The Cons to Online Stock Trading
1. No investment experience
Possibly the biggest criticism levied against trading online is that traders have little or no previous
experience in stock trading. Substantiating this, most detractors point out that 80 per. cent. of new online
stock traders will make a loss from Day One. Moreover, not only does the lack of investment experience have
an affect on the new investor’s personal wealth, but:
- the new trader has no understanding of how technical indicators and stock charts work.
- the new trader will, likely, not have an idea of how they wish to develop their investment plan over a
prolonged period of time.
- the new trader will not know how to mix-up the shares they hold between blue-chip and high-risk investments
so as to maximise the chances of making a profit, while minimising the chances of making a loss.
- the new trader has no controlling influence over his or her decision to sell stock that may just be about
to make a move into positive territory.
In addition, because the online trader is unlikely to have experience in any of these areas, it is generally
contended that they will not be able to get themselves out of trouble once they are in it.
2. No exit plan
Basically, an exit plan is an instruction you give to your broker to the effect that if the share hits a high of
‘x’ amount the broker is required to sell the stock; or, alternatively, if the stock hits a low of ‘y’ amount the
broker is required to sell the stock. Because online trading is instantaneous, it is not usually possible for
you to provide your broker with this forward instruction to buy/sell. Consequently, any exit plan you adopt
is one that you have to exercise by yourself. Notwithstanding this, empirical evidence shows that if a stock
is falling, a stockholder will likely keep hold of the stock beyond the threshold in their exit plan in the hope
that the stock will rebound. Likewise, if a stock is on the rise, evidence shows that, short of an
exercisable exit plan, stockholders will try and keep hold of the stock for that little bit longer in the hope that
they can make a little more profit!
3. Commissions are misleading
A further criticism made against trading online is that the commissions charged are misleading. In this
regard, detractors of online stock trading claim that:
- the flat fee, as a percentage of the trade value, is higher than the commission brokers normally charge in
the real world.
- a number of Internet brokers are required to use the services of a third party in order to buy/sell stock
and these third parties charge a commission for their services, which is often passed on to the investor
without their knowledge.
- some online brokers charge joining fees and annual membership fees and once these are added to the trade
commission, the fees are not as attractive as advertised.
4. Lack of information service
Most brokers in the real world provide their customers with investment information – normally in the form of a
monthly bulletin – and spend large amounts of money on research. However, online brokers do not normally
offer this service, which is, in part, why they can charge such low commissions. Critics of online Internet
brokering say that this is a major flaw and that such stock research information is essential if investors are
going to make an informed investment decision.
5. Limited access to market
A reason cited why you should not bother with online stock trading is that you have limited access to stock
markets around the world. Here the claim is that although you may be able to have access to multiple stock
markets around the world via the Internet, rarely will it be the case that your stock broker will be able to
execute trades on all of the bourses. Indeed, some brokers may not be in a position to allow you to trade on
multiple exchanges within the USA, such as both the NYSE and NASDAQ, as they are exchange specific (i.e. only trade
on one stock exchange).
Within the ambit of this criticism of stock trading online is that not many brokers offer ‘real time’ stock
ticker-tape prices, but that, conversely, most prices being quoted on the screens of subscribers are relayed
time-delayed prices. As such, by the time you come to sell the stock, the bid/ask price of the stock could
well have changed.
6. It’s too technology dependent
Finally, critics of online trading say that the system is too technology
dependent. Ordinarily the scenario they paint here is what happens if you want to sell/buy stock immediately,
put have problems trying to log-in to your online brokerage account? In the case of a real life broker, the
trade can still go ahead, but in the case of the Internet trade, the opportunity is lost.
Next: How to avoid the Cons and Make the Most of
the Pros to Stock Trading Online