Beware of the convenience of online share trading

by Manshu on January 6, 2010

in Opinion

Generally speaking, the more convenient a product is, the better it is for the customer. However, in the case of stock trading platforms, — this is not always true.

I was reminded of this when I was talking to a friend about the good old days of calling up a broker and buying stock, or sometimes even heading over to the brokerage to conduct a trade.

That’s because there is a slight conflict between a convenient share trading platform, which makes it easier to buy and sell, and long term investing philosophies.

The conflict is as follows: Most investors are better off being long term investors who hold stocks for a long period of time and let their investments grow. So for most people, the lesser they trade, the better it is.

However, the goal of any good online and offline stock brokers should be to make trading as easy and cheap for their customers as they possibly can. Convenience and cost – effectiveness will drive people to buy and sell stocks frequently and that goes against the goal of profitable long term investing.

An online stock trading platform is a lot easier to use than a traditional broker, and that is both a positive and a negative.

Anyone with an internet connection can get used to an online stock broker, and start trading in minutes. It makes it easier for you to deal in derivatives, commodities and currencies.

The problem is that just because it is easy to use, — it becomes easy to abuse as well. Online brokerages are great because they make it easier to buy and sell stocks, and they are cheaper than traditional brokerages. But just because you can buy and sell easily, doesn’t mean you do that.

For an average investor being a long term investor is much better than being a trader, and frequently getting in and out of stocks. Trading frequently increases costs and eats into your profits.

The objective of investing is to make steady money in the market, and that is best done when you leave your investments alone for a long period of time.

Realizing that this subtle conflict exists is a great thing because it increases awareness, and helps you avoid easy but foolish trades.

If you are going to buy or sell something, which you are not sure about, — take some time to think how likely you would have been to do this trade if it weren’t so easy. That should tell you how much of a part ease of use is playing in influencing your decision, and if that is a big part of it, then you should rethink your decision.

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