The basics of online trading explained.
Online trading enables you to research, monitor and adjust your investments at any time of the day or night wherever you are in the world. This means that whether you want to issue a purchase or sale order or simply monitor the performance of your portfolio you have instant access to information relating to your investment. Advancements in technology now mean that you are able to use WAP enabled mobile phones or organisers to access your online broker when you are on the move.
The majority of online brokers offer an execution only service meaning that while they offer access to research tools such as share prices, performance charts and business news, they do not provide any specific advice. However, execution only broker services tend to be much cheaper than personalised services - many online brokers charge a minimal flat fee for any investments made (although some may charge an annual administration fee). As an incentive to attract new customers many online dealers offer introductory rates and offers for new clients.
Although the use of an execution only broker service is not ideal for the novice investor, most online trading services offer customers the ability to theoretically invest and monitor the movement of shares in the stock market. This gives novice investors the opportunity to familiarise themselves with the way their share account works and how their 'fantasy investments' perform before risking their funds.
Features to look for when deciding which online broker to invest with are things such as whether the broker places a limit on the maximum or minimum amount you are able to trade with, the research facilities they offer, any administration or commission fees charged and also the length of the settlement period offered (as this will dictate how long it takes to withdraw funds from you trade account and can be anywhere between 1 and 10 days). It is also important to find out whether a broker offer facilities such as limit and stop loss orders and whether there is a related charge for their use. You should also check whether there are any limits on the variety of markets you can invest in.
Once you have chosen an online broker to invest with you will be required to set up a trading account and deposit funds. You will then have access to the brokers full range of investment resources to help you research potential stock. Once you have decided which stock to invest in, you can generate a real time share price. If you are happy with this price you can then instruct the broker to purchase the shares on your behalf.
The majority of online brokers will hold your share certificates in a nominee account which they will operate on your behalf but of which you are listed as the beneficiary. This means that all documentation relating to your investment is automatically forwarded to them. Although this cuts down on paperwork for you it also means that you won't be directly sent the company's reports and account, takeover announcements and other shareholder perks. Additionally, any dividends paid or shares sold will be paid into this account.
Although online trading has many advantages there are also several risks to be aware of By using an online execution only broker you are effectively managing your own portfolio, meaning you need to be able to constantly monitor share prices as well as the status of your investment. Additionally, as with anything that relies on computers, technological problems can occur and may have adverse effects on your ability to trade, especially if share prices are moving rapidly. Also you must always consider the risks to your capital that apply to investment in shares whether you trade online or use a more traditional broker service.
As long as the risks are taken into consideration, online trading provides an excellent way for the novice investor to gain experience in managing their own portfolio of shares as well as for allowing more experienced investors the facility to have instant access to their investments.
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