Online investing is more common today than ever before. It provides an easy and cost efficient solution for all investors, retail and institutional.
I have personally been investing through online brokerage accounts for years now, and have several retirement and investment accounts held in online accounts.
The article from our friends below explain the basics of getting started with online trading platforms and how retail investors can take advantage of the advancements in technology.
The Internet has led to a surge in online trading of financial instruments. Anyone who has access to a computer and the Internet has the ability to invest in the financial market.
But how does an amateur investor get started? If you’re looking for a basic guide to becoming an online trader, read on to find out how to get started with stock and shares, what the various investments entail and how to reduce financial risk.
Before you can trade online, you need to set up an online share account. The easiest way is to set up an account with a company that you’re already using, such as your bank.
Alternatively, there are several online share dealers you could set up share accounts with, such as Interactive Investor. Different dealers apply different trade rates, so make sure you compare these to find the best option.
Unless you’re investing on a long-term basis, you will need to monitor the movement of the shares on a daily basis. If your account is inactive for a few months, some stockbrokers may charge you an inactivity fee. Always read the documents carefully before completing your application.
However, the benefit to online trading is that you don’t have to call your stockbroker to place an order. You will be provided with the real time price of securities that are traded on different stock exchanges.
This allows you to place order at any price you want. Compared to the traditional mode of trading, online trading is a faster and more flexible method. So what are the differences between types of investment?
Companies issue shares as a means to raise capital. Buying a stock or share enables an investor to own a share of ownership of a company and this entitles you to have voting rights in the company’s annual general meeting (AGM).
Some companies distribute dividends to shareowners if they made profits during the year. If the company is doing well, its stock price will usually rise. If the selling price is higher than what you bought them for, you will make a profit after deducting the commission fees paid to your stockbroker.
On the other hand, the stock market is very volatile. The price of a stock can swing sharply up today, down tomorrow and remain low for weeks, months or years. You will suffer a loss if you sell at a lower price than what you paid for. Unless trading through a Stocks and Share ISA, you will be taxed on the dividends and capital gains from selling the shares.
There are two types of IRAs, or Individual Retirement Accounts. Traditionally, an IRA is designed to minimise the tax you pay whilst planning for your older age, because any money you earn off your savings in an IRA is un-taxed (until withdrawn). At the moment, the contribution limit is $5,500 p.a., but once you reach 50 years, you can pay ‘catch-up’ contributions of a further $1000.
Roth IRAs are slightly different, in that the contributions that you pay in are not tax-deductible, whereas they can be in the case of traditional IRAs. Some withdrawals, known as ‘qualified distributions’ are not taxed either, but this is usually subject to certain conditions, such as withdrawing after you are aged 59 1/2, disabled or the withdrawal is made after your death.
To reduce the risk of a decline in share price, some investors prefer a kind of package of stocks, bonds and money market securities. A mutual fund is often referred to as a collective investment, since it involves multiple investors putting money into an investment pool.
The most common type is an open-ended fund, in which the value of the fund changes depending on how many investors there are and the company will redeem your shares at the current value whenever you wish.
Closed mutual funds are more like an individual company, in that the number of shares is fixed. You will need to pay the fund expenses to the investment company in both cases however, which can reduce the final return you receive.
There are also a couple of investment options which are specific to the UK, namely ISAs and unit trusts.
An ISA is similar in principle to the IRA: an individual savings account that allows you to hold cash, individual stocks and shares and unit trusts without paying tax on dividends, interest and capital gains. In the UK, the annual ISA allowance in the 2013-14 tax year, which is from 6 April 2013 to 5 April 2014, is £11,520 ($18,450).
You can either pay the whole allowance into a Stocks and Shares ISA or pay up to £5,760 ($9225) into a Cash ISA and the remainder into a Stocks and Shares ISA. Beside stocks and shares, you can invest in different types of financial instruments in your Stocks and Shares ISA, including government and corporate bonds, investment trusts, exchanged traded funds, investment funds, and Open Ended Investment Companies (OEIC).
Some British investors prefer to invest in unit trust to spread their investments in different asset classes. This is similar to a US mutual fund in principle, but the main difference is that unit trusts do not actively trade, and use a smaller portfolio of investments. Unit trusts often have a fixed termination point, and a fixed number of shares.
Reducing Investment Risks
Although stocks and unit trusts are investment tools to grow your savings, no investment is guaranteed. If you’re investing in stocks and shares, find out more about the company that you intend to invest in. Read their financial reports and announcements of dividend distribution. Examine the trends of their stock over the past few years.
Ask yourself: Does the company management have a proven track record? Is the company introducing new products and services that might have an impact on its share price? Is there fierce competition that might cause its share price to drop? How will the economy affect the performance of the shares?
Ultimately, it’s important to diversify your portfolio; low risk comes with low potential returns while high risk comes with high potential returns, so a good balance of the two means you are covered by a safety net, whilst still able to make some money.
Though becoming a ‘day trader’ or trading online for a living is increasingly accessible and therefore popular, it does take time to familiarise yourself with the volatility of the market.
It’s wise to have a back-up income, at least in the first few months and begin your portfolio by investing in a small range of companies you trust or stocks which have predictable growth, even if that means a relatively low return.