In recent years online trading has been booming as the world of trading is no longer restricted to those working at stock exchanges in major cities. There are now several online platforms where anyone around the world with a decent computer, reliable Internet connection, and a bit of know-how can trade assets such as stocks and bonds online.
If you are thinking about getting into online trading you will need to do some homework first so here are some tips on what you can do to start trading online.
Research Online Brokers
The first step in online trading is researching online brokers and creating a brokerage account with one of them. Reading up about the different online brokers in this article by business24-7 should help you get a handle on the types of brokers and the commission fees they are likely to charge. You will also want to consider how easy the web or smartphone applications and software are to use and if it features any research or training tools for new traders.
Some brokers have been around for years such as Charles Schwab, Fidelity, and Vanguard who over recent years have developed web and app-based trading platforms. Within the last five years, newer online trading platforms arrived on the scene and have become increasingly popular, these include Robinhood, SoFi, and Weibull. However, the choice of online brokerage comes down to the trading style you prefer and the size of the brokerage in terms of active traders.
Read About Stocks
After doing some research on different online brokers and narrowing down which ones best suit your needs, it is time to find out more about the stocks you will be trading.
For people who are very new to trading then exchange-traded funds (ETFs) may be a better place to start instead of stocks. With ETFs investors buy a package of stocks in one go, which is a good way to spread the risk if you aren’t feeling too confident to back only one or two companies. ETFs can be tailored to include several stocks, one recommendation is to build an ETFs package that mirrors the main U.S. stocks markets such as the Dow, Nasdaq, and S&P 500, this will result in your portfolio having wide exposure to the most active and lucrative markets.
It is common for traders to diversify their portfolios by adding assets such as bonds as well as stocks to decrease the amount of risk they are exposed to.
Choose a Trading Style
The online trading of financial assets, whether it be stocks or ETFs, involves different kinds of trade orders, however, the two basic types commonly used are limit orders and market orders.
Market orders work by processing trades instantly so the asset that is being traded will be bought or sold at the best market price at that moment in time.
Limit orders provide you with more control over prices when either buying or selling and they aren’t always processed immediately. Alternatively, with limit orders, you set a price to buy or sell at so you can set limits to help you forecast profits.
One option is to place a trailing stop-loss order on a stock you own, which is a mechanism that allows you to hold stock whilst the price is increasing but set it to sell automatically if it drops below a certain value.
Understand the Costs
Although you can start small-scale trading with just a few hundred dollars, there are other costs related to online trading and you should be familiar with them.
Every online brokerage will have a commission fee so it is worth shopping around to find a broker with a reasonable commission rate and good reputation, typically online brokers charge between 2 and 10 dollars commission per trade.
You should also consider your risk tolerance as this will affect how you want to trade and how you can trade in reality. Some people naturally trade more aggressively or conservatively, you should try to figure out how you would react in a trading loss scenario and if you would trade aggressively then you should make sure you have the emergency funds to cover the potential losses.
Online Trading and Taxes
An important issue to consider, especially if you will be trading stocks frequently, is taxes. The taxes that apply to profits made on trading stocks are known as capital gains taxes, which are more if you trade a stock within a year of buying it and less if you hold a stock longer than one year. Capital gains taxes are designed this way to encourage long-term investments that provide better support for companies.
Your First Trade
Once you have made an account at an online brokerage and decided which stocks to trade, you can think about making your first trade. Start by transferring money from your bank account into your brokerage account so you have money to buy stocks with, it may take a few days for your funds to be available.
When your brokerage account is active with available funds you can choose a stock you want to buy, select the order type and then place the order. Wait a few minutes for the order to execute and receive confirmation.
As well as trading traditional stocks online, there are a few popular alternatives including currency trading.
Forex or currency trading takes place on the foreign exchange market and focuses on buying and selling currencies from around the world. Currency trading works by investors taking a position on a currency that allows them to buy or sell in the future but at a previously decided rate. Currency trading happens in pairs of currencies such as the Euro and U.S. dollar, if it is expected that the dollar will rise in value against the Euro then you should use dollars to purchase Euros. Then when the exchange rate increases again you can sell the Euros for a profit.
Trading is more accessible than ever before as it now mostly takes place at online brokers who have reasonably easy-to-use platforms. Even though getting into online trading is easy, there is still a lot of information to understand and tips to follow if you want to make a career out of it.