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Benefits of Online Trading

Online trading, or e-trading as it is sometimes referred to, is basically electronic trading of stocks, bonds, foreign currency and exchange traded derivates over the Internet. There are two main types of online trading in the financial markets: business to business trading, which involves large investment banks and brokers transacting large quantities of securities, and business to client trading, where individuals who are buying and selling smaller amounts of securities trade with institutional clients like fund managers or insurances companies, with brokers sometimes in between. The majority of retail trading now happens online.

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Normally, the cost of a traded commodity is set on an exchange rate. For instance, if a client wants to purchase a particular stock that is on the NYSE, it is up to their broker to have their stock trader on the exchange floor seek out the current "quote"; this can usually be done just by reading the price off a screen. Afterwards, they will then add a few cents to the price they give back to the client. This is how the broker makes their profit. If the client opts to trade the stock, the broker will then pass the order on to the trader execute the request.

Before online trading came to be, exchange trading would usually happen on the floor of an exchange building, where different stock traders in colored jackets that identified the company they worked for would yell and gesture at one another to communicate. This process was known as "pit trading". Pit trading has mostly been replaced by computerized electronic trading, although there are still a few exceptions out there. (Of course, for many people, pit trading still is what enters into their minds when they do think of stock trading. However, that rapidly is starting to change and a growing number of people think of their PCs when it comes to stock trading in the 21st century.)

For securities that aren't traded on exchanges like treasury bonds, the dealer market is substituted for the exchange. This market is when dealers trade directly with each other or through inter-dealer brokers who act as middle men between dealers like investment banks. This type of trading traditionally was done over the phone but brokers are beginning to provide online trading services.

The increase of e-trading has created some important implications and benefits for traders. For one thing, there is now a reduced cost of transactions. By automating the process as much as possible through online trading, overall costs are brought down. The goal is to reduce the small cost of trades to as close to zero as humanly possible, so that higher trading volumes don't lead to severely increased costs. As a result, this savings has translated to lower costs for market investors. Another benefit of e-trading is greater liquidity. Electronic programs make it easier to allow various companies to trade with each other, no matter where they might be located. This leads to more buyers and sellers which in turn increases the efficiency and liquidity of the trade markets. Online trading also leads to greater competition among industry players. Though the cost of entry is still high, traders can now make online trades without going through a broker or passing orders on an exchange floor. Also, e-trading has increased the transparency of the markets. It is now easier to find information on the price of securities since that information is circulating rapidly and electronically.

For retail investors, monetary services on the web offer great advantages. The main benefit is the lower cost of transactions for everyone concerned as well as the simplicity and the convenience. Online trading will likely remain a mainstay of the trading industry for many years to come.

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