Introduction To Online Trading
Online trading is the process in which individual traders, buy and sell securities over an electronic network by using the services of an online broker or a brokerage firm. A broker is a person licensed to trade shares while charging a commission. A share or stock is a tiny piece of the corporation whose value depends mainly on the economic conditions, company performance and investors attitude. When the enterprise makes the profit, the shareholders earn their profit through dividends paid to them by the firm.
The brokerage firm will execute all your online trades and store your money and stocks in your account. Some examples of online brokerage firms include options House, CMC Markets, Merrill Edge and TD Ameritrade. While choosing the kind of broker or broker firm that you want to manage your account, ensure that the dealer’s websites that require personal and financial information are well protected. With proper security measures like automatic logouts and transmission encryptions to ensure the safety of your money and stocks and that the broker firm chosen has a good reputation.
Some of the account types used by some online traders include cash account and margin account. A cash account involves; buying shares using the money that the investor already has in his account, while in the margin account, shares are bought on credit and this mainly depends on the equity of stock that the online investor already has as this stock will be used as collateral. Margin accounts are more complicated than cash accounts, as buying stock on loan brings about additional risks and so many online investors tend to stick to cash accounts. According to the Federal Reserve Board, an investor must have at least 50% of the price of the stock that one wishes to purchase in their account. it means that if an investor wants to buy stock worth 5000 pounds the value of the stock and cash in his/her account must be at least 2500 pounds and the brokerage firm can provide a loan of the remaining 2500.
The different types of accounts chosen by the investor depend on the investment and financial history of the investor. The majority of the brokerage firms do not allow an investor to handle investments that he/she cannot reasonably handle. Also, an online investor has to provide his address, telephone number, social security number and other personal information, as this will assist the brokerage firm to track investments according to the tax regulations of the country that the investor is currently living or investing.
Online trading had become more and more familiar, unlike the past when the stock market was dominated by the wealthy. Nowadays, a person with a computer, enough money to open an account and has a sound financial history can carry out online investment, but just like any other business, it comes with its risks as many people have suffered severe losses in the stock market due to crashing in the market. It is brought about by the rapid drop in commodity prices, and this may be caused by catastrophic events and economic crisis in the country.
It leads to the panic selling of shares by investors who rush to sell their shares at the same time while others are removing money from their bank accounts can result in economic problems. Some of the major stock market crashes include Black Thursday in 1929 which was mainly caused by panic selling and financial problems, which lead to the great depression. Black Monday in 1987 also caused by mass panic, in 2008, the housing and real estate market crashed and lead to what is now famously referred to as the great recession.
Measures have been put in place to ensure that this recession from the past does not occur again. Some of the actions implemented include: Implementing trading kerbs, this prevents any trade activity from taking place for a period following a sharp decline in stock prices. It is meant to stabilise the market and avoid the stock market from further decline. Another method used is a massive purchase of shares so as to prevent panic selling by other shareholders but this approach are unproven and ineffective.