Candlestick Trading Blog

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Trading Online and What Every Investor Should Know

When trading online it is important to understand how brokers handle your trades. You may have some assumptions as it relates to trading and investing online that are false. For instance, many investors with brokerage accounts, who trade online, assume that they have a direction connection to the securities markets to execute a trade. This is actually not true. When an investor submits a trade online and order is sent to over the internet to your stock broker who then makes the trade on your behalf.

Also, the actual trade execution does not happen instantaneously. It can take time and the stock prices can change very quickly. For day traders or other types of traders who trade online in fast moving markets, the price quotes can be different by the time your order reaches the market. That is why you must be sure to research trade execution times for the brokerage firm that you choose to utilize when trading online. Whether they make the trade over the phone or online, each firm advertises their speed of execution and they must live up to that advertisement.

Whether you choose an online discount broker or a full service broker, your broker has a choice of markets it will choose to execute your trades. For those stocks listed on an exchange such as the New York Stock Exchange (NYSE), the broker may direct the order to that exchange, to another exchange, or to a firm that is referred to as a third market maker. Third market makers are firms that will buy stock or sell stock listed on a stock exchange at publicly quoted prices.  When trading online the over the counter stocks, broker may send the order to a NASDAQ market maker. They may also route your order to an electronic communications network that will automatically match buy and sell orders at specific prices. Broker will go this route when their client issues a limit order. The last option the broker has when executing your order, is to send your order to another division of your broker’s firm. The order is then filled out of the firm’s own inventory so that the broker can make money on the spread. This process is called internalization.

Trading online can be tricky so each investor must be sure to have full knowledge of their market of choice. Brokers are very helpful but make sure that you have a complete understanding of what they do, and how they do, so that you can choose a broker that fits well with you. Selecting the best broker is one of the most important choices you will make when you begin to invest in stocks online.