Through online trading, you can easily buy or sell thousands of stocks. Orders are routed through the brokers online system to the particular stock exchange and executed within a few seconds, usually without any manual intervention.
Online investing is different from day trading. In day trading, an individual buys and sells shares in a very short period of time, within the same day in most of the cases, in order to gain from marginal movement in the securities.
Risks of Online Trading
If you are a new investor, you should be aware of the principles of investing, your investment goals and risk tolerance before entering into online trading. Being an online trader you may tempt you to trade very frequently or to be involved in over trading, which would result in increase in trading costs, complication in your tax related conditions and large losses.
Despite some limitations, online trading has improved the way stocks and other investment instruments, such as, bonds, mutual funds and currencies, are being traded, substantially, in the fast moving capital markets. So, should you should be a trader or an investor?
Being a Trader
Normally, short-term traders including day traders, who are also called market timers, do not gain profits from their investments consistently, since their investments are not based on the companies’ fundamentals. Short term traders sit in front of their computer terminals throughout the day to see the movement of the particular stock. Day traders usually buy stocks on borrowed money to make quick profits, however, they bear very high risks of losing money. If you are a day trader, you should risk that amount of money which you can afford to lose. Short term traders do not “invest” generally, since they are riding on the momentum on the particular stock, by seeing the charts. They do not research or look into the fundamentals.
Being an Investor
Investors generally look into the fundamentals of a particular stock, such as revenue growth, earnings growth, cash flows, debts and rate of returns etc, before investing into a company’s stock. Investors also take in to consideration the valuation of the stock very seriously. Long-term investors take minimum risks as they study the risk/reward ratio associated with securities thoroughly. They achieve their long-term goals regarding their investments. Investors who are on a long-term horizon generally do research on a particular stock or get expert investment opinion from investment bankers in order to gain maximum benefits with limited risks. They also look into the history of the returns from a particular stock.
Investors also follow investment strategies, such as, ‘top-down investing’ or ‘bottom-up investing,’ which are being used to find sectors which would yield above-average or premium results. In ‘top-down’ investing, an investor investigates into the prospects of a country’s economy and then decides about the particular sector before investing. In bottom-up investing approach, an investor is purely opportunistic and does research on various sectors of a particular economy and invests in as many sectors as possible without any restrictions.