How Does Online Trading Work?


All of us have heard of a friend or a relative who is involved in online trading or have invested money in the stock market. While some of them know what the stock market is all about, most do not. A large section of people have very negative ideas about the stock market. They fear losing all their money in the stock market.

Like everything in life, investing in the stock market comes with its risks. However, these risks can be mitigated if one has thorough knowledge about it and makes decisions wisely.

The number of people owning stocks has risen significantly due to the rise of online trading. Anyone with a good internet connection, sufficient money to open an account, and a satisfactory financial history can trade online.

You don’t need to have an investment planner or a fortune to invest in the market. Online trading is becoming one of the most sought out ways of investing in the stock market. It is time-efficient and can be done from the comfort of your own home.

Let us analyze the different kinds of online trading accounts, how to choose the right online brokerage, make profitable trades, and shield yourself from fraudulent activity.

What are stocks and how does Online Trading work?

Stocks are an investment that allows you to own a portion of a public corporation. They are also called shares or equities. People who own stocks are called the shareholders. The price of these stocks is dependent on various factors like the economy, performance of the company, and the attitudes of investors. If a trader thinks a company’s earnings are high or will rise further, they will bid up the stock price. Investors buy stocks in the hope of good returns from the company and build their wealth. 

Every company needs funds to grow and expand their business, launch new products, or pay off their debt. A company can decide to go public to gain the necessary funds. The first time a company issues stocks to the public, it is called an Initial Public Offering or IPO.

The shareholders are issued dividends when the company decides to share the profit with them. In other cases, the business saves up its profit and uses the money to make improvements to their company or hire new people. Stocks issuing recurrent dividends are called income stocks while companies that reinvest their profit are called growth stocks.

A broker is an individual who has the authority to buy and sell stocks on your behalf. They are licensed individuals who trade stocks through the exchange and charge commissions on each trade. 

Brokers can trade stocks on the trading floor, via phone or virtually.

An exchange can be compared to a marketplace where stocks, commodities, and other financial instruments are traded. An individual or a computer matches an order to buy to a sell order and vice versa. Online Trading happens when matches between buyers or sellers take place electronically.

Some of the popular stock exchanges are The New York Stock Exchange, The NASDAQ and The Tokyo Stock Exchange

A list of major exchanges can be seen in the Worldwide Stock Exchange. While the OTC Bulletin Board or the PinkSheets has a list of all the stocks that are not listed as major exchanges. 

During online trading, you have to employ the services of an online broker. It involves real money and instead of taking advice about investments, you make your own decisions about which stocks you want to buy or sell and request the trades yourself. Some also offer broker-assisted trades and real-time advice from live brokers as part of their trading services. They can even charge a small fee. 

Before you start online trading, select a legitimate broker. They will carry out your trades or put them into an account. Firms provide different kinds of services and account types depending on your needs.

Amount of Investment

As an online investor, you have to keep a minimum amount of money in your account. It is different from the minimum account balance in banks.

Decide on the frequency of your trades.

Since there are different kinds of investments, you have to decide on which investment you want to opt for and the period of the investment.

If you are going to hold on to a stock you buy, you should look for brokerages that don’t charge a huge sum of money for online inactivity.

Similarly, if you plan on trading every day, you need to look for brokerages that charge a lower fee per trade. You also need to think of the bigger picture and evaluate what will be the cost of using the site in the long run.

How much trading experience do you have and will you need guidance?

Before you start online trading, one must have adequate knowledge about the topic. 

As part of their services, many brokerage firms offer market analysis, information about trading, and help from licensed brokers. Some provide these services as an add-on and will charge a small fee.

A few trading sites function similar to major banks and provide services like debit cards, mortgage loans, and chances to invest in other financial instruments like bonds or mutual funds.

Many popular websites like Smartmoney and Keynote provide a thorough analysis of these firms and rate them on their services. They also provide customer reviews and analyze them based on their rates of success, customer service response time, trading tools, etc. These sites allow you to browse and compare the prices of different brokerage firms so that you can make the right choice.

