Back in that prehistoric era known as the 20th century, the way to engage in a stock market transaction was to pick up the phone and call your stock broker. With the onset of the Internet age, stock market investors can easily conduct transactions with just a few clicks of a computer mouse. While online trading may be convenient, it also features a number of inherent risks.
As when performing any financial transaction online, trading stocks online can pose security risks. Despite the security precautions taken by online trading sites, there is no guarantee that a hacker won't finds his way into your account and steal your vital and sensitive financial information. If your online trading account is large, you are at risk to lose a serious amount of money. Make sure that you choose a unique account password and change it frequently.
Technical difficulties with the site can delay a transaction, resulting in unintended and undesired consequences. You may have purchased a stock at one price, but a system failure may have negated the transaction. By the time things are up and running again, the stock price may have increased. As a result, you could end up paying more for the stock than you intended. When seeking an online broker, check into what safeguards it offers to protect you if this type of incident occurs.
Online trading often occurs after the stock market has closed for the day. Traders perform transactions by using electronic communications networks (ECNs) on which buyers and sellers are matched via computer systems. Possible drawbacks to trading after hours can include increased price volatility, reduced ability to act upon current quotes and more competition with professional traders. Liquidity can also be an issue, as you may not be able to convert your stocks to cash quickly if the need arises.
Too Much Chatter
Online trading fosters the creation of online chat rooms and forums where people can "meet" and share information. Unfortunately, these meeting places can be a breeding ground for rumor, misinformation and even the spreading of false stock tips. It is important to research any information you pick up from chat rooms or forums before taking action based on a recommendation from a "Chatty Cathy." It may even be wise to ignore what you read in these spots completely.
Chris Joseph writes for websites and online publications, covering business and technology. He holds a Bachelor of Science in marketing from York College of Pennsylvania.