Why Use an Online Broker?

eOptionInvesting & Money Management

Online brokerages have existed ever since the internet became mainstream. They offer a unique set of benefits and drawbacks compared to traditional brokerage houses. This makes them perfect for some investors, but it’s important to understand their differences before jumping in.

What Is an Online Broker?

An online broker is a firm that has systems in place that allow customers to place their own trades through a website-based interface. It will typically offer the ability to trade in stocks, options, and other securities. The details of the offering may vary between firms, but it’s a safe bet that they will all provide basic trading capabilities.

The Advantages of the Online Broker

The most obvious advantage is the lower cost. Many online brokers specifically refer to themselves as being “discount,” and this is important for those who make frequent trades. An online broker can charge as little as $3 per trade, while traditional ones can charge as much as $75 or more. It’s easy to see how high commissions can destroy the profit for people who trade even every few years.

Brokerage houses normally offer the results of research to their customers. Years ago, this was a feature that only applied to traditional firms. While traditional firms still provide their own proprietary research for their customers, today’s online equivalents may offer good research as well. Therefore, the knowledge gap between the two has been greatly narrowed if not eliminated.

Are There Any Disadvantages?

According to The Motley Fool, there is one disadvantage that may be important to some investors. Traditional brokerage houses offer better availability to the IPO market. It’s possible to get in on first-day IPO trading at some of these firms. Online brokerages, on the other hand, often don’t get new stock offerings into their systems as quickly.

Getting Started with Online Trading

As with many other internet services, it can be easy to figure out how to trade online. The first step is to choose a brokerage. U.S. News & World Report’s Money suggests that fees should be on the top of the list of selection criteria. This is because most online brokerages use the same services for the actual execution of trades. That said, they’re not all the same. Differences in costs, user interfaces, and overall site stability set them apart and make it worth digging a little deeper before opening an account. Look for firms with good reviews and solid histories. Also, keep in mind that not all of them use powerhouse execution services like Citigroup, Knight, or Citadel. This makes it worth checking out exactly how they go about fulfilling trade orders.

Once a brokerage is chosen, look for a tutorial on its site. Most if not all will have a FAQ, videos, or both that will explain exactly how to execute trades on their platforms. Since all sites intentionally make themselves somehow different from the others in the field, it’s a very good idea to watch these intros to learn the intricacies of any particular one.

Online brokerages also offer plenty of other information on their sites. It’s possible to find FAQs that answer questions as basic as “what is online trading” and as advanced as in-depth explanations of specific investment strategies. This allows investors of various levels to find the information they need to get good starts.

Thanks to the fact that more people are familiar with the internet in general, the idea of trading securities online isn’t the shocking thing it once was. Since discount online brokerages have been around for a long time now, they have also matured and can meet the needs of their customers very well. Thanks to the convergence of these two factors, now is a great time to take another look at switching to online trading. Doing so won’t just bring increased convenience. Since online brokerages typically charge much lower fees than physical ones, profit from trades could immediately increase.

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