Investing Tips

The Risks of Online Trading

8 Apr , 2017  

Online trading involves risks that are not suitable for many individuals. This trading is speculative and although it can bring in short term profits it can also result in losing your entire investment. For the past two years’ complaints to the SEC regarding online trading have shown an increase of 330 percent. Many of these resulted from investors not having the necessary information.

One of the major problems with online trading are delays occurring on the newer systems. Trade confirmations are not always received in time and an understanding of alternatives must be in place to effectively cope with these delays. If not orders can’t be confirmed and executed in a reasonable length of time.

Investors need to be aware of how quickly the prices of stocks change. With so many investors buying and selling simultaneously the price you see may have already changed. The price must be confirmed or you may be paying well over the amount you intended or what you can afford. When dealing with what is considered a hot stock it is best to use limit orders instead of market orders. When there is no limit on an order, the stock may have substantially increased in value and you could be paying ten or twenty times as much as you intended. The risks of trading in a quickly moving market must be understood and addressed to control the risk factor.

When purchasing securities on a margin it is critical to understand volatile markets. Additional cash may be required after an initial margin payment has been made if the stock’s price substantially drops. If this payment is not made in a timely fashion the broker is within their rights to sell off the securities. Any loss accrued is charged to the investor. When you purchase stock on a margin you are borrowing money and must be certain you do not overextend.

Despite the new technology available the stock market is best used for investing not trading. Day trading is extremely risky and should not be done if you can’t afford to lose your entire investment. For example, a second mortgage, your entire savings account or a student loan should never be risked on day trading.

There are now millions of investors taking advantage of the control and access provided by the internet. It must be understood these advantages also come with risks, challenges and responsibilities. Although the SEC is trying to protect investors the responsibility is with each individual investor. You must know exactly what you are purchasing, the level of risk you are undertaking and be aware of all the ground rules.

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