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 Just to give you give you a feel for how popular online investing is today - it's estimated that over 200 securities firms now offer clients the ability to invest online. Times are changing and investing over the Internet represents a dramatic change in the relationship between the broker and their clients.
If you're thinking about online investing, we're going to help you to better understand exactly what to expect. As with all forms of investing, an educated investor is more likely to make the correct choices and avoid costly mistakes. In this article, we're going to help all you beginners out there understand what to look out for before you open an online investing account with a broker.
What's Different With Online Investing?
There are three things that all beginners investors need to understand when it comes to online investing - trade execution, researching stocks, and a quick primer on perhaps the most fascinating form of online trading - day trading.
Online Stock Trades
If you've worked with a traditional brokerage house in the past or you're a beginner that's finally decided you're ready to start investing online, then perhaps the single most important thing you need to understand is how to actually trade stocks online. There are four basic ways to buy or sell stocks online - market orders, limit orders, stop orders, and stop limits.
Market Orders
A market order is the fastest way to buy or sell a stock online. Placing a market order tells your broker that you want to sell or buy a stock at the prevailing market price.
With a market order, your online broker is guaranteeing the execution of your order. You are not guaranteed anything when it comes to price other than getting the prevailing market price. With state of the art online investing computers, a market order is executed virtually instantaneously.
Limit Orders
A limit order is a request to buy or sell a stock at a price that you specify. You are not guaranteed that your buy or sell order will ever be executed. If the order is placed, then you'll get the price specified or a better price.
Online investors place limit orders when they can afford to wait for a stocks price to rise or fall. Or in situations that investors believe a stock's price will rise or fall to their financial advantage.
Sell orders will execute at a price that is at or above your order limit, while buy orders will occur when the price is at or below your order limit.
Stop Orders
A stop order is a request to buy or sell a stock at the prevailing market price, but only after a stock trades past the stop price. Once a stock's price moves past this point, your stop order becomes a market order.
Online investors place stop order to protect a profit or limit a loss on a stock that they already own.
Stop Limit Orders
A stop limit order is a combination of a limit order and a stop order. A stop limit order is used to protect an investor's profit or limit their loss. Once a stock moves past the stop price, a limit order kicks in. At this point the rules of a limit order are in effect, meaning the investor is guaranteed the limit price, but not the execution of the stock trade.
If you've invested via a traditional broker in the past, then you probably recognize all of these terms we just discussed. If you're a beginner that's just looking for some online investing information involving the trading of stocks, that's all there is to it. If you think there is more to trading stocks online, then we're sorry to disappoint you but there isn't anything more you need to know about trading stocks.
Leveraging Online Investing - Day Trading
Day trading takes online investing to the extreme and back. The speed of information and computers today allow day traders to rapidly invest online and conduct a relatively large numbers of transactions in a given day.
Day traders typically adopt the strategy of buying and selling stocks throughout the day in the hopes that price momentum will result in profits. Day trades stare at computer screens all day long searching for a stock that is moving quickly in one direction. Their investment in a stock may only last minutes as they attempt to close out a position before a stock's price reverses itself.
If you're thinking about investing online and eventually becoming a day trader, then just be prepared to suffer financial losses. In fact, most day traders never graduate to profit-making status because the learning process can be such a painful financial experience.
Traditional investors that carefully research stocks before making an online trade believe day traders are more like gamblers than investors. The rush of day trading can be addicting. Our advice is to never take out a second mortgage or take a chance of losing your retirement funds just for the thrill of a stock trade. If making money by investing online was that easy, everyone would be doing it.
Researching Stocks Online
Perhaps one of the most useful tools available to online investors is the ability to thoroughly research stocks before buying or selling shares of stock. Yahoo! Finance, Google Finance and nearly all online brokers provide investors with plenty of information on the financial health of the stocks they're evaluating. However our favorite is Microsoft's Money Central.
In fact, we've got an entire series dedicated to the topic of researching stocks that mimics the approach taken by Microsoft. Reviewing this information can be extremely valuable before making an online investment of any kind:
While investing online makes it extremely convenient to purchase and sell a stock, that's no reason to skip your research. In fact, our advice is to put all that time you're going to save by investing online to good use by increasing the time you spend researching stocks.
Online Investing Tips
Finally, here is a short list of tips that should help make your online investing experience a little more satisfying:
- Make sure you get information from the online broker substantiating all marketing claims of trading speed. Make sure the real trading speed is aligned with the advertised speed.
- Determine if you are seeing delayed or near real time stock quotes.
- Make sure you understand the process for entering or canceling an online stock order (limit or stop loss).
- Review the process that occurs if the online broker's website experiences an interruption and you are no longer able to place an order online. Even if the broker claims to have redundancy for their website, your ISP could also break your connection to the Internet. Understand the back up process.
- Keep all customer service telephone numbers handy in case you need assistance during the learning process.
Investing online was meant to streamline the trading process and empower the investor. However, the technology has also spawned innovative ways of trading such as day trading - which is not always positive. As speeds increase and technology continues to improve, the future holds even more promising services for those wishing to leverage technology to help them with their investments.
About the Author - Investing Online
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