- Online trading is associated with discount brokerage firms, such as E-Trade and Scottrade. As of 2010, you can expect to pay less than $10 per trade for online brokerage commissions. To keep costs down, the online trading firms are largely self-service and do not offer investment advice. Online trading is, therefore, more ideal for value-conscious investors that prefer to research and execute their own money management strategy.
- Online trading firms have created user-friendly interfaces that help you to navigate the stock market. To trade stock, you will enter a stock's ticker symbol into the portal, alongside the number of shares that you wish to buy or sell. After the trade clears, you will immediately observe a confirmation statement on the computer screen. Beyond stocks, you may also purchase bonds, mutual funds, certificates of deposit and options through your online trading account. Money that is not invested is automatically put into a sweep account, which is a type of money market account.
- Online trading accounts are further categorized into cash and margin accounts. With a cash account, your buying power is limited to the amount of your cash balance. With a margin account, you may actually borrow against your cash balance on a dollar-for-dollar basis to buy investments. For example, if you deposit $10,000 into your brokerage account, you may borrow another $10,000 to buy $20,000 worth of stocks.
A margin account is also necessary to sell stock short. When you sell a stock short, you borrow stock from another investor and immediately sell it for cash. At a later date, you re-enter the market and buy the same stock back to repay the original loan. You turn a profit when the stock's price has actually declined. - Online trading provides for real-time accounting, where your account balances and investment positions track current stock market activity. In addition to real-time accounting, the brokerage prepares monthly statements that summarize your investment trades and deposits made into the account. At tax season, you will receive 1099 forms that document your capital gains, interest payments and interest income from online trading. You will use this information to file income taxes with the Internal Revenue Service.
- The Securities and Exchange Commission (SEC) alerts investors to protect themselves against identity theft, or phishing. Online trading accounts are ideal targets for criminals to breach security and place unauthorized trades and balance transfers. The trades are usually coordinated to artificially boost prices for stocks that the criminals own within their real accounts. From there, the thieves can sell off their own stocks at a profit. To guard against identity theft, you should install antivirus software onto your computer.