Online trading is a form of investing that prioritizes short-term profits over long-term gains. It can be risky to dive in without properly understanding what online trading is.
According to legend, Joseph Kennedy sold all the stock he owned the day before “Black Thursday,” the start of the catastrophic 1929 stock market crash. Many investors suffered enormous losses in the crash, which became one of the hallmarks of the Great Depression.
What made Kennedy sell? According to the story, he got a trading tip from a shoeshine boy. In the 1920s, the stock market was the realm of the rich and powerful. Kennedy thought that if a shoeshine boy could trade, something must have gone terribly wrong.
Now, plenty of “common” people at least know what trading is. Online trading has given anyone who has a computer, enough money to open an account, and a good financial history the ability to trade the market. You don’t have to have a personal broker or a disposable fortune to do it, and most analysts agree that average people trading stock is no longer a sign of impending doom.
Almost anything can be traded online: stocks, currencies, commodities, cryptocurrencies, physical goods, and a whole host of other things – at this stage, you do not need to worry about all of these. For now, just keep in mind that if something can be traded, it will be traded.
And, you do not have to work on Wall Street to do online trading. Online brokerages have made it possible to trade online quickly from your home computer or your smartphone.
While online trading can bring quick gains for those who time the market correctly, it also carries the danger of substantial losses.
So, before you dive in, you should make sure you know what online trading is and how it works, the types of online trading, the best apps for trading online, and how to do online trading step-by-step. CAPEX Academy provides access to online trading courses for beginner and advanced traders.
What is Online Trading
Online trading involves buying and selling stocks, commodities, currency pairs, cryptocurrencies, or other instruments through a trading platform or mobile app. The goal is to generate returns that outperform buy-and-hold investing. Trading is a form of speculative investing.
While investors may be content with annual returns that beat inflation, traders might seek a higher percent return each month. Trading profits are generated by buying at a lower price and selling at a higher price within a relatively short period of time. The reverse also is true: trading profits can be made by selling at a higher price and buying to cover at a lower price (known as “selling short “) to profit in falling markets. However, please note that short selling is a high-risk trading method because any asset prices can keep rising – theoretically, without limit against you.
It’s also important to note that when trading online, most of the time you’ll use derivative products to speculate on the price movements of underlying assets – without ever owning the asset itself.
This is because derivatives like CFDs track the price of the asset on which they are based. Traders using derivatives never take delivery of the underlying, whether it be a physical commodity like gold or oil, foreign currency, Bitcoin, or security like company shares. In comparison, if you invest, you will buy, own, and sell an asset.
A ‘contract for difference’, or CFD, is an agreement to exchange the difference in price of an underlying asset, as measured from the time the contract is opened until the time it’s closed.
For example, you engage in analysis and believe that the price of Tesla will rise from its current level of 900. So, you trade long (open buy position) five Tesla share CFDs. Your forecast is correct, and you close your position when the market reaches a sell price of 975. The difference is $75.
Your total profits, excluding other costs, are calculated as follows: (975 – 900) x 5 CFDs = $375. If, however, the market moves against you, and you close at a level of 885, your loss would be $75.
Types of Online Trading
Based on asset class
There are two routes to trading the markets: speculating on their prices using CFDs or buying the assets in the hope they increase in value.
Stock trading involves buying and selling shares in companies to profit on daily and weekly changes in price. This short-term approach is what sets stock traders apart from traditional stock market investors who tend to be in it for the long haul.
While trading stocks can bring quick gains for those who time the market correctly, it also carries the danger of substantial losses. A single company's fortunes can rise more quickly than the market at large, but they can just as easily fall.
Most stock trading refers to the buying and selling of public company shares through a stock exchange or as over-the-counter products.
Forex trading is the simultaneous buying of one currency and selling another for proﬁting on floating exchange rate between two currencies (e.g., EUR/USD) by either:
- Buying low and selling high a currency pair anticipating that the base currency (the one on the left) will appreciate against the counter currency (the one on the right).
- Selling high and buying low a pair anticipating that the base currency will depreciate against the counter currency.
In either case, the forex trader could earn an amount of money on the difference between the opening and closing price of the trade. However, if the price moves against the trader, he will encounter a loss.
Like equity and currency, commodities are widely traded assets. Commodities that are traded are typically sorted into four broad categories: metal, energy, agricultural, livestock and meat.
- Metals commodities include gold, silver, platinum, and copper.
- Energy commodities include crude oil, heating oil, natural gas, and gasoline.
- Agricultural commodities include corn, soybeans, wheat, rice, cocoa, coffee, cotton, and sugar.
- Livestock and meat commodities include lean hogs, pork bellies, live cattle, and feeder cattle.
Cryptocurrency trading refers to the process of speculating a cryptocurrency's price movement. As compared to the other asset classes discussed above, online crypto trading is a newer concept. Cryptocurrency trading become a more popular alternative to the time-consuming, expensive mining unsuited for most people.
