What Is Online Trading And How Does It Work?

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So you’ve heard about online trading and are intrigued about joining the millions of online investors in the UK taking control of their financial gains from the comfort of their own home. 

If you’re new to online trading, we have written this guide to provide a simple overview of what online trading is and how it actually works to set you on the right path for trading success. 

Simply put, online trading is buying and selling financial securities and derivatives online with the intention of making a profit. The main tradable financial assets include  shares, commodities, futures, currencies and bonds. 

To learn how trading works, you will need to understand the market you want to trade in, analyse investment vehicles, choose a reputable broker, create a trading and Demat account, build your trading strategy, test it, then implement it. 

Whether you have visions of making millions on the stock market or want to dabble in a new hobby, it pays to do as much research as you can and practice your trading strategy with trading simulators before investing any actual money. 

The fundamental principles of online trading will be the same whatever market you’re trading in but the specific trading strategies you use are specific to each investor, their goals, instruments they trade in and cash available. 

Find Out More About Online Trading And How It Works 

As an online trading educator, the team at Trade Room plus supports thousands of investors taking their first steps into the world of online trading every year. 

We teach the theory, the strategies, the planning and the trading discipline you need to succeed then show you how it works in real time in our live trade rooms. Our aim is to give you the confidence to put everything you’ve learned into action yourself when following our trade signals. 

In the rest of this article we will expand on what online trading is and how it works in more detail - perfect for those who are new to trading and are looking for a simple overview of the common pitfalls new investors face and how to get yourself on the right path to enjoy successful online trading. 

What Is Online Trading 

Online trading is used to describe the process of financial securities such as stocks, bonds, currencies, commodities and derivatives being bought and sold online via online trading platforms.

It is common to trade via financial intermediaries such as investment brokers, banks and stock exchanges. An example of an online trading platform is ‘Metatrader 4 (MT4) which is widely used by online retail foreign exchange speculative traders and is what we use at Trade Room Plus. 

What Is Online Trading & How Does It Work
MetaTrader 4

Who Trades Online? 

Online traders come from all walks of life, male, female, young, old. Every trader and their strategy is unique but many will share similar personality traits including a desire to take charge of their financial fortunes from the comfort of their own home. 

Due to the amount of analysing and statistics involved in investing, those who enjoy trading will generally like solving puzzles and will have an analytical mind that enjoys using numbers, patterns, forecasting and trends to make informed decisions about what trades to make and when. They will also need to have enough time to dedicate to honing their trading craft. 

Where Can You Trade Online?

Online trading means anyone with a trading account can access the world’s markets from anywhere they want to. You could be at home, work, or on holiday, and providing you have a computer, internet connection and trading account, online trading will be accessible.

This means that we now have near-instant online executions (how fast our trades are opened and closed), really tight spreads (the difference between the prices we are able to buy and sell the market at), charting and technical analysis at our fingertips. 

How Does Online Trading Actually Work? 

What is online trading and how does it work

So you’ve done your research, have found an online trading educator to learn the ropes from, have come up with a trading strategy and are ready to place your first trade.

When ready to trade, online traders will need to find a broker, open a trading account, place a trade, monitor their trades and end trades at the right time. We have outlined each of these steps in more details later in this article. 

The specifics of this general process will vary from trader to trader as there are so many variables including:

  • What instruments you trade
  • Your approach and appetite for risk
  • How much time you have to trade
  • How large your account is
  • And plenty more… 

Whatever your trading plan is, you should always remember that the only thing you can control in online trading is when you buy and when you sell. Everything else is out of your control so you should focus on perfecting your trading executions with rock-solid discipline and healthy psychology on proven trading strategies.

When You’re Ready To Trade You Must: 

  1. Be at least 18 years 
  2. Have cash that you are able to purchase financial securities with (and subsequently be willing and able to lose)
  3. Proof of ID 

Find A Broker 

A broker is an individual or company that is licensed to trade stocks through the exchange. They provide a trading platform that allows you to trade efficiently and will usually charge a fee for this service. It is essential to choose a broker who is reputable and registered with relevant authorities. At Trade Room Plus, we only recommend brokers that we use ourselves. Here is a list of highly regulated brokers that we use and recommend at Trade Room Plus. 

The best way to get a feel for a broker is to open a demo account with them. Whether that’s using their web platform (if they offer one) or MT4 shown above. You will get a feel for the executions (how fast you trade is entered) and other aspects which contribute to the ‘feel’ for a broker.

What Is The Brokers Role? 

When a trader submits their order to the broker, the broker's role is to find another trader on the stock exchange who is willing to buy or sell the same asset for the same price. When a match is made, the deal is complete. Nowadays this all takes place automatically online in a matter of seconds

Open A Trading Account

What is online trading and how does it work

Once you have found your broker, open an account with them. This account will likely be made up of three things, a savings account, demat account and trading account. 

Savings Account When there is any buying or selling through the trading account, the money is debited or credited from a savings account..
Demat accountThis is where shares that you buy are deposited and the shares that you sell are extracted from. The Demat account holds a record of all the financial securities you have in your name virtually.
E-broking (or trading) accountThis is the account through which you direct orders in the stock market. It helps in measuring the efficiency of the trades carried out, by exhibiting the ratio between the shares sold and the gross profit earned through them. This is for the platform for trading provided by the brokerage firm.

