Posted on | October 7, 2016 | 4 Comments
Online trading is the process of buying and selling shares on the internet. There’s no need for telephone calls to the broker, although, in some cases, certain stocks have to be bought over the phone!
Historically, the ordinary man on the street would never have thought to buy stocks and shares themselves, always operating through a broker who would have made the investing decisions on their behalf. Whilst the broker still offers these custom services, there’s now nothing to stop the average consumer picking and choosing their own stocks to create their own portfolio.
A customer would typically create an account through an online brokerage service and take advantage of the wealth of company information available at their fingertips. Brokerage firms offer lots of choice and information when it comes to trading online. Historical data is also provided along with relevant news articles and specifics on the company activities.
Different ways of trading online
Buying individual stocks
A customer can go online, search for the company they wish to purchase shares in and buy those shares online through a brokerage service. The customer then receives paperwork online or in the post to show that they now own the shares they have purchased. Other options including purchasing bonds and managed funds.
This is a completely different way of trading online. Instead of buying and owning the share in a company, the customer places a bet on whether a share price will rise or fall.
Spread betting works in this way. The customer decides whether they think the market will rise or fall. They then place an amount on this bet which is usually between 1% and 10% of the expected profit/or loss.
The customer can choose to between two positions – go long or go short. Go long means that they are betting on the market to rise and go short means that they are betting on the market to fall.
Firms that offer spread betting online will set a buy and sell price. The difference between these two prices is described as the ‘spread’. The customer decides whether they think the stock will rise or fall and places the bet.
There are a number of companies that offer spread betting online, for example, CMC Markets. Companies like these also offer the opportunity to try spread betting in a simulated web environment before betting with real money. This gives the customer an idea of what is involved in the process and demonstrates how the system works.
There are three terms in spread betting that the customer needs to be familiar with:
Margin – this means that the customer does not have to front the entire value of their position at the time they place their bet. A 10% or 20% margin is usually accepted.
Stop loss – this allows the customer to arrange a guaranteed point at which the loss would stop.
Close out – this allows the customer to close the bet before the expiry date. For example, if the bet is going in the wrong direction, the customer can choose to minimize their losses by closing out before they incur greater costs
This system of online trading is an incredibly high-risk one and customers should not take part without considering the pitfalls as well as the benefits.
There have been success stories highlighted in the news with spread betting. In 1997, a trader made five million pounds trading in this way on the foreign exchange market. However, the losses are not as well reported but often can be equally as high.
The best way to start with spread betting is to start small. £1 per point is more sensible than £10 a point for the beginner. Those starting out with spread betting should also find themselves a good broker, who can offer advice and potentially save them from making costly mistakes.
To summarize, there are opportunities to be gained from engaging in spread betting. However, it is still a high-risk activity that can result in significant losses as well as potentially high returns. Customers should proceed with caution and research as widely as possible.