Online trading what is it and how does it work?
August 21, 2020
Online trading has become one of the most used alternatives to enter the financial markets. It is a very practical option that thanks to current technology, everyone can use to make a profit, with a little dedication and effort.
Through online trading you can buy and sell a wide variety of financial instruments with just one click.
What is online trading?
Online trading is about participating in financial markets over the Internet. It consists of selling and buying financial assets or instruments listed in open markets, to achieve a speculative profit.
In other words, people who participate in online trading are dedicated to analyzing financial markets, in order to take advantage of changes in the price of goods and make a profit, either by buying or selling.
This is an activity that demands time and dedication, so it must be taken seriously. Especially since there is a risk of losing money.
Two main players participate in online trading:
A trader is the person who makes the purchase and sale of assets in online trading. You must analyze the markets and determine whether to sell, buy, or do nothing.
One of the main functions of the trader is to take care of his capital, and make the right decisions to increase it. To achieve this, it makes use of a set of tools, formulas and strategies.
A trader can work in a financial firm working with other people’s capital, or he can be a freelancer working his own money. The latter are known as “home traders”.
The broker is in charge of offering a trading platform to the trader. It is through this platform that online trading is carried out.
The best platforms provide a complete set of tools to facilitate the trader’s work, such as: technical analysis functions, graphical tools, among others.
Some of the most recommended platforms for online trading are: iForex, IQ Options, Markets.com and Tradeo.
How does online trading work?
Online trading allows you to create trades in the markets in just a few seconds or less. It is a simple process that works as follows:
- The trader makes the decision to open a trade to buy 50 shares of company X.
- Search and find the asset “Company X shares” on your trading platform, select the desired number of shares (50) and generate a buy order.
- The request for the purchase order is received by the broker, and it initiates the execution of the order. It requires getting the corresponding counterpart, a trader who wants to sell the asset indicated for the same price.
- When the broker finds the counterpart in the stock market, it proceeds to carry out the operation.
Currently, the trading platform does the job of searching and finding the counterparty to execute the transaction. The process is automatic, so it usually takes only a few seconds.
Financial instruments you can trade with
There are different types of assets or financial instruments with which you can operate online. Most are considered traditional, and others emerged after online trading was born.
You can buy and sell:
- Shares: consists of a part of a company that is traded publicly.
- Cryptocurrencies: it is the newest financial instrument. It is a digital asset generated by software. They have a high level of volatility, their value can rise quickly or fall precipitously.
- Currencies: these are the main asset of the Forex market, and they are always traded in pairs. For example: GBP / USD, EUR / USD, etc.
- Metals: covers non-ferrous and precious metals. The main ones are gold and silver.
- Indices: an index is made up of a specific number of shares.
- Agriculture: these are not the most popular assets but they can still be traded. They include wheat, beans, soybeans, etc.
- Oil and gas: belong to the classification of energy resources, and are very popular in the market.
- ETFs: consist of investment funds that combine stocks and other financial instruments.
Types of operations in online trading
Another aspect to consider in the world of online trading are the different ways of trading that you can apply. We describe what each one consists of:
It is an extremely aggressive technique. They are buy and sell transactions with a duration of a few minutes or seconds. In this case the trader must make decisions quickly based on a constant analysis of the market.
In this technique the trader closes all the operations that he has opened on the same day. That is, it does not leave operations open for the next working day. Transactions can last for hours, but are closed before the end of the day.
With this mode of operations, the trader tries to detect the macro trends of the market. The risk in this type of operation changes completely, since they are more extensive. Changes as well as losses can be more significant, but market analysis can be done with more time and calm.
With swing trading, you can handle multiple assets at the same time. Operations in this case can last several days or weeks.
In this style the trader captures the great trends present in the market. The most affected changes are the main ones to consider, since they influence these extended time operations. The trader must keep updated with respect to trends, and make the corresponding adjustments: he can partially close, strengthen the operation, etc.
In this case, the operations can last a week or even months.
How to do online trading
In the first place, this type of operation must be carried out by persons of legal age, who have the capacity to enter into contracts.
Once the above is clarified, we indicate the best tips for you to put online trading into practice:
You must have the basic work tools that allow you to carry out your operations without problems. We mean a personal computer or mobile device, a secure and stable connection to the Internet, and a workspace. This is enough for you to start online trading.
Open an account with a broker
Nowadays opening an account with a broker is very simple. But before doing so, we recommend that you do a little research on the existing options, to ensure that you choose a reliable and safe one.
To open the account, you usually only have to enter the website of the selected broker, indicate the data in the registration form, and send a set of documents to validate your identity.
All steps are carried out through the Internet, so you do not have to go anywhere.
Get familiar with the trading platform
The broker gives you access to a platform from where you will carry out your operations. This platform includes very useful functions that allow you to make buying and selling decisions, so it is very important that you know it thoroughly.
Know each option, function and tool that the platform offers you to manage your trading. This way you can get better results.
Determining a specific amount is somewhat difficult, since you can decide on endless operations. But if you do your research and decide on a certain trading style and certain asset, you can determine how much you need to get started.
Use the demo account
A good alternative to start is to use the demo account. Usually brokers provide you with this type of account that gives you access to a simulator. There you can operate as in the real markets but with virtual capital. This way you can learn by doing, without risking your money.
Get the right training
In order to function correctly in the world of online trading, you must handle and know a series of basic concepts about money and risk management, as well as technical analysis.
You can make use of tutorials, guides and all the information that you find on the web. You can also practice with your broker’s demo account and gain experience over time.
Remember that to achieve a good foray into online trading you require discipline and perseverance.