Online stock trading is a form of investment that has become popular in recent years thanks to the diffusion of computers and the Internet. Online stock trades can be executed quickly from anywhere in the world, whether at home or in an internet café in Thailand, without the need for calling an expensive broker. With just a few clicks of the mouse one can be in total control of his/her investments.
What are the key advantages of online stock trades vs. traditional stock trades?
Speed. Online stock trades can be routed quickly to the market without any phone calls. The best brokers have their severs co-located at the exchanges and information between brokers’ and exchanges’ servers does not even go through the internet but travels via dedicated fiber-optic lines. Such technological advances created a “speed rush” for the lowest latency among firms specialized in high-frequency trading.
Access. Online stock trades, depending on the broker, can be routed to many different markets and countries. The best brokers can provide multi-currency, multi-instrument, platforms that allow online trades of virtually anything at the click of a button: from commodities in India to options in Europe to futures and stocks in the US.
Price. Competition between aggressive brokers makes online stock trades generally much cheaper than offline alternatives. At the cheapest discount brokers, such as Interactive Brokers, online stock trading fees can be as low as $0.005 per share or $1 per trade. This compares very favorably to traditional offline fees as high as $20-25 per trade.
Investing vs. Trading
The lowering of barriers to entry, together with the three key advantages above (i.e., speed, access, price), has created a shift among many investors towards trading. What is the difference between investing and trading? In simple terms Warren Buffett is an investor while George Soros is a trader. An investor will buy a company stock with no predefined notion of when he or she will sell, if ever. On the other hand, a trader will normally have a price or time target in mind to realize a profit or cut a loss. An investor may keep an asset for years or decades, a trader might keep a position just for a few minutes.
Alternatives to online stock trades
In the last 4-5 years an alternative to stock trading has stormed the internet: online forex trading. Forex, or FX, is the largest market in the world and provides several advantages to stock trading:
High Liquidity. The forex market is huge. According to the Bank for International Settlements the average daily turnover in 2007 was $3.98 trillions. No other market in the world is this big. This means that entering-exiting positions in this market can normally be done very quickly.
24 Hours Trading. The forex market is open 24 hours hence traders can place trades online at any time.
Going Long & Short. One of the key advantages of forex trading is the ability to either go long or short. No restrictions are placed on shorting like it happens in the stock market.
High Leverage. In forex trading, a small margin deposit can control a much larger total value. Leverages can reach 200 to 1. This means that a deposit of $500 can control trading values up to $100,000.
As FX is normally the domain of sophisticated trading desks within the top international banks it is certainly not easy for a retail trader, normally used to online stock trades, to make the cut in forex and become profitable. Automated Systems can help an investor take emotions out of the equation.
In my next article I will discuss the benefits and shortcomings of automated forex systems. In the meantime, you can find out more find out more here about online stock trades vs forex.
George Pagani. Investor and trader based in Zurich, Switzerland.