Log In And Place Your Trade 

  • Once you have logged in, ensure there are sufficient funds in your savings account then head to your trading platform where you can open a position on your chosen instrument. (asset that you will be trading in - stocks, bonds, commodities etc.) 
  • Check the spread, (the difference between the lowest ask price and the highest bid price) and decide how many units you wish to buy. 
  • Now enter the stock symbol, number of shares you want to buy, and the price you want to buy at. Alternatively, instead of entering the price, you can choose to select ‘market’ which will buy the stock at their current price. 
  • Finally, remember to use a stop loss order for every trade you open. (a trigger that will close your trade when it reaches a predefined value, designed to promote profitably and minimise losses). 
  • You can also choose to place a limit order for stocks you want to buy and sell. This simply means that if you want to buy stocks in Company A at $15.50 for example, but it is currently selling at $17.00, you can place a limit order that is good until cancelled stating that you would like to buy X amount of shares in Company A when they reach $15.50. Should the stock ever reach this price, your order will go through, but if it doesn’t, it will remain active indefinitely. 
  • Remember to start small and build up when you get the hang of trading online.

Monitor Your Trade 

Closely follow the performance of your investment. If you see a decrease in activity or suspect the markets are reacting unfavourably, consider selling or waiting for the stop loss to kick in to minimise loss on your account. 

There are plenty of things to consider when trading but whatever is happening around you, always follow your trading strategy to ensure you’re acting with well thought out actions and not just following your heart or emotional reactions to what you’re seeing in the markets and fund values. 

If your trade makes a profit that is inline with your goal, close it and take the profit by executing a withdrawal request. 

Tips For Successful Online Trading 

What is online trading and how does it work

Trading isn’t easy and it relies on your ability to learn a set of rules to play by and the parameters in which to play them. This is called your trading strategy and the goal of your trading strategy is to give you the tools you need to know when and how to make a final trading action of buying or selling a financial security. Find out how to create your trading strategy here. 

Aside from education, education, education, knowing your attitude to risk and having a plan, we recommend you pay attention to the following tips for a successful online trading experience whilst learning the stock market basics. 

  • Reduce expenses 
  • Analyse your performance 
  • Analyse the markets you’re trading in 
  • Know what you can and can’t control - get in and out at the right time. 
  • Know your attitude to risk
  • Give your strategy time to work  
  • Be prepared to lose money 
  • Find a good teacher & practice 
  • Know what kind of investor you are 
  • Enjoy what you do  

Learn The Stock Market Basics 

The stock market functions on the principle of supply and demand. To understand how it works, you need to analyse the investment vehicles used. You should know where you can put your money and the likely market trends which will affect your investments. This can be done by keeping track of financial news and websites and conducting your own research.  

For learning the stock market basics we also recommend: 

  • Following respected financial journalists that cover the products, type of investments, companies and markets that you’re interested in trading in. 
  • Reading the paper for financial updates 
  • Listen to reliable investment programs on the Radio such as BBC Radio 4’s acclaimed programme Money Box. 
  • You Tube Channels for Trading Educators  for live demonstrations 
  • Review the resources available on your chosen brokers website
  • Trusted investment regulators such as The Investment Association and the The Financial Conduct Authority
  • User friendly investment websites such as Investopedia, moneycontrol and economic times

Simple Glossary For Online Trading 

As we said at the beginning of this article, the world of online trading can feel daunting for the uninitiated so to help you get to grips with the basics and hold your own in trading community conversations, we’ve explained some commonly used trading terms in the table below: 

Trader The individual holding a trading account and wanting to place trades
Exchange Exchanges are marketplaces for the trade of securities, commodities, derivatives, and other financial instruments.Examples include the FTSE 100 or The New York Stock Exchange. Some exchanges work like auctions on an actual trading floor, and others match buyers to sellers electronically.
Trading platformTrading platforms are software tools used for trading allowing traders to open, manage and close trades. Examples include TradeStation and MetaTrader. 
Investment vehicles Examples of investment vehicles include common stock, preferred stock, bonds, options, futures, annuities, and collectibles.They are bought and sold in order to try and make a profit on the money invested in them. 
A broker A broker is an individual or company that is licensed to trade stocks through the exchange and they will provide traders with trading software that can be used to access the markets they want to trade in. 
Stock symbolA stock symbol may consist of letters, numbers or a combination of both.And is used to uniquely identify publicly traded shares of a particular stock on a particular stock market. 
Trading strategy  A trading strategy is a tool used by traders to aid them in the process of making a profit by trading over a period of time. An traders strategy will be unique to them and will provide a set of predefined rules that are used to help make their trading decisions.
Market index A portfolio of investment holdings which represents a segment of the financial market. Because it's hard to track every single stock, these indexes include a section of the stock market and their performance is viewed as representative of the entire market. Major stock market indexes include the Dow Jones Industrial Average or the S&P 500. 

Where Can I Find Out More About Online Trading? 

The best way to learn how trading works is to see it in action. Learning the ropes from experienced traders that can share their knowledge, strategies and market tips in order to help you learn enough so you have the confidence to start trading solo is an important part of every new online traders journey - and is exactly the service we offer our customers here at Trade Room Plus. 

We hope this article has given you a simple introduction to online trading, how it works, and plenty of ideas about how you can get started with online trading to enjoy the benefits it has to offer.

Try Trade Room Plus FREE For 14 days 

If you’re ready to join thousands of online investors taking control of their financial profitability online, our online trading education hub, free 14 day trial and excellent customer satisfaction scores make Trade Room Plus a brilliant place to start your trading journey.  

We’ve been running our profitable live trade room since 2013. In that time we’ve taken thousands of live day and swing trades on index and forex markets and have taught thousands of aspiring traders how to trade consistently and profitably.

At Trade Room Plus we trade live in front of our members and thousands of aspiring traders on YouTube every single day. It’s real trading, real money in real-time and is the best way to learn about the risks of trading in a safe environment. Have a look at our live trade room and our membership options if you want to take courses, see live trading in action and receive our profitable trade signals.

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