How to Trade Stocks Online

There are several ways to trade stocks online, and a plethora of different trading products that provide access to stock prices. Stocks can be traded through banks, discount brokers as well as contract for differences brokers. Each company offers a slightly different nuance which is geared to meet their customer needs.

Trading Online Through Banks

Banks generally offer their clients access to stocks and stocks indices including exchange traded funds ( ETFs) and Mutual funds. The online trading system allows you to make deposits and withdrawals based on country regulations. Banks generally offer very little leverage to their clients. In the United States for example, banks are restricted to the SEC regulation “T”, which restricts leverage to 1.5-times.

Generally, banks will offer access to individual stocks and indices as well as options on stocks and indices. An option is the right but not the obligation to purchase or sell shares at a specific price on or before a certain date. Banks generally offer their clients personal research and services in exchange for relatively high commissions and fees.

Trading Online through Discount Brokers

A discount broker is a stockbroker than provides access to individual stocks, indices through ETFs and mutual funds. Discount brokers will often offer access to options on stocks and ETFs. There has ben a trend in the discount broker space to reduce commissions to zero. The goal is to drive revenues from money management fees. This has led to consolidation in the industry. Recently Charles Schwab, the largest discount broker agreed to purchase TD Ameritrade.

Trading at a CFD Broker

Another cost-effective way to trade stocks is through a contract for differences broker. A contract for differences (CFD) is a financial instrument that tracks the movement of an underlying asset such as stock or currency pair. The benefit of a CFD, is that you don’t need to own the underlying asset, and you are only responsible for the change in the price. If you want to short the price of a stock (benefit if the price declines), you do not need to borrow the stock and pay it back. All you need to do is sell a CFD.

CFDs also provide leverage that is well beyond the leverage that you can receive at a bank or discount broker. Some CFD brokers provide leverage on stocks up to 20-1. Additionally, most CFD brokers do not change a commission. Instead, there revenue is driven by the bid/offer spread. The competition in the space has driven down the spread, allowing investors to benefit from robust liquidity in many popular stocks.

Take Away

Banks provide access to the stock market, offering research and full service, but generally charge a high commission on trades. Discount brokers also offer access to stocks, ETFs and mutual funds, and have reduce commissions to zero in some instances. In both cases the leverage is generally low.

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