The Internet has changed trading in many ways. Internet trading has spread widely and fast, with investors unable to get enough of it. From newbies to more experienced investors, trading over the Internet has given the investor benefits in the form of time, speed, wealth, power, and knowledge, as well as more independence. Even people who did not trade before have jumped into the excitement and become “internet investors” in hopes of making fast money.
As many benefits and advancements that it has brought to investors, this type of trading has its pitfalls or downfalls too. Many inexperienced investors caught in the frenzy of the trade have lost a great deal of money while others have made a fortune.
Speed and fast trades are two of the Internet’s contributions to investing. That is, speed to place your orders to a broker, to communicate your desires to execute a transaction to buy or sell in the stock market. But there is a misperception in the general public, and some less experienced investors, that by the click of a mouse the transaction is executed. The speed in which you communicated the order is there, but on the other side sits the broker waiting to get you the best price for the executed trade. During that period, the market continues to fluctuate.
There is a technique to help you lessen the negative impact of these speed orders. It is called a limit order. It protects you from loss while your broker is finding you the best price in the shortest amount of time. In addition, it protects you from fluctuations in the market by limiting the cost to buy your stock – to your broker.
Broker commissions have also gone down due to Internet trading. However since it has allowed brokers to execute more transactions, the opportunity to make more money is there. The commissions are still there, just lower, since the internet has simplified many tasks. When choosing a broker, make sure that the low commission is not a reflection of performance or poor service. Investors should take this into consideration.
On the other hand, Internet trading has allowed some firms to take advantage of a larger number of small commissions in a shorter amount of time, freeing time to concentrate in larger clients that translates into larger commissions.
Specialty brokers have encountered a lot of competition, as Internet trading has become the way of doing business. Since most investors prefer a firm to handle all their trading, this has hurt specialty brokers. Most investors favor diversity in their portfolios and firms that handle a variety of trades are a better choice. Trading has become more intensive and most brokers are not interested in offering specialties. If you are going to trade in a specific arena, for example penny stocks, then you might benefit from a specialty broker in that area.
However, some firms utilize specialty brokers for clients or investors with special needs. These specialty brokers cater to these investors and are limited to their specialty. This seems to work well for this purpose, but there is always a loss of time in the execution rate for the firm.
When choosing a brokerage firm, you should do a bit of research to determine if an online firm will be able to satisfy your investing needs. By understanding your investment goals, you will be able to determine if you need some diversification. A firm that handles many types of trades will be best for you. If you are interested in investing in commodities, you would do better with a specialty broker.
When shopping for commission rates, beware of low commissions and use your own discretion by doing some research on the firm. Commissions could be a flat rate or based on the size of the trade; they could be promotions or sales that last for a determined period of time. Do a bit of investigating before you commit to any firm that seems to be charging very low commissions.
Another aspect to consider is the firm’s policy. Read the fine print. This can include issues with broker’s mistakes, margin accounts, website crashes and many other important issues that you might otherwise be unaware of.
A lot of this information is available on the company’s website since online trading lacks the “one on one” interaction of a traditional brokerage firm. If you prefer a personal touch and constant communication with your broker, online trading may not be for you.
There are advantages, as well as some disadvantages, to online trading and before choosing a firm you become educated about it and assess your investment goals.