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What should I know if I want to trade on the Internet? How does it differ from day trading?

What is online trading?

Online trading simply refers to the medium used to carry out trades. Online investors place their orders with Internet-based brokers, most of which are also discount brokers.

Many do-it-yourself investors who want to take charge of their own investment decisions find the ease, speed and affordability of the Net a convenient and cost-effective alternative to commission-based trading. Everything from low-risk guaranteed investment certificates, mutual funds and stocks and bonds can now be purchased online through a discount broker.

Online trading has become a convenient option for investors of all ages and financial personalities - everyone from conservative, buy-and-hold investors, to mutual fund holders, to active traders. That said, basic investment knowledge, knowing your risk tolerance, and a willingness to learn are crucial ingredients to wise online trading. Discount brokers do not provide advice or recommend securities, so a good grounding of investment knowledge is needed.

Online investing vs. Day trading

There is often confusion over online investing and day trading. While the same electronic medium is used, that is where the similarity ends. True day traders chase after fast-moving securities and place several to hundreds of trades in a 24-hour period in the hopes of making a profit from the stock movement.

When it comes to day trading, it is buyer beware. Day trading is a highly speculative form of trading. According to a recent article in The Financial Post, seventy per cent of day trading accounts (monitored in an August 1999 study for the North American Securities Administrators Association) lost money.

Fees and Services of Online Discount Brokers

  • The average online trade is less than $29.00 per trade compared to the average full-service commission of $100.00. Online investors can save more than 70 per cent in fees and up to 95 per cent in some cases.
  • You're on your own. Discount brokers do not give advice or recommendations. Many discount brokers offer web-site links to research information but it's up to you to do your homework.

Pointers for trading online

  • Know thyself: In other words, know the level of risk you are taking and whether it suits your investment personality and goals.
  • Know what you're buying: Research and understand what kind of security you are trading and whether it suits your investment needs.
  • Is your computer up to speed? Dated technology at your end can create delays in executing trades and receiving confirmations.
  • Exercise discipline: If you are buying a volatile stock, use a limit order to protect you from sharp, upward price movements. By submitting an order to buy a stock at a specific price, if the price rockets no purchase is made. This protects you from paying much more than you anticipated.
  • Know your options: If you can't get access to your account online, know your options for placing a trade. Most online brokers, for example, offer alternatives for placing trades such as touch-tone phone trades, faxing, or the old-fashioned way - speaking to a broker by telephone. But be aware that these options may increase your costs.
  • Confirmations: Investors sometimes mistakenly assume their trade orders weren't executed and submit another order. Check with the online firm on what procedures to follow to receive confirmations.

Research Sources

There are 12 discount brokers in Canada and all but three are owned by large financial institutions with a retail banking network - E*Trade Canada, Charles Schwab Canada and Sunlife Securities. A trip to your local bank or trust company will supply you with valuable information regarding online trading.

To compare discount brokers here are three web sites:

  • www.bay-street.com
  • www.ndir.com
  • www.quicken.ca

A popular resource book is, e-investing: How to Choose and Use a Discount Broker by Rob Carrick & Guy Anderson, publisher John Wiley & Sons, copyright 2000.