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4 Myths About Online Trading

Hand holding smartphone with stock graph

These days many investors are trading online, whether through the Internet or other electronic means, such as a mobile app. In most cases, that means accessing a brokerage firm's website or mobile device app and entering an order to buy or sell, rather than speaking directly with a broker in person or by phone. 

Though service may vary,
most online trading firms
have phone centers or live
chat features where customers
can speak directly to a
customer service representative,
or receive a call back.

This may sound pretty straight forward, but there continues to be some common misconceptions about online trading. Here are four myths in need of busting.

Myth #1: When you make a trade online, you bypass the brokerage firm completely. 

All trades involve a brokerage firm even if, as is generally the case these days, a stockbroker is not used to help directly with the trade. Although customers may enter orders online through an app or the firm's website, they generally do not have direct access to the securities markets, so it is still up to a brokerage firm to execute their trades. 

Myth #2: You can’t speak to a live person when you have an online trading account.

Though services may vary, most online trading firms have phone centers or live chat features where customers can speak directly to a customer service representative, or receive a call back. A phone number is often provided in the event customers enter an incorrect trade or have questions about activity in their accounts, including questions about margin requirements. That said, brokerage firms that offer online services only may not provide investor advice or recommendations over the phone or face-to-face, which is why it is important to do your homework before you invest, and decide what type of financial services provider is right for you. 

Myth #3: Online orders are always executed immediately.

Orders entered electronically are usually executed quickly. However, there is no assurance that will always be the case, particularly if you place an order with a price limit or time restriction. Investors should be aware that high trading volumes can cause delays in executions. For investors placing market orders, you should be aware that market volatility and delays in executions due to trading volume can result in trade executions at prices significantly different from the quoted price of the security at the time the order was entered. 

Moreover, all online trading firms aren’t created equal: different firms offer different levels of access and system sophistication. One more thing—the speed of your Wi-Fi or Internet connection may also affect order transmittal and execution. 

Myth #4: Online trading is less risky than trading through a full-service broker.

There is risk of loss associated with investing in securities regardless of the method used. New investors need to understand key investment concepts, their own risk tolerance and their investment goals before venturing into the market. Online investors should do their own research, and be skeptical of stock advice and tips provided in chat rooms or bulletin boards. Also, for some online investors, there is a temptation to "overtrade" by trading too frequently or impulsively without considering their investment goals or risk tolerance. Overtrading can negatively affect investment performance, raise trading costs, and complicate your tax situation. 

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