Online stock traders place buy/sell orders for financial securities and/or currencies with the use of a brokerage's Internet-based proprietary trading platforms. The use of online trading increased dramatically in the mid to late 1990s with the introduction of affordable high-speed computers and Internet connections.
Stocks, bonds, options, futures and currencies can all be traded online.
Another benefit to online traders is the improvement in the speed of which transactions can be executed and settled, because there is no need for paper-based documents to be copied, they are filed and entered into an electronic format.
Online trading, also known as electronic trading (or sometimes etrading), is a method of trading securities (such as stocks and bonds), foreign exchange or financial derivatives electronically. Information technology is used to bring together buyers and sellers through an electronic trading platform and network to create virtual market places such as NASDAQ, NYSE Arca and Globex, which are also known as electronic communication networks (ECNs).
Online trading is in contrast to older floor trading and phone trading and has a number of advantages, but glitches and cancelled trades do still occur.
While the majority of retail trading in the United States happens over the Internet, retail trading volumes are dwarfed by institutional, inter-dealer and exchange trading. However, in developing economies, especially in Asia, retail trading constitutes a significant portion of overall trading volume.
Becoming an online stock trader
Online trading has given anyone who has a computer, enough money to open an account and a reasonably good financial history the ability to invest in the market. They don't have to have a personal broker or a disposable fortune to do it, and most analysts agree that average people trading stock is no longer a sign of impending doom.
The market has become more accessible, but that doesn't mean that an online trader should take online trading lightly.
After choosing a stock broker, and before beginning to buy investments such as stocks, bonds, mutual funds, or exchange traded funds there are twelve main types of trades that can be placed, that need to be understood so that big (and potentially expensive) mistakes are not made. These are:-
- Market Orders - A market order is the simplest type of stock trade you can place. It means that if a trader wants to buy or sell 100 shares of a stock, for instance, it will get transmitted to the exchange and the order will be filled at the current price.
- Limit Orders -A limit order lets a trader set a minimum or maximum price before their stock trade gets converted to a market order and sent to the stock exchange. Until a trader becomes very experienced, almost all orders should be limit orders to protect themselves.
- All-or-None Orders - An all-or-none stock trade allows the trader to tell their broker that they only want an order filled if they can buy, or sell, all of the shares they instructed them to trade. This is important for strategies such as selling covered calls.
- Stop Order and Stop Limit Orders - A sell stop order would allow an investor to avoid further losses or protect a profit if a stock drops below a certain level. The order then gets sent to the exchange and becomes a market order when triggered.
- Selling Short and Buy to Cover Orders - A short sell order means a trader tells their broker to sell shares of stock that they don't own. If the stock falls, they can close the transaction with a buy-to-close order, replacing the borrowed stock and pocketing the difference.
- Day and GTC Orders - When a trader is ready to trade stock, they can place either a day order, which will expire at the end of the trading day if it isn't filled, or a good-till-canceled order, which won't expire for up to sixty days, depending upon the broker.
- Extended hours trading - The extended hours market allows a trader to place trades between 8 pm and 8 am; times when the market is traditionally closed. This system permits investors to react to corporate announcements and news prior to the next session. There are a number of risks associated with extended hours orders; primarily an increase in volatility as a result of decreased liquidity. Any time there are fewer shares being traded, stock price movements become larger because buy and sell orders have a disproportional influence upon the quoted value. As a result, the price a trader pays for an extended hours’ trade can differ substantially from what they would pay (or receive) during regular market hours.
- Trailing Stop Orders - A trailing stop order can let a trader protect profits. As the stock price goes up, they can tell their broker to keep trailing it and only sell if it falls, say, $2 from its highest price ever. At that point, the order gets converted to a market order.
- Bracketed Orders - Bracketed orders may allow new investors to combine the best of both worlds. They can protect their profits, limit their losses, and structure their brokerage orders according to their own outlook for a stock or exchange traded funds.
This is achieved by "bracketing" an order with two opposite-side orders. A BUY order is bracketed by a high-side sell limit order and a low-side sell stop order. A SELL order is bracketed by a high-side buy stop order and a low-side buy limit order.
The order quantity for the high and low side bracket orders matches the original order quantity. By default, the bracket order is offset from the current price by 1.0. This offset amount can be changed on the order line for a specific order, or modified at the default level for an instrument, contract or strategy using the Order Presets.
An Example of a bracketed order
Bracket orders are an effective way to manage your risk and lock in a profit on an order that has yet to execute. In this example, you want to buy 100 shares of ABC stock, which has a current Ask price of $30.00. You expect the price to fall to $25.00, and then rise to $30.00.
By attaching a bracket order, you do not have to return to re-evaluate and manage the risk of a position if the Limit order to buy at $25.00 per share is executed.
You click the Ask price of ABC stock to create a Buy order, then enter the quantity and order type, then enter $25.00 as your Limit price. You do not transmit the order yet because you want to attach a Bracket order.
A bracket order is one of many ways to help protect your positions, particularly if you not able to watch your account all day.
Terms like "market order", "limit order", "trailing stop loss", and "bracket order" may sound complicated but in reality, they are simple concepts that an online trader can understand with just a little bit of work. It's best to think of them as tools in their stock-trading arsenal. For instance, if they want to put in an order that will keep following a stock price as it rises so they don't lose any upside, but sell their stake if the market starts to crash, they can do that. If they want to buy shares and put in an order at a predetermined amount below a specific price so they limit their losses, they can do that, too.
The impact of online stock traders
The increase of electronic trading has had some important implications:-
- Reduced cost of transactions - By automating as much of the process as possible (often referred to as "straight-through processing" or STP), costs are brought down.
- Greater liquidity - Electronic systems make it easier to allow different companies to trade with one another, no matter where they are located. This leads to greater liquidity (i.e. there are more buyers and sellers) which increases the efficiency of the markets.
- Greater competition - While electronic trading hasn't necessarily lowered the cost of entry to the financial services industry, it has removed barriers within the industry and had a globalization-style competition effect. For example, a trader can trade futures on Eurex, Globex or LIFFE at the click of a button - he or she doesn't need to go through a broker or pass orders to a trader on the exchange floor.
- Increased transparency - Electronic trading has meant that the markets are less opaque.
- Tighter spreads - The "spread" on an instrument is the difference between the best buying and selling prices being quoted; it represents the profit being made by the market makers.
TradingTaking control of your portfolio means knowing what orders to use when buying or selling stocks.
InvestingA market order is the most common order used to purchase a financial security.
InvestingBuying and selling stock can be a lot like buying or selling a car. Traders should use and understand tools such as market orders, limit orders, day orders, and good-'til-canceled orders to ensure ...
TradingLearn how to set each type of stop and limit when trading currencies.
TradingStop-loss and stop-limit orders can provide different types of protection for investors seeking to lock in profits or limit losses. Investors need to know how each type of order works to know ...
InvestingWith stop-limit orders, buyers protect themselves from prices too high for their tastes.
TradingAn in depth look at how high-frequency trading works and who the players are.
InvestingA stop loss order is an order placed with a broker to sell a stock immediately if it drops to a certain price. It's a common way for investors to protect themselves from the possibility of a ...