Just about anyone who trades stocks online knows the pros vastly outweigh the cons. Nevertheless, enough disadvantages exist (especially for inexperienced investors) that both are worth exploring.
Fees are lower online
If you are working with a professional broker who advises you on your entire portfolio and how to work individual investments into the overall strategy, you will be paying through the nose for that advice. Commission fees for these trades, which the broker will execute himself, can run as high as 1.5% of the total value of the trade, and there may or may not be a cap.
Online stock trades are significantly lower. Most of the time, fees for a single stock trade will run under $10, with even lower fees possible depending on the broker or on the volume of trades you make in a given time period.
It’s all about speed
A professional full-service broker likely deals with dozens of clients on a daily basis. Some of these clients may be in crisis, which will take his time and attention away from you. If you have a stock trade you want to make, and it is time-sensitive, you may have trouble even reaching your broker. By the time you do reach him, the market may be closed or your stock may have left your desired price range, meaning a loss of opportunity. Even if you do reach him, he may get distracted while placing the trade, delaying its execution even further. Should the market be crashing, he’ll be on the phone trying to keep clients calm. But if you are anxious to sell something, every second that goes by could cost you thousands.
Stock trading websites give you access to online stock trading 24 hours a day, seven days a week. When the market is open, you can enter your trade and receive an execution notice in just seconds.
Most online trading platforms give you access to sophisticated, informative tools for trading. These are tools that a broker may have at his disposal, but by asking him about a stock he is not familiar with, it will take him more time to learn about it than it will for you. That’s because all his other clients may be asking him to do the same thing. These include tools that permit a trader to perform Technical Analysis on stocks — a kind of analysis that looks at how a stock performs relatives to itself in terms of price, momentum, velocity and volume, among many other things.
Personal brokers have such demands made on their time that in order for a client to be worth his while, the client must have substantial assets that he can manage, because his fee is often partially tied to the size of the client’s portfolio. Online brokers often have low minimums, providing trading opportunities to just about anyone.
You will often hear professional brokers criticize online trading. That’s because they are having their occupation threatened. They believe investors can’t ever be as sophisticated as they are. To a certain extent, they are right. online stock trading has opened the market up to inexperienced investors unaware or dismissive of the risks involved. The stock market is volatile, and if you do not know what you’re doing, you will lose a lot of money.
A more minor concern is that because online trading has democratized the stock market, it also increases opportunities for individuals to manipulate stocks that have limited trading activity. These are known as “pump and dump” schemes. Stocks that are infrequently traded tend to be very volatile. These schemers will buy up a lot of stock at lower prices, and then begin issuing “recommendations” in newsletters to pump up interest in the stock. As that interest increases, volume increases and the stock becomes easier to trade. The schemers then exit the stock and make their profit. Other buyers often end up losing money. These types of stocks would not be subject to such manipulation if only professional brokers made trades.