Based on purpose
Establish what you want out of your trading. Is it something you want to do on your own or do you want to let robots and experts take control of your trading?
Manual trading is where a trader will decide on when to buy or sell an asset and then place the trade themselves via market or pending orders. The manual trader may also scan multiple markets first to seek opportunities before deciding to act. Most of the work is done by the trader which means their output is only as good as their input.
Automated trading is where a pre-programmed algorithm will make all the decisions on what to buy and sell, and when, based on the instructions written in its code. A trader, programmer, or 'quant' may code their manual strategy so when certain rules or events occur, the algorithm will automatically take trades.
Social trading is a form of investing that allows investors to observe the trading behavior of their peers and expert traders. The primary objective is to follow their investment strategies using copy trading or mirror trading.
Based on timeframe
A timeframe in online trading can refer to any designated unit of time in which trading takes place.
Day Trading is the act of buying and selling a financial instrument within the same trading day, or even multiple times over the course of a day, taking advantage of small price moves, such that all positions are closed before the market closes for the trading day.
Intraday trading (including scalping or getting in and out fast for some bucks) provides traders with an opportunity to take leveraged trades and amplify both profits and losses.
Swing trading is a type of trading style wherein short-term strategies are played in the most liquid markets to take advantage of price swings, either reverting to the median or fading a rally and last from one day to a few weeks.
As opposed to swing trading, the length of the trades is much larger for positional trading. Positional trading consists of trades lasting from a few weeks to a few months and sometimes even more. Positional trading is as close to long-term investing as trading gets.
In general, the probability of success keeps on increasing from day trading to positional trading. Since the long-term market structure is upwards for most of the markets, positional trades have a decent probability of success.
Based on the analysis technique
There are two main schools of thought when it comes to analyzing the financial markets, which most of the time are combined by traders.
Trading obsessed with charts and graphs, monitoring price movements patterns and data that might indicate buy or sell signals. Technical trading relies on technical analysis and is purely based on the price action depicted by an asset class.
Trading based on fundamental analysis, which examines economic and financial factors that influence a business, a currency, or a commodity. Fundamental analysis is more appropriate for longer-term trades which avoid the short-term price fluctuations or noise.
Pros and Cons of Online Trading
Regardless of how you do online trading, there is always risk online and off. The following list outlines the advantages and disadvantages of online trading.
Benefits of online trading
- It eliminates the middleman: You can buy and sell without even speaking to your broker. This makes online trading alluring for someone who does not have the finances to work with full-service brokers.
- It’s cheaper and faster: When a broker executes your trades, it costs you more money. On the other hand, when you trade online, a brokerage charge is levied but it is always less than what a traditional broker who must place a trade physically, would charge you. Online trading is almost instantaneous.
- It offers greater investor control: One of the most important advantages of online trading is that it gives you greater control over your investments. You can trade whenever you want with online trading during trading hours, and you can also take your own decision without any interference from the broker.
- You can monitor your investments in real-time: Your online trading platform has a lot of advanced tools and interfaces to monitor your investing performance and to do your own research. You can see real-time gains or losses whenever you log in from your phone or computer.
Disadvantages of online trading
- Easier to invest too much too fast: Because online trading is so easy — you push a button — there is the risk of making poor investment choices or overinvesting. Online traders can protect themselves by understanding the asset they are buying and setting up safeguards in fast-paced markets. Placing a limit order on your account is one way to control what you buy, where, and how much of it.
- Overexposure: Overexposure in trading is the term used to describe the mistake of taking on too much risk. Typically, it's when a trader makes the technical blunder of investing too much capital in a single position or market using leverage. If managed well, leverage can work in a trader’s favor. But in some extreme cases, an investor can be wiped out just from using too much leverage.
- No personal relationships with brokers: From getting help on how to create an investment strategy to understanding how the results of feedback mechanisms affect the market, online traders are left to their own devices. For some, this kind of autonomy can be unsettling. Experts often stress the importance of research, particularly for new traders. You need to learn as much as you can about the markets in which you invest.
- Addictive nature: Online traders can experience a certain high when trading that is like what people experience when gambling. The structure itself of the two activities (gambling and trading) can be remarkably close when not properly understood and controlled.
How to do Online Trading?
If you're trying your hand at online trading for the first time, know that most traders are best served by keeping things simple.
That said, the planning of online trading comes down to three steps:
Choosing an Online Broker
Before you can trade online, you must select an online broker. Your online broker will execute your trades and store your money in an account. The online trading industry has seen lots of fraudulent boiler rooms, but there are still many regulated firms to choose from. Different firms also offer various levels of help, account types, and other services. Here are some things you should keep in mind as you look for a broker.
- low cost (low commissions and fees)
- reliable (can trade when you want, with minimal system outages)
- regulated (provides proper security of funds)
- gives you tools for research (least important, since there are loads of free tools available online)
If you want to day trade, there are a couple of extra requirements:
- The broker must execute orders instantly. No intervention on their part. Even a one-second delay is too much. “Trade from chart” capabilities, and/or ability to rapidly place, adjust and cancel orders.
