Online Investing and How it Compares to Stock Trading

 

People who are interested in creating additional income often look to the stock markets as the most profitable route to follow. Our financial education teaches us that over the long term stocks outperform many other types of investment, especially for those who like to trade for themselves.

However, in recent years global economic crises have severely dented the image of stock investing as many hard working people have found to their cost. In this article I’d like to explore how stock trading compares with what I term online investing which for this discussion I will define as passive investments.

Stock Trading

Clearly, given the technology available today most stock trading is carried out online so it needs to be clear that my definition of online investing is different. And in fact if you ask anyone who trades stocks via online brokers I don’t believe they would consider themselves to be online investing rather investors who use online tools.

In its simplest form stock trading online can be undertaken by any eligible individual who opens a trading account with a broker and then funds that account. There are always restrictions on who is eligible to open an account and these would need to be considered when contemplating this form of investment. Assuming however that an account can be opened and funded it is a relatively straightforward process to trade stocks in a vast array of markets and companies.

The benefits of stock trading include:

1. Wide range of online platforms to use from well established companies

2. Accounts can be funded directly from individual bank accounts

3. Reasonable liquidity in markets

4. Choice of markets/stocks to trade is wide

5. Competitive trading costs on execution only basis

6. Potential gains can be high

Disadvantages include:

1. Sizable fund required to trade

2. Potential for significant losses where price movement unfavourable (although robust stop loss strategy can mitigate this)

3. Little or no advice available if execution account only

4. Requires close monitoring

Passive Investment

Next let’s take a look at passive investing and see how it compares. In essence I’m using an example where you open and fund an account and returns are defined in advance usually based on the sum invested. You are effectively handing your funds over to someone else to invest on your behalf and you are able to withdraw as needed subject to any restrictions on minimum holding periods.

The benefits of passive investment include:

1. Hands-off investment

2. Simple to open an account

3. Good rates of return

4. Compounding of returns is normally an option

5. No knowledge of trading required

Disadvantages include:

1. Offered by companies who are not household names

2. Passive nature attracts investors with limited investment experience

3. Depositing and Withdrawing funds can be a time consuming process

4. Need to keep accounts with several online payment processors

5. Difficult to carry out due diligence on the company and their operations

Is it worth the risk?

On the face of it passive investments are a greater risk and it will take a very long time for this to change, if ever. However, as an investor you should be looking to create a balanced portfolio and to diversify across a range of instruments so I’d suggest that passive investments should be considered.

The purpose of this article is not to dissuade current stock traders from investing money in that way, rather it’s an attempt to introduce them to an alternative source of investment that, whilst it certainly carries risk, also offers good returns when chosen carefully. Clearly, advice should be sought when considering any specific investment but the potential for introducing passive investment into an individuals portfolio should not be overlooked.

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