As online trading platforms grow and expand access to investing, many people are turning to online services for their investing needs. These platforms allow users to enter buy or sell orders on a mobile device or computer rather than speaking directly with a representative at a brokerage firm. While this might sound straightforward, common misconceptions persist.
If you're considering online trading, make sure you research the firm and understand the process before you invest. Here are answers to some common questions to get you started.
Does an online trade involve a brokerage firm?
Even if you're not receiving advice or speaking directly with an investment professional, all trades made by individual investors need to go through a registered brokerage firm. At some firms, you can enter orders online through the firm's app or website. After an order is routed and executed by a brokerage firm, you'll receive a confirmation listing the details of the order, including the order type and the execution price and date. If applicable, a commission and other transaction fees will also be shown on the confirmation total.
Are online brokerage firms regulated?
Even if they operate solely online, all brokerage firms that do business with the public in the U.S. must be registered with the Securities and Exchange Commission (SEC) and must be members of FINRA. FINRA's mission is to protect investors and safeguard the integrity of capital markets to ensure everyone can invest with confidence. Among other things, FINRA writes and enforces rules that govern the activities of member firms and their representatives, and examines member firms to ensure compliance with federal law and FINRA's rules. Online brokerage firms are subject to the same rules and regulations as their brick-and-mortar counterparts, and the same investor protections apply.
Before you select any firm or investment professional, verify their registration and research their background using FINRA BrokerCheck. If you believe a firm or investment professional has treated you unfairly, contact the firm to see if you can resolve the issue. If you're still unsatisfied with the firm's response, you can file a complaint with FINRA.
Is online trading free?
Many online trading platforms offer commission-free trading. However, there still may be fees or costs associated with the trade. Platforms may charge fees for upgraded services, which might include access to analyst ratings, research reports or educational resources. Separate from fees charged to customers, firms may be compensated in other ways, such as through interest earned on the uninvested portions of customer funds, bid-ask spreads or payment for order flow.
Is online trading more -- or less -- risky than trading through a full-service brokerage firm?
There's risk of loss associated with investing in securities regardless of the method used. You should understand basic investing concepts, including your risk tolerance and investment goals, before venturing into the market. Do your own research before investing, and be skeptical of stock advice and tips you see promoted online or find on social media.
The ease of online trading can also tempt some investors to "overtrade" by trading too frequently or impulsively without considering if the transactions are suitable for their portfolio and goals. Overtrading can negatively affect investment performance, raise trading costs and complicate your tax situation, so make sure you're carefully evaluating each trade before hitting enter on an order. Also consider talking with a tax professional about potential capital gains implications.
Are online orders always executed immediately?
Firms have a regulatory obligation to seek to execute a market order fully and promptly. However, there's no guarantee that will always be the case, depending on the market for the security. In addition, if you place an order with a price limit or time restriction, the order might not be immediately executable. When placing market orders, also be aware that high trading volume and market volatility can result in prices that are different -- sometimes significantly so -- from the quoted price of the security at the time the order was entered.
Moreover, not all online trading platforms are the same; different firms offer different levels of access and system sophistication. The speed of your WiFi or internet connection might also affect order transmittal and execution.
Is help available for online trading accounts?
Though services may vary, most online trading platforms 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 case a customer enters an incorrect trade or has questions about activity in their accounts.
That said, while they often provide basic customer support, brokerage firms that only offer online services might not provide investment advice or recommendations, whether over the phone or face-to-face. In deciding what type of brokerage firm to use, you'll want to consider how comfortable you are making investment decisions without the guidance of an investment professional.
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