The Disadvantages of Online Trading
Online trading is fast and inexpensive. You can place trades from the convenience of your home without ever having to speak to a live agent. However, the speed and efficiency of online trading platforms depend entirely on the supporting technology infrastructure, which could malfunction at critical moments. Other potential areas of concern include customer service and feedback for investment decisions.
Online trading platform are only as good as the underlying servers and software. High volumes on volatile trading days can slow processing speeds and information flow. You could incur substantial losses if you couldn't place the required buy and sell orders, especially in fast-moving markets. Software bugs can lead to delays in getting price quotes and information on order status. This also could result in trading losses, because you might enter orders based on incorrect price quotes or delayed order-execution reports. Investors depend on Internet and cellular service providers for researching information and placing trades. If these Internet access points malfunctioned, you would not be able to receive timely information or place critical trades.
Online brokers have a lean cost structure, which allows them to offer discounts on commissions. You might have to wait a long time to place a phone trade, especially during volatile markets, because trained and certified traders cost money. You might need to place certain trades over the phone if your online portal malfunctions or your Internet connection is down. In addition, you might not be able to place certain types of orders over the phone, such as spread orders involving options. Brokers might assign priority to high-net-worth clients and active traders, which could lengthen wait times for average investors. Administrative actions, such as exchanging funds between accounts or transferring positions between brokerages, could take a long time and limit trading opportunities.
Online trading means that you are your own investment manager, but this independence comes at a price. You do not have the benefit of a professional feedback loop, such as a reliable sounding board for your investment decisions. Online brokers typically do not provide buy-sell recommendations. You have to set aside time for research, such as reviewing financial statements on corporate investor relations websites and price charts on financial websites. You should consider mutual funds, which offer professional management and diversification at a reasonable cost, if you do not have the time for adequate due diligence.
You should have a backup Internet connection at your workplace or at a public library in case your service provider is experiencing problems. Do not call a discount broker during regular hours for administrative actions, such as transferring positions between accounts. Avoid placing market orders in fast-moving markets, because these orders could be filled at unfavorable prices. Review publicly available information on different brokers, including comments on service levels and features, before opening an online account.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.