Over the past decade and a half, technology and the internet has totally transformed the way in which traders and investors are able to access the financial markets.
While virtually all of these changes have been positive ones, and there has never been an easier time to trade stocks or shares, as a new traders vitally important to have a clear overview of the environment in which online traders now operate and the exact nature of the opportunities available. As a retail trader, knowing where and how to compete is your biggest edge in the market.
Accessing portfolio leverage
As technology has transformed the computerized systems brokers use to manage client accounts, it has become significantly easier for them to monitor an account and assess risk in a more sophisticated fashion. This has allowed brokers to broaden the circumstances in which they permit access to leverage, the means to amplify the outcome of your trades, by assessing risk on the basis of your portfolio rather than your outright margined positions. Nevertheless, margin should be used with caution in stock trading and rules surrounding pattern day-trading (the buying and selling of a stock within the space of a single day) continue to apply.
Reducing your stock trading fees
The main benefit that online trading of stocks has brought is a huge reduction in fees. Most of this is due to the intense competition between online brokers to secure clients. This has driven down commissions and service fees, but a further factor has been the capability to allow traders to execute orders online entirely by themselves. Many of the fees associated with the traditional model were connected to the research and execution service that telephone brokers provided; a self-directed trader who conducts all their own analysis and executes trades with the click of the mouse costs the brokerage firm virtually nothing, and they’ve passed these savings on to the trader. If you’re considering opening a new stock brokerage account, one thing to consider is whether the broker offers a “per share” fee schedule. Many online brokers offer a fixed price for all trades, no matter how large, and this can be very cost effective if you’re buying and selling shares online in large blocks. If you’re starting out with a small account, however, and only buying a few shares at a time, then it may mean higher costs. With a per share model, you’ll pay based on the number of shares you trade (often from around one cent per share), usually with a minimum fee of one dollar applied.
Making the most of your trading platform
As a self-directed trader buying and selling stocks through an online broker, youâ€™ll be doing all your own analysis. Once again, technology has transformed the ease with which information and research can be communicated, and most brokers provide extensive support in this area. As well as allowing you to execute orders, platforms typically support advanced charting and technical analysis tools, automated trading strategies, news feeds, stock scanners, and live exchange bid-ask data. Many of the larger brokers also support institutional trading and hedge funds, so as a retail stock trader youâ€™ll be benefitting from exactly the same platforms as the professionals do.
An expanding range of markets and how to benefit from them
One of the basic tenets of successful stock trading is diversification. By holding positions with a positive expectancy across a range of different stocks, risk and volatility within a portfolio can be significantly reduced. To further aid this, the range of ETFs (which stands for â€˜Exchange Traded Fundsâ€™) has increased exponentially over the last decade. ETFs trade exactly like stocks, and can be bought and sold within a traditional brokerage account. Unlike like traditional funds, they are managed â€˜passivelyâ€™, which means that rather than having a remit to make as much money for investors as possible, the manager of an ETF is charged with tracking a particular index or sector. This might be anything from the S&P to a particular sector such as healthcare, to a commodity such as crude oil or the major stocks of a country such as Japan. As well as providing access to a greater range of markets, ETFs have in-built diversification (they always contain many stocks), and can be a great tool to use in your online trading to smooth your returns.
HFT and the race to zero: should you be worried?
Where have the advances in technology potentially set stock traders at a disadvantage? The rate of flow of information has allowed some institutions to engage in HFT (â€˜High Frequency Tradingâ€™), a process where stocks are bought and then sold again almost instantaneously, reacting to new information within fractions of a second for tiny profits. For such trading outfits, speed is everything, and they compete with one another in what’s often termed as â€œthe race to zeroâ€�. Even with all the benefits that online trading has brought, you cannot hope to compete with the speed and computational resources of such firms. The good news is that you donâ€™t have to. Buying and selling with a longer term outlook of just a few days means youâ€™re not competing against such firms for profits, and places you on a far more level playing field where those you trade with have access to similar resources and information.
There has scarcely been a better time to start out in online stock trading. With the reduced costs and fees and the wealth of information and analysis tools currently available, positioning yourself to compete with other traders is nothing more than a question of understanding where your strengths as a trader lie, and how to exploit the opportunities that the market presents.