With online trading, traders make all their decisions themselves. Such an approach differs from using a stockbroker, as the broker typically offers input and advice. Regardless of how you trade, there’s always risk. Here are five advantages and disadvantages of online trading.
Online trading continues to grow in popularity. More than 14 million households in the U.S. are signed up 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 typically offers input and advice.
Regardless of how you trade, there’s always risk online and off. The following list outlines the advantages and disadvantages of online trading.
5 benefits of online trading
1. Lower fees
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One of the clearest advantages of online trading is the reduction in transaction costs and high fees associated with traditional brick-and-mortar 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 you trade stocks, so the speed of using online trading portals is a benefit to many investors. With online trading, you can execute a trade almost immediately. Traditional brick-and-mortar brokers might require appointments, either online, over the phone or in person, just to initiate a trade.
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 in the form of a commission for selling specific mutual funds and other products.
4. Access to online tools
In the world of online trading, a lower cost does not necessarily mean a shoddy product. Many of today’s online trading companies offer customers an impressive suite of tools providing valuable information and helping optimize trades.
5. Option to monitor investments in real time
Many online trading sites offer stock quotes and trade information that make it easy for people to see how their investments are doing in real time.
5 disadvantages of online trading
1. Easier to invest too much too fast
Because online trading is so easy — you basically push 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 setting up safeguards in fast-paced markets. Placing a limit order on your account is one way to control what you buy and how much of it.
2. No personal relationships 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 left to their own devices. For some, this kind of autonomy can be unsettling.
Experts often stress the importance of research, particularly for new traders. You need to learn as much as you can about the companies in which you invest.
3. Addictive nature
Online traders can experience a certain high when trading that is similar to what people experience when gambling, according to a recent study on excessive trading published in the journal Addictive Behaviors. The study noted that some investors choose short-term trading strategies that involve investing in risky stocks offering the potential for large gains but also significant losses. “The structure itself of the two activities (gambling and trading) is very close,” the study concluded.
The nature of online trading means that, ultimately, you’re at the mercy of your internet connection. If the internet connection is too slow or is interrupted, you can lose out on a potentially important or lucrative trade.
5. Buying errors due to computer missteps
With online trading, to simply assume a trade was not completed can cost you money. Investors who believe their trade was not completed might make the trade again and end up investing twice as much as they intended. Assuming a trade was completed without seeing confirmation of the fact also is a mistake. Make sure you understand how to verify trades and review statements before you begin using an online investing system.