Online Trading


Of Note:

- Decide on which broker to go with.

- What kind of trader you are?

- Is speed of execution important ? - (To reduce "slippage" costs.)

- Are you comfortable with the brokerage interface (trading platform)?

- And, of course, you have to look at fees. You don't want to lose your earnings to commissions


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Notes From a Cyber Trader


Following the online rules pays off
Searching for a broker who's solvent is the best way to start investing

February 11, 2009
Jerry Langton
Toronto Star

If you're one of the many Torontonians interested in trading online, you probably already know that the first hurdle is to decide on which broker to go with.

While slick advertising campaigns may make them all appear similar, there are important differences a potential investor will probably want to consider before making any kind of commitment.

The first question any would-be online investor should ask themselves, say the experts, is how stable is the company itself?

"You have to make sure the broker is solvent before you invest anything," says Sunny Harris, a California-based financial adviser who has written a number of books on online trading.

"You certainly don't want to see them drop out from underneath you."

Of course, Canadians can choose from any number of online trading brokers with healthy parents. And it takes very little homework to find out exactly who owns whom.

After that's settled, the deciding factor could be what kind of trader you are.

"When it comes down to investors who trade frequently, execution speed is the most important thing," says George Pruitt, a North Carolina-based online investment adviser and president of Futures Truth, a company that ranks online trading brokers and their services.

"But if you're just trading a hundred shares every month or so, it's less of a worry."

It makes a difference, he says, to frequent traders like day traders, because if the execution of the trade takes more than an instant, the price of the share may be different than what the trader intended when he or she wanted to trade. This effect is called slippage.

"Slippage can rob a day trader of any profit," Pruitt says. "But these days the technology is so good that for most people, it's not an issue."

Still, if you're the kind of person who trades volatile stocks frequently, it would pay to look at a third-party analysis of the slippage rates of any brokers you are considering.

And, of course, you have to look at fees.

"It's important to look to see if there are any hidden fees. You don't want to lose your earnings to commissions," says Harris.

"There can be penalties for early withdrawal, or the per-trade fee advertised may be for a limited time."

While Pruitt agrees it's essential that you read the fine print before committing any money, he points out that for the most part, hidden fees and other unexpected costs are a thing of the past.

"Most of the time these days it's just one flat fee," he says.

"All that other stuff has been displaced due to the immense amount of competition."

That competition for clients, he says, has paid off for the individual investor.

"This is a great time to be an online investor," he says. "Fifteen years ago, people were afraid of being ripped off by their brokers.

"Now there's just too much transparency."

As far as security is concerned, Pruitt says there's little difference between the major competitors.

"They all have the same kind of 64-key encryption, so security isn't usually better or worse at any of them," he says. "It's not that big an issue that more."

A more important consideration, he says, is how comfortable the individual investor is with the brokerage interface.

"Some people like charts, some just like numbers," he says. "If you like to research your transactions on the brokerage site, some are clearly better than others."

But it's not just a matter of personal taste; some interfaces can present a potential risk, especially to older investors who may not be quite as familiar or comfortable with online navigation.

"Some brokerage sites are built for speed to reduce slippage, which means that you can sell 10,000 shares by clicking a single button," says Pruitt. "For a lot of people, that's extremely risky."