Although investing used to be reserved for the rich and powerful, today just about any average Joe with access to the internet can get involved. One of the ways that access to investing has been expanded is through online trading.
In the years of yore, all trading took place in financial exchange buildings (picture in-person Wall Street stock exchanges). Because access to these buildings was restricted to licensed financial professionals, only investors with access to stock brokers were able to buy and sell stocks in-person or over the phone.
But today, online trading has made it easier, faster, and cheaper to get involved. That said, you still shouldn’t take online trading lightly. How does online trading work exactly? What types of securities are available? Keep reading to learn more basics about online trading.
How does online trading work?
Online trading works in much the same way that traditional in-person trading works — it just makes use of an online platform. In any type of trading, the process generally works as follows:
- A trader (or an investor) decides that they would like to make a deal (for example, to sell 50 shares of a particular stock that they own).
- The trader then contacts their broker to execute the deal.
- Together, they create an order to sell 50 shares of the stock.
- The broker finds a buyer for the stock shares.
- Once a buyer is found, the broker sells the shares.
- The broker receives a percentage of the sale for his service fee and the trader who sold the stocks receives the remaining profits (and may be taxed on them).
Previously, it was more common for these types of transactions to take place in person and over the phone. Today, online trading apps and software have made it possible for these transactions to be conducted virtually. Most transactions can be completed in just a few seconds using this technology.
Read also: Day Trading basics for beginners
Online trading platforms vary in how they make use of brokers. Some apps cut out the human broker all together and allow you to make your own investment decisions as to whether to buy and sell. Others allow you to consult with brokers online for an extra fee or as part of the service.
Some may require that their online brokers conduct all trades. The variety of services may be associated with variable fees and may meet the needs of different types of investors. Make sure to select a service that provides the type of broker support that fits your level of experience and needs.
What types of securities are available?
Online trading has exploded in popularity in recent years. As such, the assets available to trade online have diversified. Some of these options include:
- Stocks: A stock is a share or an imaginary “piece” of a company. A stock is assigned a proportional value according to the company’s overall value. Diverse types of stocks are widely available through online trading platforms.
- ETFs: Exchange-traded funds (ETFs) are a type of investment fund which can be bought or traded like stocks through brokerage accounts. ETFs are passively managed, relatively cheap, and diversified.
- Cryptocurrencies: Cryptocurrency is a kind of virtual currency. The data that represents this currency cannot be reproduced in a blockchain network. It has value because it can’t be counterfeited, much like gold.
Investing doesn’t have to be a luxury for the wealthy — tools like online trading have made it easier for normal folks to get involved in the stock market and to improve their financial fitness. For more ideas on how to become a smart investor, check out the rest of the Academy financial education library.