How Online Trading Works: An Introduction

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Not long ago, you had to personally meet a broker to initiate a trade. And if you didn’t have deep pockets, you didn’t belong. Rich people controlled the markets—until online trading stole the show.

What is Online Trading?

Basically, online trading lets you trade stocks, currencies, and other assets through an online platform. It’s as simple as that.

BUT there are huge differences if you compare it with the traditional way of trading.

Let’s take a closer look at how online trading works.

Online Trading Kicks Out the Middleman.

Well, almost.

Before, you had to talk with a lot of middlemen just to execute your trade. Now, if you’re not lazy to click a few buttons, you can trade.

You have greater control over your money. No need to call or message your broker, unless you really have to.

We Repeat: Greater Control

Online trading lets you execute your trades at the drop of the hat. You also get to decide when to trade and when to not trade.

That’s a lot better than having to wait for another person (broker) before you can start whipping out winning trades.

Costs are Low

Since there’s no middleman, and you’re practically free to do anything, you pay lower fees. In addition, most brokers charge very low commissions to start with.

Less money for fees and commissions means one thing…

…more money for your investment!

But since we’re talking about fees, here are some common online trading-related fees:

  • Base-trade fee (fee that you pay every trade)
  • Account Maintenance Fee (or account inactivity fee)

Most brokers, however, don’t charge commissions at all. They earn their cheese by the difference between the bid-ask price, or spread.

Different Account Choices

When you sign up for a live online trading account, you have to choose the kind of account you want to have. In general, you got two choices:

  1. Cash Account
  2. Margin Account

Cash Account

Consider this as a straightforward checking account. And just like a checking account, you must deposit enough cash in this account to pay for an asset.

Margin Account

This, on the other hand, is more like a loan. This is slightly more complicated than a cash account. But the good thing is that it lets you control more assets than your money can afford.

When using a margin account, you’re buying on borrowed funds. That’s an additional risk for you. However, margin accounts let you try out more trading strategies like short selling.

Different Order Choices

One of the most compelling features of online trading is the variety of orders it offers. These are like additional ammo for you to have better firepower.

Market Order

A market order, in terms of trading, executes at the current market price of an asset.

Limit Order

A limit order, meanwhile, executes at the price you choose. If the asset doesn’t reach the price you want, the trade won’t execute.

Meanwhile, other orders let you control the ammount of losses you incur. You can think of these as your insurance for when the trade goes against you.

  • Stop Orders
  • Stop Limit Order
  • Trailing Stop Orders

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