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In today's electronic world, online investing is very popular. 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 transformation in the relationship between the broker and their clients.
If you're thinking about online investing, this publication should help you to better understand the services offered. As with all forms of investing, an educated investor has a better chance to make the correct choice and avoid a costly mistake. In this article, the aim is to help beginners to understand what to look out for before opening an online account with a broker.
What's Different With Online Investing?
There are three factors that all beginner investors need to understand when it comes to online investing: trade execution, researching stocks, and a quick primer on the most fascinating form of online trading: day trading.
Online Stock Trades
Whether you've worked with a traditional brokerage house in the past, or you're a beginner that's ready to start investing online, perhaps the single most important factor you need to understand is how to 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 computers supporting the online investment community, a market order is executed nearly 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 stock's price to rise or fall, or when an investor believes a stock's price will increase or decrease 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 will place a 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 is placed. 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 through a traditional broker in the past, then you probably recognize all of the terms just discussed. If you're a beginner that's 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. The speed of information and computers today allow day traders to rapidly invest online, and conduct a large number of transactions in a given day.
Day traders typically adopt the strategy of buying and selling stocks throughout the day with the hope that price momentum will result in profits. Day traders 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. Yahoo! Finance, Google Finance and nearly all online brokers provide investors with information that can be used to assess the financial health of the stocks they're evaluating. Our current favorite is Microsoft's Money Central.
In fact, we have 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 convenient to purchase and sell a stock, that's not a good reason to skip your research. In fact, conducting additional stock research is a good use of the time you're saving by investing online.
Online Investing Tips
Finally, here is a short list of tips that can help make your online investing experience 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 backup 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 that wish to leverage technology to help them with their investments.
About the Author - Investing Online
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