In the old days, if you wanted to purchase a stock you had to call up your stockbroker, give them your trade order, pay a commission, and sit by the phone to await their confirmation. With the creation of the internet however, came brokerage firms offering immediate and discounted online trading. From Scottrade, to E-Trade, to Vanguard, these online brokerage firms offer “ordinary” citizens the opportunity to manage their portfolio on their own.
So should you? What are the advantages and disadvantages of online trading? How does one go about getting an account? How does an investor chose what to buy and sell and when to buy and sell? When is it appropriate to manage your own investment portfolio and when is it best to leave it to the professionals?
Advantages of Online Trading:
Flexibility. Online trading is nearly instantaneous, providing you the freedom to trade at your leisure from anywhere, anytime. No need to make a call, travel to your broker’s office, or even get dressed. This flexibility means you have the freedom of watching the market and making quick trades if needed. You don’t have to wait on anyone other than yourself.
Expenses. For the most part, transaction costs are usually lower for online trades than traditional brokerage firms. E-Trade offers trades starting at $6.99, Scottrade at $7, and TD Ameritrade at $10. One reason for this is because overhead is obviously lower for online firms. Another reason for this however, leads us to one of the disadvantages of online trading which is no advice.
Disadvantages of Online Trading:
No Advice. Buyer beware! Unlike traditional brokerage firms that may offer investment advice specifically for your situation, you won’t find that online. Therefore, it might pay for inexperienced investors to meet with an investment advisor while still new to the game. You also won’t have guidance as to what price you should buy and sell with an online firm.
Expenses. While these can be an advantage because of low cost, many investors become “trading happy” and begin to make excessive daily trades which can not only lead to higher transaction costs but possibly lower returns as well.
So, What Should You Do?
Practice Before You Pay. While it might sound frustrating, if you are a beginning investor I highly suggest you practice before you pay money out of your own pocket to play the market. Take a few days or weeks (whatever you feel comfortable with) and make pretend stock selections and transactions. You can either keep a spreadsheet of fantasy stocks you would buy and sell and at what price. Or, you can even use a website such as UpDown.com where you get to practice investing in the stock market with a $1,000,000 practice portfolio of fake money. The website also lets you set up your own investing challenges and compete against friends and other investors. A cool feature of UpDown is that you can also earn money by beating the indexes because the website shares the revenue with its users, and it is all free!
Do not forget to include transaction costs to make the illustration as accurate as possible. You can even use Monopoly money as you practice. The idea here is to begin to understand your investment style, what you are comfortable with, and what you are not good at managing. At the end of your fantasy training ask yourself honestly if you would feel comfortable managing your own portfolio of money.