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Online Stock Market Investing

An overview of various investment strategies used by online traders.

The technological advancements in online trading over the last decade have made investing online the norm for many traders. One of the reasons for this is that the cost of online investing is far lower today than when the only choice to invest was with traditional full-service brokers. For smaller investors, online investing through platforms such as TradeKing's, provides an opportunity to access the markets with very affordable transaction costs and commissions. There are also benefits for larger and more experienced investors, including the flexibility of investing online, as well as the speed of order confirmation and trade execution.

Depending on the investor's market forecast and company outlook, there are different online stock investing strategies that he or she can use. These online investing strategies usually depend on the duration of the investment that the individual investor thinks is best. Risk management is also an important factor for determining which style to use.

Trading over the Internet allows not only allows for investment in stocks, but also investment in derivatives such as options. While stocks represent tangible assets, options are more abstract. Call and put options derive their values not only from the underlying stock but also from the duration of the contract and other market conditions. Multiple options can be combined to create intermediate to advanced option strategies. Multiple leg options strategies involve additional risks and multiple commissions, and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.

As an investor matures and gains more knowledge about investing online, it is common to combine option strategies with different stock trading strategies. Therefore it is optimal to select an online broker that offers access to both styles of investing, even if the investor is just at the beginning stages of learning about the market. One such stock and options broker that excels with a dual-purpose platform as well as low transaction costs is TradeKing.

Different Trading Strategies for Online Investing with Stocks

To learn to trade successfully when investing online, it is helpful to have knowledge of different trading methods and styles so that the investor has the flexibility to adapt to changing market conditions.

Buy and Hold Investing - A Bullish Strategy

The most basic investment strategy when investing online is buy and hold investing. Investors buy stocks with a long-term bullish view of the company. The strategy is to realize gains on the stock price well in excess of transaction costs. In addition, often times stocks are chosen that pay quarterly dividends. This added income bolsters the overall return of the stock investment. The holding period for this type of investment strategy is usually six to twelve months, but is commonly longer than one year. Since the investor typically has time on his side due to the longer time frame, he may be more willing to accept an adverse move in the stock than someone with a shorter time frame.

Position Trading - A Shorter-Term Strategy Used by Bullish Investors

The next investment strategy for online stock investing is called position trading. This is a slightly more active trading style than buy and hold investing, with a similar bullish company forecast. The typical time frame of this type of online investing is as brief as two weeks but as long as six months. The intention is to participate in the mid-term upward trend of a company but retain the flexibility to exit the position if the stock falls below a stop loss threshold set by the online investor. This downside limit would be slightly stricter than a risk limit used by a buy and hold stock investor.

Swing Trading - A Short-Term Strategy for Bulls

A more active investment strategy for investing with stocks online is commonly known as swing trading. The investor's trading plan is to capture small movements in the stock while also reducing risk. Investing online through swing trading strategies involves holding a position for as little as two days, or as long as two weeks. If the trader thinks the stock price will increase in the short term, the trader will determine potential profits to be gained, as well as how much risk is involved in each trade. If these calculations are in line with her investment and risk management objectives, a bullish trader will buy shares of the company. To better manage this kind of trading plan, Advanced Orders may be used to set profit targets and stop losses simultaneously. TradeKing offers a full suite of these sophisticated orders to help investors manage their capital and time wisely. Swing Trading involves specific risks and commission costs different and higher than the typical investment strategies.

Swing Trading - A Short-Term Strategy for Bears

If the swing trader is bearish, he may decide to short sell the stock with the hope of buying the shares back in the future for a lower price. If successful, he will net the difference from the two trades and make a profit. If he is not, the trade will result in a loss. Swing trading with a bearish perspective utilizes the same methods a bullish swing trader would use. This includes establishing profit targets, risk limits, and evaluating the merits of each stock trading opportunity. Advanced Orders like One Cancels Other and One Triggers Other are powerful tools to enhance this trading plan.

Day Trading and Scalping - Adaptable for Bullish and Bearish Strategies

The most active investment strategies for stock investing online is when the trader seeks to earn money as a result of the change in a stock's price over the course of the day or a matter of hours. These trades may be initialed with a long purchase or a short sale, and therefore can be used by investors with either a bullish or bearish forecast. Because the trader is trying to successfully capture only a sliver of a stock's movement, one may logically conclude that this method of online investing offers the most opportunity. However there are significant risks. Due to the frequency of trading, this style lends itself to accumulating and incurring the highest amount of transaction costs. Commissions can quickly erode the small gains of a profitable day trade. Therefore it is paramount that an investor chooses an online broker that is highly competitive on price, such as TradeKing. Because day trading and scalping are the most active styles, they also have the smallest margin of error among all the practices described here. Therefore solid risk management will play a prominent role in determining success with this method.
As you can see, there are many ways to invest online with stocks, from buy and hold investing, to day trading. Regardless of the style of trading you employ, it is imperative that you have a complete understanding of these opportunities as well as their risks. Each investor needs to evaluate for themselves what is the best strategy before committing capital and resources. Key features for many trading plans include low transaction costs and Advanced Orders. These items alone do not guarantee success. Open a an account at TradeKing to get started now.

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