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Types of Online Trading and How They Work

Types of Online Trading and How They Work
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Online trading is the practice of buying and selling financial instruments on the internet. As long as you have a good internet connection, computer, and an amount of money you are willing to risk, you are good to go.

The only thing as a beginner you might find tricky is choosing an online trading platform that works for you. But don’t fret, in this article, we discuss some types of online trading and how to choose an online trading platform suitable for you.

What are the types of online trading and their benefits?

Some common types of online trading include:

Forex

If you are familiar with online trading, you may have heard of forex trading. It is the largest trading market in the world trading trillions of dollars daily.

Forex stands for foreign exchange market and it is referred to as the currency market because it only trades in currencies. Anyone can engage in forex trading, and you can buy and sell currencies 24 hours, 5 days a week. In the forex exchange market, currencies are listed in pairs. The most common pairs are EUR/USD, USD/CAD, and USD/JPY. You can choose to trade in more than one currency pair,

To execute a trade in forex trading, you need to first select a currency pair you are confident about. For example, let’s say you choose to trade EUR/USD pairs. The Euro is the base currency and the US dollar is the quote currency. In addition, there is always a price associated with every pair.

For example, if 1.0999 is the price associated with the EUR/USD pair, it means that it costs 1.0999 US dollars to buy one Euro. If this price goes up, it means you will need more US dollars to buy one Euro. When this happens, it means that the value of the Euro has gone up and the value of the US dollar has gone down.  

At this point, you can sell the Euros for a profit. So this is what traders do. They buy a currency with the hope that its value will go up in order to be able to make a profit.   

Now that you have an idea of how forex trading works, let’s look at some of its benefits.

  • Flexible trading hours: Forex trading does not have a physical location. You can trade 24 hours a day, 5 days a week and from the comfort of your home. All you need is a computer and reliable internet connectivity.  
  • High liquidity: Given that there are many traders trading in the forex market at any one time, this means that transactions are completed easily and quickly. So transactions costs are low.

CFD Trading

A contract for difference (CFD) is a form of day trading whereby traders speculate the price movements of commodities, shares, indices, treasuries, and currencies. There is no direct buying or selling of a trading instrument.

With CFD trading, there is a buyer and a seller. Both parties get into a contract whereby one of them has to settle the difference between the purchase price and the final selling price of the contract.

If the price of a trading instrument rises, the seller of the contract pays the difference and the buyer profits. If the price of the trading instrument falls, the buyer pays the difference and the seller profits.

When trading CFDs, there is the potential to make huge profits, but there is the potential to make huge losses because it is a leveraged product.  

So should you trade in CFDs?

Here are some reasons why you should consider trading CFDs.

  • With CFDs, you have access to a huge range of markets. You can trade on multiple markets and you don’t have to do it on multiple platforms.
  • You can trade CFDs at any time, even when the market is closed.
  • CFD trading provides you with the option to use CFD leverage. This feature enables you to pay a small portion of your trade’s total value to open the trade. This portion or deposit is referred to as margin.  

Binary Options

With binary options, you don’t buy or sell an asset. Instead, you place a bet on whether the price of an asset will go up or down within a specific period of time. You are the one who sets the expiry date, once the option expires, your account is credited when you make a profit and debited when you make a loss.

Some of the advantages of binary options trading include:

  • With binary options, you know exactly the amount you are risking to lose and how much you are going to gain if the trade goes your way.
  • Binary options are easy to trade. Many binary options trading platforms provide investors who have little or no experience with information on how to trade binary options. Websites that offer this service also provide demo accounts to help you build and develop your trading skills.

Choosing an Online trading platform that works for you

When choosing an online trading platform, here are some things to look out for:

  • Accessibility – we live in a digital era where people are able to access information from anywhere at any time. So when you choose a trading platform, select one that has a trading app that you can download on your smartphone or tablet. You want to be able to gain quick access to your trading platform at any time regardless of where you are in the world.
  • Information is everything – pick an online trading platform that provides information and news on how the market is performing. You don’t need the hassle of going to another website to find out about the best stocks to buy or other information about the trading market.
  • Calculator – select an online trading platform that has a calculator that can enable you to calculate the trading fees associated with your trade. The last thing you need is to be hit with unexpected costs after your trade.  
  • Trading tools – a good online platform should provide its users with trading tools that make trading easy. You should be able to receive notifications on your computer or smartphone/tablet on what is happening in the market.

Advantages and Disadvantages of Online Trading

There are certain aspects of online trading that make it attractive to investors. But there also certain features that are not so attractive. So here are some advantages and disadvantages of online trading.

Advantages

  • Low fees – with online trading, the transactions costs and fees are low compared to traditional trading.
  • It’s cheap: Since you don’t need the services of a human broker to trade online, the cost of trading is not high.
  • Flexibility and convenience – the biggest advantage of online trading is that you can trade any time, any were. And you don’t need a broker to execute a trade. One of the best platforms you can use is MetaTrader4. Here’s an in-depth guide on how to use MetaTrader.
  • Control – with online trading, you are in control. You don’t need a broker to execute trades on your behalf.
  • Access to trading tools – many online trading platforms offer their users a range of trading tools that offer valuable information as well as help traders with their trading decisions.
  • It’s unbiased – it is not uncommon for brokers to mislead investors so as to make a profit. But with online trading, you are the one in control.  

Disadvantages

  • It’s too easy – online trading is not difficult. You simply click on the buy or sell button on the website, and that’s it. Since it’s too easy, you might end up overinvesting, which may result in considerable losses. So as an online investor, you need to protect yourself by understanding how trading works. Otherwise, you may end up losing a lot of your hard earned money, if don’t know what you are doing.
  • Internet dependent – to engage in online trading, you need a reliable and fast internet connection. But if the internet is slow or is constantly interrupted, you may lose out on some potentially lucrative trades.
  • You are on your own – when you engage in online trading, you are the one in control. There is no chance of building a personal relationship with a broker, which can be helpful especially when you need sound investment and financial advice.
  • Human errors – a small mistake or misstep can end up costing you a lot.

Final Remarks

Online trading has its advantages and disadvantages. It is up to you to decide whether it is something you want to do. However, keep in mind that it also has its risks and like traditional trading, you must be willing to invest an amount that you are willing to lose.

Avoid overinvesting especially if you are green at online trading as you may end up losing all your investment. Also, do your due diligence when choosing an online trading platform. We have covered some key features that a good online trading platform should have in this article, but there are many more.

And lastly, learn as much as you can about online trading before you get started. The internet has a plethora of information about online trading you may find valuable and useful.