What you need to know about online trading platforms
By ATB Wealth 24 July 2020 5 min read
Many routine tasks have been made easier and more accessible by technology in the modern household. Having the full functionality of the internet in the palm of your hand allows you to complete errands from the comfort of your couch.
Saving and investing is also getting easier through what has been coined “do-it-yourself” or “self-directed” investing which allows investors to manage their investments anywhere they have internet access. Part of the appeal, aside from the convenience of accessing markets easily through the internet, is the low cost of transactions that typically come with the online platforms.
These platforms are run by discount brokerages that have limited fee-based services as opposed to full service brokerages who instead provide thorough advice, tailored research, and have a greater customer service base. Client experience is not a priority for discount brokerages and this one of the main reasons they can keep costs low.
A popular example of a discount brokerage in the United States is Robinhood, which has added 9 million users since 2016. The app allows investors to trade stocks, bonds and options online at little to no cost. From this, trading and speculating success stories have reverberated through online communities and media, making self-directed trading more attractive than ever. So what’s the catch?
Top things to be aware of when investing online
The internet has made investing easy and accessible but it has not made it foolproof, despite what you may see in commercials or online forums. Success stories of doubled-money are shared widely, but we rarely hear about someone losing the full value of their investment.
The latter isn’t much to brag about of course, and doesn’t make for a particularly popular post on social media, but this range of outcomes is the reality of investing in financial markets. Without a disciplined process and know-how or experience self-directed investing can be a challenge.
Here are the top three things to keep in mind when you’re considering managing your investment account on your own:
1. Your investing goals
No matter how you invest, starting with well-defined goals is always an important first step. There are a few considerations to make when considering market exposure.
For starters, you should have an established budget and an emergency fund set up.With your budget defining how much money you have to invest, you should then think about your time horizon and risk tolerance.
If your goal is short-term, it may not be prudent to invest in the stock market whereas a long-term goal will allow for more time for you to withstand fluctuations in the market value of your portfolio.
Lastly, how much are you willing to lose? Investing in the market comes with risk and risk leads to inevitable losses. If you lost half of your money tomorrow would you remain invested for your long-term goals or do you think you would consider exiting the market entirely? These kinds of questions can help you to evaluate your risk tolerance.
Some investors just want to try managing their own portfolio to see if they could do it. They may be looking to understand markets more or maybe they want to save on fees over the long-term. Some online investing platforms have “test areas” built into them that will allow you to test your strategies and will give you a taste of what it takes to manage a portfolio over time without putting your own money at risk. This is a great place to start!
Choosing to invest online, or with a trusted advisor does not have to be an all or nothing decision. There are many facets of an investor’s lifestyle to consider when making the choice that works best for them.
2. Your behavioural biases with investing
One thing new and seasoned investors alike may not account for are behavioural biases, and there are many that can surface when attempting to manage a portfolio. To be successful, investors have to stay invested throughout inevitable market turmoil and understand which behaviours lead to, and detract from, successful investing. The ability to avoid market timing, speculation, and performance or (trend) chasing in decision-making can be hard, even for experienced investors.
Filtering through information in the market can be another challenge. Most markets are very efficient and if you are reading a tip on the internet, chances are many investors have read it before you and the opportunity was probably gone, even before the tip was published.This is because markets can process new information rapidly as investors respond to changing conditions and sentiment. It would be rare for the average self-directed investor to receive a hot tip that isn’t already accounted for in the price of the stock they are considering.
How to check your biases
One way to check your biases in investing is to keep a journal. It doesn’t have to be a diary entry, but a simple log of your initial investment thesis can be interesting to reflect on at the end of your time horizon. If you ended up losing money on an investment decision, you can look back to the journal to see where your thesis went wrong. This strategy helps to combat common biases like overconfidence and herd mentality, but also to teach you valuable investment lessons that you can apply to future trading.
3. Keep your eye on fees
Despite fees typically being lower within a self-directed account, they can still add up over time if you are not being mindful of the various costs. Many online platforms have moved to a zero-commission model or very small flat fees. To keep these costs low, operational costs are often passed on to clients, and these can add up. These costs could include statement costs (you can often beat this with an electronic statement), minimum balances (account must be at $X for quarterly fees to be waived), as well as fees for transfers out or withdrawals.
Another way that discount brokerages make money is by selling subscription services. Much like how streaming services charge a monthly fee, these subscription services charge for various online accesses to equity research or market data. Oftentimes these services also include buy or sell recommendations from analysts,which can be enticing but just because you have paid for them doesn’t mean they’ll always be right.
Remember, if you are receiving this information, thousands of other investors are as well and likely markets have already been impacted by the recommendation. The recommendation might not get you ahead of the game but it could share with you some interesting considerations and teach you more about trading.
Ultimately, your investment journey will evolve over time. Whether you are managing your own investment account or working with a trusted advisor, investing can still be complicated.
If you are considering managing your own portfolio, taking the time to understand your goals, what you are ultimately investing for, and the amount of risk you are willing to assume to get there can create a great foundation for successful investing. From there, navigating the noise and challenging your own biases will be integral to improving your investing skills.
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