Stock investment is undoubtedly one of the most traditional ways to invest and what most people associate with the term investing. Yet, a surprising number of people don’t understand the difference between stock investments and trading, and many dedicated stock investors frown at the idea of using an online broker to trade stocks.
Therefore, we saw our chance to explain the basics of stock trading compared to long-term investments as well as highlight some of the main benefits.
Just keep in mind that all forms of investing and trading are related to certain risk and you should never get started without proper knowledge and funding.
What’s an Online Stock Broker?
Let us start with the fundamentals and explain what an online broker is. In most cases when trading stocks online, you will actually be trading derivatives and not the actual underlying stock. The most common derivative these days are Contract for Difference (CFDs) but many of the best trading platforms also support spread betting.
When trading a derivative such as a CFD, your goal is to predict whether or not you think the price of a said stock will increase or decrease during a certain period of time. The same concept applies to spread betting and other derivatives.
In other words, an online broker works as a middleman between the stock exchange and you as a trader, providing you with the real-time prices and a platform where you can place make your predictions.
Online Stock Trading Benefits
And now to the million-dollar questions: why should you trade stocks instead of investing in the long-term?
Well, we’re not saying that you should only trade stocks. We do, however, recommend that you combine both long-term investing and short-term trading for the most opportunities. It’s just a great way to improve your portfolio while maximizing your efforts.
With that said, there are several great benefits that trading provide.
- Easier to Go Long or Short
Oftentimes when using a traditional stockbroker, you’re mostly investing in stocks that are predicted to increase in price. The reason for this is that people, generally speaking, find it easier to predict growth in the stock market. That’s also the reason why there are fewer bears than bulls in the stock investment industry. Moreover, many traditional brokers make it more difficult to short stocks and you can expect to pay increased commission.
When using an online broker, on the other hand, it’s just as easy to open a long position as a short position and you won’t pay extra for a short position. Also, since you’re not trying to predict the price movements on a long-term scale, you’ll be able to benefit from even the smallest price declines.
In other words, stock trading provides access to more opportunities than investing does.
- No Commission
Another great benefit with many of the leading online brokers is that they don’t charge a commission, something a regular stockbroker has to. Naturally, brokers do have to make money somehow and when trading online that’s usually controlled by spread.
Spread is the difference between the bid and ask price and is often adjusted by the brokers themselves. Furthermore, the spread can often differ dramatically from asset to asset meaning you can “shop around” for the stocks with the lowest spread, thus keeping more of your profits.
Now, not all online brokers are commission-free so make sure to double-check your broker’s terms before you get started.
- More Available Assets
Lastly, online brokers are not strictly offering stocks. In fact, many of them were originally forex brokers before they started offering CFDs and other derivatives. Also, CFDs can be made from pretty much any underlying asset from commodities and indices to cryptocurrencies.
Because of this, it’s not uncommon for online brokers to offer 5+ markets and thousands of assets, all on the same exact trading platform. Needless to say, if you want to trade more than just stocks, online brokers provide an excellent solution.