Online Trading: How It Works and How to Stay Safe When Trading Online

Online trading is becoming increasingly popular worldwide as it offers traders virtually limitless possibilities, providing access to global financial markets from anywhere in the world. For instance, you can trade thousands of financial instruments using your computer or phone anytime from the comfort of your home. Among other things, investment in online trading can significantly strengthen your personal finances and help you achieve whatever your financial goals may be, securing a favorable future ahead of you.

What Is Online Trading?

Simply put, online trading is trading done via the Internet. Traders and investors buy and sell financial instruments (such as individual stocks, bonds, exchange-traded funds (ETFs), mutual funds and index mutual funds, derivatives, etc.) online through a trading platform provided by a broker.

Online trading also involves new risks that one should always keep in mind:

  1. Traders should not place orders using computers that other people have access to;
  2. It is important to log out after trading is complete to avoid misuse of your trading account by third parties;
  3. Traders should never choose the "Remember me" option when logging into their trading account on someone else’s device.

Social Trading as One of the Forms of Investing

Social trading is a form of online trading that has become extremely popular in recent years as it is an excellent option for beginner traders. Simply put, social trading is a form of community-based investing: investors analyze financial data based on the actions of successful traders and use copy trading to copy their strategies. Social trading is suitable for investors with little time or knowledge to identify profitable investments.

Trading investors have a wide market range. You can invest in one or more markets at the same time, depending on your short-, medium- and long-term investment needs. Here are the most important financial markets you can invest in:

How to Start Trading Safely?

The most important thing you should do is choose a reliable and licensed online broker – a firm acting as an intermediary between a buyer and seller of a financial instrument – which will provide a platform for trading.

In turn, an online trading platform is a software system used by investors to trade securities, options, futures, ETFs, cryptocurrencies, commodities, or Forex. It allows them to open, close, and manage market positions online through an online broker – a financial intermediary. Brokers usually offer such trading platforms either for free or at a discount for maintaining a funded account or making a certain number of trades in a month.

For example, the best broker for beginners is TD Ameritrade; for ETFs – Fidelity Investments; for advanced traders or international trading – Interactive Brokers. Other popular brokerage platforms include Robinhood (provides commission-free trading of stocks, ETFs, and options) and eToro (a global social trading broker).

How to Choose a Reliable Broker?

While most online brokers are engaged in quite legitimate activities, there are also fraudsters among them who use incredibly tempting offers with obscure terms and low financial literacy of the population to try to steal as much money as possible from gullible people who readily believe anything.

Here’s what you need to pay attention to in order to protect yourself from fraud and scams while trading online:

  1. Upon receiving any offer to invest your money, consider whether it is too good to be true.
  2. If the investment offer doesn’t seem suspicious and you’re willing to take the risk, take some time and search for reviews about this online broker from existing clients.
  3. Ask the online broker to show the license for brokerage services. The thing is that obtaining a license is a rather troublesome matter for fraudsters to do.
  4. Even if an online broker gives you a copy of the license, don’t be lazy to find the website of the body that issued it and check if this online broker is on the list of licensed operating brokers.
  5. When signings a contract with an online broker, make sure that the broker company listed in the contract is the same company that is listed in the online broker license.
  6. If you see the logos of various payment systems, electronic wallets, etc., on the online broker’s website, and the broker says that they can only accept your payment by bank transfer, this should alert you.
  7. Even if you decide to send money to an online broker by wire transfer, make sure that the payment recipient is the exact company listed on the license certificate and is on the list of active licensed brokerage companies published on the website of the relevant regulator.

Of course, following these simple tips does not guarantee 100% protection from fraudsters, but it significantly reduces the risk of losing your money.

Learn to invest

To learn about investing and personal finance, it's helpful to start by understanding the basics of financial planning, such as creating a budget, saving and investing for the long term, and managing debt. You can find helpful resources online or through books and courses that cover these topics in depth. It's also a good idea to seek out guidance from a financial advisor or professional, who can provide personalized recommendations based on your specific financial goals and needs. As you learn more about investing and personal finance, it's important to be aware that picking individual stocks carries a higher level of risk compared to investing in a diversified portfolio of assets, such as index funds. Index funds offer a way to invest in a broad range of stocks or other assets, which can help to spread out the risk and potentially provide more stable returns over time. While it's possible to achieve strong returns by picking individual stocks, it can also be challenging to consistently outperform the overall market. For these reasons, many investors choose to include index funds in their portfolios as a way to gain broad-based exposure to the market while also mitigating risk.