Investing is just a click away.
With access to financial and news websites, you can get free, up-to-the minute information on stock and bond markets and real-time quotes on individual investments from anywhere at any time.
Basic screens on most sites show the major indexes, the latest trading prices, plus the kinds of information you can find in newspapers, financial magazines, annual reports, and prospectuses. There may also be links to research about individual investments.
Many sites let you identify topics you want to follow and have that news delivered to you on the site’s homepage, a personalized homepage, or by email. And if you open an online brokerage or mutual fund account, you can act on your investment decisions by trading on the site.
OPENING AN ACCOUNT
Opening an online trading account begins with filling out an application you’ll find on the brokerage firm’s website. US brokerage firms require a Social Security number for US citizens and residents and an IRS Form W-8 for international investors. They ask about your work, your income, and your investment experience. They may also ask for a financial reference.
You can apply to open individual or joint online trading accounts, as well as specialized accounts for retirement or education savings. When the account is open—often within 24 hours of your application being approved—you can start trading. As with other US brokerage accounts, you have to pay for stock and bond purchases within a fixed period from the date of the trade execution. When it’s two days, the settlement date is described as T+2, and when it’s one day the settlement date is T+1. If payment isn’t received, the transaction isn’t settled. You can handle those payments by transferring money from a money market or margin account you’ve set up with the firm, by check, or by electronic transfer.
The drawback of having so much information available is that it can be hard to put it into perspective. Minute-by-minute fluctuations in the markets can be intimidating, and maybe even a little frightening, especially if you’re not an experienced investor. So keep in mind that not every event in the business world, even those involving companies whose stock or bonds you own, will have an impact on your portfolio, especially over the long term.
NOT PLAYING FOR KEEPS
You can test your research skills and your investment strategy by creating a mock stock portfolio—a feature that some online financial sites offer. All you have to do is follow the directions on the site for setting up the hypothetical account. Then you can choose investments and track their performance without actually putting any of your money at risk.
There’s a financial benefit to investing online: It usually costs less.
Unlike most traditional brokerage firms, which charge a commission based on the size of your stock trade or an annual fee based on the value of your portfolio, many online firms charge a fixed rate for any trade up to 1,000 shares, regardless of the price per share.
For example, if you buy 500 shares at $65 a share, a transaction of $32,500, you may not pay more than $4.95 for the online transaction. With a traditional full-service broker, however, you might be charged between $325 and $650—or 1% to 2% of the value of the trade—for the same transaction.
Discount brokerage firms, while less expensive than full-service firms, also tend to base their commissions on the amount of the transaction.
What you give up by trading online is the chance to interact with an investment professional who, in addition to carrying out your buy and sell orders, has a responsibility to alert you to potentially unsuitable decisions.
NOT ALWAYS QUICK ENOUGH
Online brokerage firms also make trading more convenient. In most cases, buy and sell instructions you type into your computer during regular trading hours are confirmed almost immediately. That’s generally the case with phone calls to your broker as well.
But as fast as trading online is, speed isn’t guaranteed. Sometimes—especially when volume is high and you’re eager to buy or sell at a certain price—the electronic systems that support online trading may have trouble keeping up.
And while not common, there have been occasional glitches on most online sites that shut down trading for a period of time.
But online trading does have a time-related advantage. If you place an order online while the markets are closed, it should be automatically executed the next day. You don’t have that convenience with phone orders.
TRADING BY DAY
One potentially dangerous consequence of online trading is getting involved in daytrading, or buying and selling investments rapidly, often within a matter of minutes, to take advantage of quick price changes.
The problem with day trading is that it’s impossible to predict how much or how fast prices will change. Plus, if you’re buying and selling at lightning speed, you’re piling up trading costs. In fact, most individual daytraders end up losing money.
…AND BY NIGHT
After-hours trading, which occurs during certain hours when traditional exchanges are closed, is increasingly open to individual investors. But some online brokerage firms charge extra for after-hours transactions. And since trading volume is lower during these times, there’s less liquidity. You may decide that it’s smarter to wait and place your electronic order for execution when the markets open again.