The internet has made it so that millions of people are making trading decisions for themselves. This approach is drastically different from the decade’s old approach of using a broker who typically can offer some advice. Regardless of how a person trades, there are going to be advantages and disadvantages to trading online. There are thousands of trading platforms online today. If you are new to all this and are not sure how trading actually works, you will probably need help with making the right trading decisions.
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Benefits & Risks of Using Trading Platform or Software
Lower Fees and Improved Flexibility Are Benefits of Using a Trading Platform
A clear benefit of online trading is the drastic reduction of costs and fees when compared to trading using a brick-and-mortar firm. You can expect to pay between five and $10 when you buy and sell stocks and exchange-traded funds using online discount brokers.
Trading stocks is time-sensitive. Online trading platforms allow one to execute trades almost instantly. Working with a brick-and-mortar broker requires setting up an appointment, be it on the phone or online, to initiate the trade. By the time this is done, the factors that might have encouraged you to make the trade may have changed.
Online Trading Platforms Help Avoid Broker Bias
Broker bias happens when a broker gives their client financial advice based on what’s going to benefit them as a broker. The broker might help by getting a commission if they sell a specific mutual fund or other products.
Seller bias is expected when you purchase a product. For example, if you want to buy a vehicle and you are looking to decide between a Toyota or a Ford, you know that when you walk into the Toyota dealership, they are going to try to sell you a Toyota. However, when you walk into an investment firm, you may not have that same awareness that these same types of biases exist. Brokerage firms have been cited for many biases to base abuses. Some function like supermarkets where they put the best “shelf space” aside for firms that pay the most for that privilege. It means that the investment vehicles they offer are not always what’s best for the client, but instead of what is best for them.
The Benefit of Monitoring Investments in Real-Time Online
Using an online trading platform does not mean that you are necessarily using an inferior product. The truth is that many online trading companies give customers an impressive suite of tools that provide them with valuable information to help them make the most out of their trades. Online trading sites offer stock quotes and trade information so that people can quickly see how their investments are doing in real-time.
For the past nine decades, the S&P 500 has had an average return of about 10 percent. Most investors are not even making this average return. The problem is that they are not able to effectively manage multiple investment accounts and lack the tools needed to monitor their investments in real-time. Online platforms allow you to know how your investments are performing right now. It will enable you to see what changes you need to make to improve your outcome.
Using an Investment Platform May Lead to You Investing Too Much Money Too Fast
All investments carry risk. However, because online trading is secure, all you need to do is click your mouse, and there is the risk of making emotional investments, making poor choices, or over investing.
If you choose to use a trading platform, you can protect yourself by understanding the stocks you are purchasing and then setting up safeguards. For example, place a limit order on your account so you can control how much you are buying and what you buy.
Inexperience is dangerous when using an investment platform. When you use an investment platform, you have no relationship with brokers. There is no one there giving you advice on how to create an investment strategy. For some people having this amount of autonomy when it comes to managing their own money is unnerving. New traders need to do their due diligence. Learn as much about the companies that you want to invest in before clicking the mouse.
Using an Investment Platform Can Become Addictive
Without having the proper perspective, one can go from investing to gambling. When something becomes addictive, a person loses their ability to control their actions even though they know that their actions can have negative consequences. Some traders using online platforms choose short-term strategies that involve risky stocks with the option to gain a ton of money or suffer significant losses.
Structurally, investing, and gambling have a lot in common. They both require assessing risk capital versus risk-reward. They both are based on minimizing risk while maximizing reward. Investors have more ways to mitigate losses than gamblers do. Investors have sources of relevant information that they can turn to.
The Unreliable Nature of Technology Affects Online Traders
Online trading means that you can only trade if you have an internet connection. If the internet connection becomes slow, if it gets interrupted, or if there is some other technical glitch, you run the risk of losing out on a lucrative trade.
Computer glitches have cost investors a ton of money. They may go through the trading process, and then there is a glitch. So they assume that the trade was never made. They make the trade again and end up investing twice as much as they wanted to invest.
The same thing can happen in reverse, assuming that a trade was made without getting proper confirmation that can cost trader money. When using online platforms for investing, you need to make sure that you know how to verify trades and review statements.
Online trading platforms have helped many people get a firm grasp of their financial situation. They have helped them save for the future, have a clear picture of where their money sits, and have provided an easy to understand vehicle to allow people who otherwise would not invest to invest in themselves.
As always, we love to hear from our readers. What do you think are some of the pros and cons of online trading platforms? Let us know in the comments section below.
Originally published November 6, 2019 , Updated : November 7, 2019