Online trading is spreading like wildfire – in the USA alone, over a third of adults hold some sort of investment outside of their retirement accounts.
The numerous benefits of online trading bring thousands of new investors daily, eliminating the entry barriers for beginner traders. Just in the last two years, the average daily trade volume grew over 100%.
But the main question is – isn’t it too late to jump on the trend and start investing with an online trading broker? The answer is: it is never too late. Getting started with building your investment portfolio has also never been easier or cheaper.
Despite all the good things that the world of online trading has to offer, it also has several disadvantages. So, are you curious to know if online trading is your cup of tea?
Read this 2021 list of advantages and disadvantages of online trading to get a taste.
What Does Online Trading Mean?
If you were investing in the stock market just some 30-40 years ago, you would have to physically call brokerage firms and place buy or sell orders for a particular stock or index manually. Physical brokers used to ask for exorbitant transaction and account management fees, have higher minimum investment accounts, and place orders manually, consequentially making the whole process of investment tedious.
Things have changed a lot since then. With the advent of trading platform development and the internet, brokers were able to move their entire operations online. This allowed them to replace numerous sales agents with code that executed transactions cheaper and faster than humans ever could.
Now that you understand the difference between online and offline trading, let’s take a look at the major pros and cons of online trading.
8+ Benefits of Online Trading in 2021: Never Too Late to Start
While there are a few obvious benefits of online trading, such as faster transaction processing and lower fees, some entries on this list might surprise you…
#1: Faster and cheaper transactions
Online brokerages process transactions automatically as opposed to offline brokers, who have to process them manually. As a result, you get much lower transaction fees on your trades. Online platforms like Revolut even offer free transactions included in some of their plans. Needless to say – buy/sell orders are placed instantaneously.
#2: More control and flexibility
You can see the history of your trades, view the current positions of your stocks, and analyze their performance in a neat dashboard. These features of modern online brokers enable you to have more control over your trades.
#3: Better information flow & tools access
One of the major benefits of using an investment platform is that it comes with several tools and features that empower you to make the right decision about your investments. Online trading platforms like eToro also share news about your stock performance directly on the dashboard and provide analyst opinions on the performance of all the stocks on the platform.
#4: Avoid brokerage bias
Many physical brokerages often get financial backing from major holders of a particular stock or fund. As a result, sales teams of such brokerages are incentivized to promote particular stocks. This brokerage bias can force you to make a hasty decision. Luckily, online trading brokers are much more decentralized in this sense.
#5: Lower entry barriers
Gone are the times when you needed to have thousands of dollars just to open an account in a brokerage firm. With online investment platforms, you can start trading with as little as $5. Bigger online brokerages like RobinHood will even give you some free shares to get started with the account.
#6: Easy deposit and withdrawal
With online brokers, you can easily exchange money between your investment, savings, and checking accounts. The transactions between the accounts are executed within one business day, making the process of buying and selling stocks highly efficient.
#7: Machine Learning and AI trading
When you unite trading software and machine learning development services, great things happen. Many trading platforms have built-in machine learning algorithms, which can help you automate trading. With AI trading, your application will consistently process the data from millions of transactions daily, adjusting the trading algorithm of your portfolio automatically.
#8: Custom notifications and automated buy/sell triggers
Wanting to buy that Tesla stock when it gets below $1,000? Not a problem! With automated buy/sell triggers, you can place automated orders on stocks based on their performance. You can also create custom email notifications to stay up to date on the performance of your stocks daily.
5+ Disadvantages of Online Stock Trading: Proceed with Caution
Let’s get the elephant out of the room. Do the benefits of online trading outweigh the disadvantages?
With that being said, no Fintech solution is perfect. Automated trading platforms are great because they break the entry barriers, and provide for the most efficient transaction processing.
But all these features come at a cost…
Curious to know what are the 5+ major disadvantages of online stock trading?
Scroll down below!
#1: You are on your own (mostly)
While online trading platforms make it very easy for you to form a constructive opinion on the performance of your stocks, you are pretty much on your own when placing the actual order.
Unlike physical brokerages or funds, which might offer their expert opinion on the purchase, you have to decide everything by yourself based on the data organized for you by the online brokerage.
#2: Fast market response = more volatility
Online brokerages enable millions of traders worldwide to trade their stocks instantaneously. While this is a great feature from the user point of view, it also can cause some problems. When certain news about the stock arrives quickly, millions of users can decide to pump or dump their stocks instantaneously, bringing more price volatility to the market.
#3: Trading becomes disruptive to life balance
While online trading platforms enable you to stay connected with your trades 24/7, they might also become disruptive. Therefore, it is important to stay mindful when planning your trading and investment learning hours.
#4: Riskier for beginners
With online trading, getting started with your investment portfolio became simple. However, this simplicity can also lead to higher losses in the beginning due to the lack of trading knowledge.
#5: Internet dependency
If you are out of the coverage area – you won’t be able to place an order manually with an online stock trader.
#6: Hidden costs
Some online brokers have complicated fee structures, which might be hard to understand. Unfortunately, no one is safe from hidden fees so make sure that you study the pricing section of your online brokers’ website thoroughly before investing.
#7: Biased suggestion mechanisms
Online brokerages provide various stock performance suggestion mechanisms, which are very helpful in guiding trading decisions. However, there’s no guarantee that these mechanisms will be 100% accurate, which means that you might be led to place some poor trades.
Do the Benefits of Online Trading Outweigh the Cons?
If you are a beginner trader looking to get started with your investment portfolio, then undoubtedly – online trading with a broker is the way to go.
Online brokers offer unbeatable entry requirements, the lowest transaction processing fees, and a lot of useful tools and reports, making the process of trading simple and more efficient.
With that being said, traditional brokerages have one advantage over online trading platforms – they provide you with their expertise backed by years of experience in stock trading. But does this benefit outweigh the downturns of trading with the physical broker? Not at all.
Curious to learn more about financial software applications and all things trading? Check out our blog for more informative articles.