Buy stocks online with confidence, but be aware of the risks.
Most investors these days choose to buy stocks online. It’s convenient, fast, and with smartphone and tablet technology, accessible everywhere. If you’re a new investor, or an experienced one, where do you start—and are there risks?
Online trading may look like a fairly quick and convenient way to build wealth, but there are hidden dangers that may not be evident at first.
The main risk comes from the fact that it all may seem deceptively easy. The lower costs and higher speeds of online trading can lead otherwise conservative investors to trade too frequently. That can lead you to sell your best picks when they are just getting started.
The apparent ease with which investors can buys stocks online may prompt even the most conservative investors to take up short-term trading or day trading. And there’s another danger with trading stocks online—there’s a large random element in short-term stock-price fluctuations that you just can’t get away from.
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Below is a list of helpful tips investors can use when deciding whether to buy stocks online.
1. Start by following the advice at TSI Network
Investors who want to buy stocks online should always start their stock research here on TSI Network. Whether you subscribe to one of our newsletters, or receive our free email newsletter, following our stock market guidance is a sound way to begin investing your money.
2. Don’t indulge in frequent trading
Frequently trading online can be profitable for short periods. But you can’t reliably profit from it over the long term. In fact, most short-term traders wind up losing money. By the time their beginners’ luck fades, many are trading in dangerously large quantities.
Frequent trading can also lead you to buy stocks online that are of lower-quality or are thinly traded. The danger arises from the fact that the bid and ask spreads of many of these investments can be so wide that the share price will have to go up significantly before you’ll even begin to make money on a sale.
You can make trades quickly and easily with online trading, and that cuts your commission costs. However, for successful investors, this is a bonus, not the objective when you buy stocks online.
It is far more important to focus on high-quality, well-established companies and how they fit in a well-balanced portfolio. The longer you hold these stocks, the greater the chance that your profits will improve.
3. Stay away from automated stock-picking systems
Some investors who buy stocks online use automated stock-picking systems to help them make investment decisions. These systems are typically marketed with impressive-looking performance records designed to make investors think they are sure to make guaranteed profits.
However, those records are typically derived by “back-testing” the program against past data. In other words, the promoters go back through old trading records and see what would have worked in the past.
Automated stock-picking systems essentially do two things: First, they narrow down the data you use when you make investment decisions. Second, they apply a fixed rule, or rules, to draw a conclusion or an investment decision from that selection of data.
Unfortunately, the market’s key concerns continually change. Today’s good investments can turn into tomorrow’s dead ends.
For a time, these systems may seem to work, but that’s usually coincidental. If the market is going up and the system tells you to buy volatile investments, it automatically generates profitable trades. But they can just as quickly turn around and begin pumping out unprofitable trades. Often this happens just when they can do the most damage to the investor relying on the system.
4. Be careful with practice accounts
Online practice-account users aren’t learning how to invest. They are just learning how to enter orders to buy stocks online. Rather than an educational experience, practice accounts are a little like play-money sessions at Las Vegas, where gambling novices can learn to play casino games without risking any real cash.
In the casino, players are learning how to play the game. But they aren’t learning how to win, because that’s not possible. In the end, they can’t overcome the statistical advantage built into casino games that gives the house an edge. They’re really learning how to avoid losing their money any quicker than they choose to.
Using an online broker’s practice account, you can learn online trading essentials, such as how to enter an order to sell or buy stocks online; how to double-check your order before submitting it, so you avoid obvious but common mistakes, like buying 10,000 shares when you only meant to buy 1,000; and so on. In doing so, you can choose what stocks to buy, but the only feedback you’ll get on your choices is the price changes they go through after you buy.
However, there is a large random element in short-term stock market results. It will take months or years before you know if your choices are likely to provide attractive long-term returns. In fact, the real test will come only when you see how you do in the next bear market.
Have you just begun to buy stocks online for your personal portfolio? How have you found the experience? Share your stories with us in the comments.
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