Online trading has brought the world of stock market investing into home offices and living rooms across the country. With so many chances to make a fast buck, many folks are flocking to online investment websites like never before. However, online trading just like trading in real life carries with it a few potential dangers. Here is a look at ten potential hazards of online trading:
Sudden Turns in the Market
Even the savviest broker is not immune to sudden turns in the market. Stock performance is impacted by a number of different factors, some of which are visible and some of which are not. Knowing what is going on behind the scenes in all investment areas requires a huge amount of research and ability, which is why brokerage firms have such large employment bases, but knowledge is the greatest method to avoid getting stuck with sudden drop in price. While taking advantage of those sudden turns can yield massive profits, getting caught up in them can wipeout a week’s work.
Unpredictable events trigger massive changes to a company’s stock price. Even large super-corporations are subject to natural disasters, unforeseen accidents, and sudden terminations or resignations. Any of those events taking place in a company in a portfolio can cause massive short-term losses, which could result in long-term headaches. To reduce this problem, traders need to pay attention to weather patterns, such as major snowstorms, hurricanes, and even oil spills before jumping on a stock that seems like a major bargain.
Timing of Updates
Stock prices change all the time, the ticker is an unending stream of data that receives constant updates. Depending on the particular software the trader is using, “real time” might not actually be “real time.” When a few minutes can make the difference between $100 and $300, those precious seconds are all that matters. Therefore, anyone engaging in online trading activity should be certain their Internet connection speed is top of the line, and his or her software is as close to real life as possible.
Underestimating the Challenge
Many folks who try their hand at online trading realize the basic axiom that rules the profession: “Buy low, sell high.” While the concept is simple, the execution can be somewhat on the tricky side. The whole experience can be extremely challenging for new traders, and many find themselves overestimating their abilities. Obviously, those who take their time and learn the craft at their own pace generally see more substantial results; whereas, anyone jumping in and investing a pile of cash can end up with many more liabilities than expected. Therefore investors should have confidence in what they are doing, but never forget that data flowing across the screen is real money.
Short Term Versus Long Term Gains
A lot of people have 401(k) plans and similar investments with a long-term investment strategy and structure. It is that long term thinking that challenges many online traders. In trying to earn a profit every single day, the day trader must be short term minded on many occasions while still maintaining a long-term strategy. In short, sometimes a small loss is necessary to prevent a major loss.
Getting Caught in a Pack Mentality
Jumping on the bandwagon has a lot to do with human nature, and stock traders are no exception. It is extremely easy to just do what the “experts” on TV are saying, but even experts are wrong (some more than others). That being said, traders need to pay attention to their own needs and successes. Branching out into other types of companies is great, but jumping out of an area of expertise can become risky, no matter how many other investors are along for the ride.
Not Using All the Tools Available
Several different software programs and Internet sites exist to serve the online trading needs of any professional. All too often those tools go unused or underused. Again, investing in the stock market should never be akin to gambling. Analyzing reports and dissecting the available information is the only way to insure a safe and profitable investment, and even then not all the time.
Over Committing to a Company
While some initial public offerings or IPO’s and certain companies can be very attractive as money-making ventures, over committing resources to a few companies can often spell trouble for a day trader. Generally, goals need to be met to insure a profit, or at least a reasonable chance at a profit. The key to avoiding this pitfall is to diversify investments. Generally for every risky investment, a safer one should be made. This process tends to soften the blow of a major failure.
Commissions & Fees
Everyone online trade comes with a price. In fact, some may come with more than one. While online trading is the ultimate in convenience, making too many trades can almost eradicate the gain from an investment. Therefore, anyone using any particular company or website needs to know and understand the rules governing any commissions and fees that might be charged just for making a trade, or they risk running up a huge tab.
Not Understanding Terminology
The terminology used in the daily stock world can get pretty complicated. Terms, ratios, and acronyms get tossed around all the time. Anyone attempting to trade online needs to completely understand what is going on, at all times. Many times enrolling in a web based tutorial or community college class can lay a solid groundwork for success. Education, knowledge, and experience are often the difference between a loss and a gain. While experience comes with time, education and knowledge can be improved by investing in oneself.