The basics of electronic trading


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Electronic trading, also known as e-trading, refers to the process of conducting trades in financial markets through an online broker-dealer. These trades can take place in the stock, bond, options, futures or foreign exchange (FOREX) markets.

Electronic trades can only be conducted during standard market hours: between 9:30 a.m. and 4 p.m. Eastern Standard Time on weekdays. Traders can create orders after markets close, but the orders won’t be executed until the next trading day.

With just a few clicks, investors can buy or sell just about any stock, ETF, or derivatives contract.

This represents a big change from the way the stock exchange worked prior to the internet, when traders would gather in one central place like The New York Stock Exchange and buy and sell stocks in person. It was a chaotic scene, with traders yelling out their orders and a broker manually completing paperwork for each trade.

Related: 6 real questions about investing— answered

How to Start Electronic Trading

Many investors today will only ever engage in electronic stock trading. Traders no longer need a personal broker whom they have to call on the phone each time they want to buy or sell a security.

Instead, investors can now open an online brokerage, create an account and start placing trades. But choosing a platform is only step one in electronic stock trading.

After that, you’ll need to decide what stocks to trade, what type of orders to use, what expenses will be involved (if any), and how trading might affect tax liability.

1. Choose an Electronic Trading Platform

There are many electronic trading platforms to choose from. They are all similar in many ways, with general ease of use: Signing up and getting started can take less than an hour, with perhaps a few days of wait time involved for identity verification.

Among the various platforms, there are slightly different features or different options as far as the user experience is concerned. Not too long ago, most platforms charged a commission fee for each buy or sell order executed, and there was a minimum amount of money needed to create a new account.

Recently, many brokerages have eliminated trading fees, and few still require account minimums.

3. Research Stocks or ETFs

There are thousands upon thousands of securities to choose from. When first starting out, it’s easy to get overwhelmed by all the choices.

Thankfully, online brokerages offer tools to help investors get started. There is also an abundance of free information online about investing.

Sources like Zacks, Motley Fool, Yahoo Finance, Seeking Alpha and many others provide new articles on a daily basis that help investors learn about new market opportunities.

4. Determine Which Type of Order to Use

It might be common to assume there are only two types of orders — a buy order and a sell order. In actuality, there are many different types of orders.

The type of order that likely comes to mind for most new investors is known as a “market” order. This is simply an order to buy or sell a security at whatever price it’s trading at right now.

Another type of buy order is a “limit” order. This is an order to buy at or below a specific price. The order can remain on the books for a day, sixty days, or until cancelled, and will be filled whenever the security falls to the specified price.

This can help investors wait to buy a security at a cheaper price without having to monitor things. Limit orders also help protect against sudden spikes in price. If a market order is used just before a large price increase, an investor could pay more for a security than expected.

“stop-loss” order can help traders limit losses. Like a limit order, a stop-loss gets triggered when a security falls to a specific price. But as you might have guessed, unlike a limit buy order, a stop-loss order will initiate a sell when triggered.

The topic of order types is one that new investors ought to consider researching on their own.

5. Consider Tax Implications

Buying securities usually doesn’t invoke any tax liability. Selling for a gain often requires an investor to pay capital gains tax, while selling for a loss could result in a capital loss, which investors can sometimes use to reduce their taxable income.

The subject of taxes and investing is long and involved. We’re not giving tax advice here, but new investors might want to consider researching the tax implications of buying and selling securities on their own.

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