What Is an Online Trading Account?

By Contributing Writer

  • Overview

    For the most part; anyone with Internet access can now participate in stock and derivatives trading. In the past, the only way to trade in the stock markets was through a stockbroker. The investor would call the stockbroker and give her trade information, and the broker would send that request to the trading pit for execution. Today you can directly participate in the stock market through your online trading account.
  • Basic Facts About Online Trading

    Before 1979, all trading in the stock markets were conducted largely through the broker and the telephone. The system today is more complicated, particularly since there are more actors and participants involved in the process of entering and exiting from a position in the market. It is widely believed that the process of trading from the broker-only system to today's online trading was made possible through the pioneering work of CompuServe. The company succeeded in establishing and linking commercial feeders together; such effort ultimately led to the implementation of a quoting system for the financial markets.
  • The Process of Online Trading

    Online trading accounts have been expanded through the efforts of discount brokerage companies. Anyone with limited computer skills and Internet access may now send an order directly to the trading pits. Today there are many online trading companies, offering trading accounts to anyone who can come up with the minimum account deposit of about $500. The fee per trade generally ranges from about $5 per trade, to the high end of $20. Before online trading, the average fees charged by brokerage companies ranged from $35 to $75. It's always a good thing for new online investors to shop around for the best rates, because fees for online trade execution still vary among the discount brokerage companies. Once your initial deposit is paid, your broker opens your trading account. What this means in simple terms is that you can, by the click of your computer mouse, buy a stock or sell your stock any time during the exchange trading hours. Once you enter your trade, it is routed through your brokerage company to the appropriate stock exchange for execution in line with your specifications such as fill price, duration of execution for your trade, and you may also indicate your exit price once your order is filled.

  • Trading on Margin

    Investors who trade through online trading platforms can also trade on margin. All brokers offer margin trading to their registered investors. Through margin, you can actually leverage extra trading power for additional stocks if you want to. To operate a margin trading account, the investor must comply with the Securities and Exchange Commission's margin-trading requirements. These investors must sign a margin agreement form with their own signature to ensure they understand the borrowing and payment fees, which come with such accounts. Upon completion of the required forms, your broker will open your margin account that allows you to purchase more stocks on margin. Here's how the system works. Assuming you open your online trading account with a deposit of $2,000, you can leverage another $2,000 in margin money for a total spending limit of about $4,000. Any losses you encounter will be deducted from your deposit, and if your account falls below the margin limit of $2,000, you will be subject to a margin call from your broker requiring you to deposit more money into your account to maintain the minimum margin requirements.
  • Advantages of Online Trading Accounts

    Online trading accounts offer many advantages to the investor. Your online trading account offers you direct access to the stock exchanges by way of your brokerage company. Such convenience means that you can directly enter your trade without going through a live broker. You may also sell and exit your positions through a similar process. Another benefit of online trading account is the savings it offers you per trading transaction. With many online brokers, the online traders benefit from such competition--which generally drive down fees and commissions. Some online brokers may charge you as little as $5 per trade, a reduction of more than 65 percent from what traditional brokerage companies may charge. Your online trading account comes with technical support and customer service to troubleshoot any issues or problems you may have. You are also offered important analytical tools for charting and technical analysis, and other research needs. These services come free with your online trading account. Also, when you operate an online trading account you have the ability to trade on most of the important world exchanges--from Tokyo to London, from Beijing and Hong Kong to Frankfurt and Sydney.
  • Security of Online Trading Accounts

    Your online trading account comes with state-of-the-art security technology, which ensures that you alone can access your account. Through the use of firewalls and encryption technologies, online trading accounts are largely safe and secure. Although no one can guarantee 100 percent safety, recent technological innovations have dramatically increased the safety of online trading accounts. In addition to the traditional user name and password, many online trading accounts now come with new software that recognizes you and links your account with your personal computer. Before you can access your account from a computer other than yours, you are asked a series of personal identification questions for which only you know the correct answer.
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