Every trading site will require your personal and financial information, so you should make sure your online broker is verified and provides good security services like transmission encryption and automatic logouts. Investing Online Resource Center contains a list of all legitimate and reputable 

Many investor protection organizations provide authorized information regarding the market to protect its integrity. These are national or government-sponsored organizations and provide reliable information about making investments. Some of them are The Securities and Exchange Commission (SEC) and The National Association of Securities Dealers (NASD) that are government and private- sector regulators respectively.

Some examples of online brokerages are E*Trade, Ameritrade and Charles Schwab.

How to open and fund your account?

When you open an account with a brokerage firm, you will have to provide your personal information like your phone number, address, social security number, etc. You also have to answer questions about your financial history. These decide whether you are suitable to have an account or not. Your investments are tracked and reported according to tax regulations and the PATRIOT act.

You also have to choose between making an individual or a joint account followed by a choice between a cash and a margin account. A cash account works similar to a checking account while a margin account works more like a loan account or a line of credit. In this method, if you want to buy stocks, you can borrow money based on the equity you already own and use that as collateral. 

The Federal Reserve Board mandates that you should have 50 percent of the price of the stock that you want to buy in your trading account. For example, if you plan on buying $1,000 worth of stocks, you should have at least $500 in your account. The rest $500 can be borrowed from your brokerage.

Margin stocks can be a bit overwhelming for the common folk because of its complex nature. It is advised to stick to a cash account for online trading.

Finally, you also need to decide how the brokerage will store your money for you in between trades. You can opt for interest-bearing accounts where you can earn money without doing anything.

How to trade?

Now that you have opened your account and added sufficient money to it, you are ready to trade. The first step is to get a real-time stock quote to confirm the current price of the stock. Your brokerage may provide real-time quotes as part of their service or you will have to wait for the quotes provided by free financial news websites. They are generally twenty minutes late. If the market is moving quickly, a delayed quote makes all the difference because it might be very different from the original trading price twenty minutes ago. 

Now that you have gotten your quote, you can start trading. You can either place a market order or a limit order. The former trades at the current market price of the stock. A limit order is an order to buy or sell a stock at a specific price or better.

There are various other kinds of orders you can place depending on the services that your brokerage provides. This allows you to prevent huge losses when the market is falling. They are:

  • Stop order – This order executes once the price falls below the point that you had set. It however executes at market order after that and not at the stop point.
  • Stop limit order – These do not execute at the market price like stop order but rather at a price that you have set. One disadvantage is your broker will be unable to sell your stocks at the price that you have set if the markets are changing rapidly. Hence, the value of your stock will continue to fall.
  • Trailing stop order – A sell trailing stop order sets the stop price at a fixed amount below the market price with an attached “trailing” amount. As the market price rises, the stop price rises by the trail amount, but if the stock price falls, the stop-loss price doesn’t change, and a market order is submitted when the stop price is hit.

One should always keep in mind that although you can trade stocks 24 hours a day, but they will only be executed once the markets open.

Online Stock Fraud

Via Online Trading you can purchase and sell without taking the assistance of an agent or an investment planner. Fraudsters take advantage of this and employ various ways to defraud investors. 

Let us discuss some of these below:

  • Fraudulent Company Information Fraudsters provide false financial statements that provide a profitable description of companies and make investors hopeful. This eventually leads to an increase in stock price. 
  • Fraudulent IPOs – Many investors like investing in IPOs in the hope of a good return. The scammers provide false information about companies that will never go public or don’t even exist.
  • Pump and Dump Schemes – Scammers provide false information about stocks that drives the stock price. They send false emails, newsletters to investors who start buying that certain stock, and the price increases. The scammers then sell their stocks for a huge profit and stop promoting it. This drives the price down and causes huge losses to the investors.

In order to shield yourself from these scams, you need to do thorough research. If you are interested in buying funds during an IPO, go through the SEC’s Electronic Data Gathering, Analysis & Retrieval (EDGAR) system. They have authorized reports about all U.S companies along with companies of other countries.

Along with investing in stocks online check the bitqt”, you can also opt for other services like investing in mutual funds, bonds, etc. which have a smaller risk factor.