- There are loads of brokers, some of which are better for investors and some which are better for day traders or swing traders. Picking a broker is the biggest trade of all; all your capital is given to this company.
- Each broker offers a trading platform or trading app. This is the technology that allows you to view quotes, see charts, do research, and most importantly place orders. Test out the best trading apps out there by opening demo accounts with various brokers.
Opening & Funding an Account
When you open an account with an online broker, you'll answer questions about your investment and financial history. These questions determine your suitability for the account you are requesting. You will also have to provide your address, telephone number, and other personal information.
One of the best ways to learn more about online trading is to open a risk-free demo account with us.
Our demo accounts simulate the live market environment found in our award-winning trading platform, giving you access to over 2,000 markets, including CFDs on:
- ETFs (Exchange Traded Funds)
Trading in a virtual market will allow you to explore, experiment, and learn with confidence. Our demo accounts come with a pre-set balance of $50,000 in virtual funds. By recreating the dynamics of ‘real’ trading, you get the opportunity to see how our products and financial markets work – all without putting any capital at risk.
Practice online trading until you’re ready to open a live account.
Once you've opened and funded your account, you can start trading. You can choose to place a market order or a limit order. A market order executes at the current market price of the asset. A limit order, however, executes at or better than a price you specify. If the price doesn't reach the limit you set, your trade will not go through.
Some brokerages offer additional options, often used to prevent high losses when an instrument price is falling. These include:
- Stop order - A form of market order, this executes after the price falls through a point that you set. The order executes at market price, not at the stop point.
- Stop limit order - These are like stop orders, but they execute at a price you set rather than market price. In rapidly moving markets, the broker may not be able to execute your order at your set price, meaning that the stock you own may continue to fall in value.
- Trailing stop order - Like a stop order, a trailing stop executes when the price falls through a point you set. However, its selling price is moving instead of fixed. You set a parameter in points or as a percentage, and the sale executes when the price falls by that amount. If the price increases, though, the parameter moves upward with it.
You must also select whether your order stays active until the end of the day, until a specific date or until you cancel it. Some brokerages allow you to place "all or none" or "fill or kill" orders, which prevent a partial rather than complete exchange of the financial instrument you want to trade.
Final Words about Online Trading
Online trading requires you to use a brokerage service that aligns with your investing goals, educational needs, and learning style. Especially for new traders, selecting an award-winning broker that fits your needs can mean the difference between an exciting new income stream and frustrating disappointment.
While there is no sure-fire way to guarantee investment returns, there is a way to set yourself up by selecting the online brokerage that best suits your needs.
FAQs (Frequently Asked Questions)
Is online trading safe?
While there are concerns about online trading, traders and investors can be assured that the highly regulated brokerage firms that offer this service use an important level of security. Experts also state that online trading is as safe as offline trading as financial transactions are always protected.
Is online trading profitable?
If you adapt to all above mention points, online trading on stocks could be profitable for you. The practice is the key to online trading. But it is important to remember that due to its volatility there is a risk to lose invested capital.
Can you get rich from trading online?
Only a very few will ever make billions trading online. However, the success of the top traders shows that is not impossible to get rich trading online. Even the best traders will lose money sometimes, but if you will keep educating yourself. Closely watching market trends can start to regularly turn a profit, then you are well on your way to success
Is online trading hard to learn?
The truth is trading is NOT easy but it’s also NOT “rigged.” Like any worthwhile endeavor, trading has a steep learning curve followed by ongoing challenges. Understanding the journey and the problems you will face at each stage can help you align your expectations with reality.
What is the best online trading app?
MetaTrader 5 multi-asset platform for trading Forex, exchange instruments, and futures. MT5 is an award-winning trading platform that puts you in charge, whether you are a long-term investor or actively trading global markets.
What is CFD trading?
CFD trading is a method of trading in which an individual engages in a contract with a CFD broker, rather than purchasing the underlying asset directly.
What is spread in trading?
In online trading, the spread is the difference in price between the buy and sell prices quoted when you want to make a trade.
What is slippage in trading?
In online trading, slippage is a term that refers to the difference between a trade's expected price and the actual price at which the trade is executed.
What is leverage in trading?
Leverage is a facility that enables you to get a much larger exposure to the market you're trading than the amount you deposited to open the trade.
This information is prepared for general circulation. It does not regard to the specific investment objectives, financial situation or the particular needs of any recipient.
You should independently evaluate each financial product and consider the suitability of such a financial product, by taking into account your specific investment objectives, financial situation or particular needs, and by consulting an independent financial adviser as needed, before dealing in any financial products mentioned in this document.
This information may not be published, circulated, reproduced or distributed in whole or in part to any other person without the Company’s prior written consent. Past performance is not always indicative of likely or future performance. Any views or opinions presented are solely those of the author and do not necessarily represent those of sc.capex.com