discount brokerages, according to a Bloomberg report.
2. More control and flexibility
Time is often of the essence when trading stocks, so the speed of using online trading portals is an advantage for many investors. With online trading, you can execute a trade almost immediately. Traditional brokers may need appointments, either online, over the phone or in person, just to initiate a transaction.
3. Ability to avoid brokerage bias
By taking trading into your own hands, you can eliminate brokerage bias. Bias sometimes occurs when a broker gives financial advice that benefits the broker, such as a commission for selling specific mutual funds and other products.
4. Access to online tools
In the world of e-commerce, a lower cost does not necessarily mean a poor quality product. Many e-commerce companies today offer their customers an impressive suite of tools that provide valuable insights and help optimize transactions.
5. Ability to track investments in real time
Many online trading sites offer stock quotes and trading information that makes it easy for users to see how their investments are doing in real time.
5 disadvantages of online trading
1. Easier to invest too much too quickly
Because online trading is so easy – you basically press a button – there is the risk of making poor investment choices or overinvesting.
Online investors can protect themselves by understanding the stocks they are buying and implementing safeguards in fast-moving markets. Placing a limit order on your account is a way to control what you buy and how much.
2. No personal relationship with brokers
From getting help on how to create an investment strategy to understanding how the results of feedback mechanisms affect the market, online traders are on their own. For some, this type of autonomy can be destabilizing.
Experts often stress the importance of research, especially for new traders. You need to learn as much as possible about the companies in which you invest.
According to a recent study on excessive trading published in the journal Addictive Behaviors, online traders can experience a certain high when trading, which is similar to what people experience when gambling. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks that offer the potential for big gains but also big losses. “The very structure of the two activities (gaming and trading) is very similar,” concludes the study.
4. Internet dependent
The nature of online commerce means that ultimately you are at the mercy of your internet connection. If the Internet connection is too slow or interrupted, you can lose a potentially important or lucrative transaction.
5. Purchase errors due to computer missteps
With online trading, simply assuming that a trade has not been made can cost you money. Investors who think their trade was not completed could start over and end up investing twice as much as they planned. Assuming that a transaction has been made without seeing confirmation of the fact is also a mistake. Make sure you understand how to verify transactions and review statements before you start using an online investing system.