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Is Online Trading Secure?

Cheesy movies abound with scary stories about viruses and computer hackers. Given that, we certainly understand why you might feel uncomfortable leaving your financial information inside somebody else's computer system and making transactions through the Internet. Fear not, though: There's a heckuva lot of protection built into the system.

While concerns about online security will always be there, rest assured that the brokerages themselves have a very, very high stake in making you feel comfortable about the level of security being used. All online brokerages have a portion of their website devoted to explaining the measures they employ to protect your transactions. While it may be true that nothing is perfectly safe in this world, online trading is certainly as good as offline trading at providing security for your financial transactions.

Nonetheless, you can be prepared. If you are making securities transactions over the Internet, make sure your brokerage is using high-end encryption. Encryption is the process developed by super-genius computer nerds (but, you know, the good kind) to scramble data so that only the intended receiver can use it. The higher the number of bits in an algorithm, the more sophisticated the encryption. (Feel free to use this last sentence liberally in cocktail-party conversations, particularly conversations you wish to end.) A 128-bit algorithm is the encryption level used by most online brokerages. It's the highest level of security currently allowed by U.S. law.

Is 128-bit encryption enough for you? Stealing information that is encrypted at that level is virtually impossible -- even if it does seem awfully easy when you watch those movies about basement-dwelling unemployed computer hackers.

Pay attention to whether the security measures are operating while you're making your transactions. Depending on what browser you use, you'll either see a closed padlock icon or a key icon to demonstrate that security is operating. When you see that those icons are displayed whole, you'll know your transaction is occurring in a secure sockets layer. This means your transaction is being encrypted -- and accordingly, you should feel safe about what you're doing.

Additionally, online brokerage firms feature various types of security measures, including passwords and personal identification numbers (PINs) that you select. Your PIN needs to be given every time you make a transaction within your account, and you can change your PIN as often as you like.

Also, no matter which brokerage you're using, make sure it is insured by the Securities Investor Protection Corporation (SIPC), which provides up to $500,000 of coverage (limited to $100,000 for cash).

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