Although many investment professionals, analysts and advisers emphatically underscore the essentials of research, strategy, goals and investment savvy, they acknowledge that online trading – although tremendously popular – is a unique DIY project.
Like other aspects of life, communication, science, medicine and business, the impact of technology is inevitable and enormous. Long before the Internet, market trading was mostly a service of stockbrokers in person or via the phone. The relationship between client and stockbroker was special. Online trading was initially a daring and radical shift from the traditional and often long-term one-on-one relationships – hectic cluttered and noisy trading floors and their mantras of “buy” and “sell”!
“Canadian investors were first able to direct their own investment strategies in 1983, with TD being the first bank to establish a discount brokerage in early 1984,” says Bruno Sandre, associate vice president of national sales and client education at TD Direct Investing. “Online investing was first introduced by TD in Canada in 1996 with the launch of WebBroker, with online investing first taking off in the late ’90s and early 2000s, as the Internet became more pervasive in Canadian households.”
As with many new ways of doing things that involve transition and change, there are lingering misunderstandings and faulty assumptions.
“People assume that investing online means being an active trader and that it’s complicated and difficult,” explains Edward Kholodenko, president and CEO of Questrade, boasting 20 years of experience challenging the status quo as Canada’s leading, non-bank online brokerage with over $9 billion in assets. “The vast majority of growth in online investing comes from people who would qualify as regular investors instead of traders, looking to take a more hands-on approach to their investments, buying individual stocks or ETFs and making use of easy-to-use educational resources to help inform their choices.
“It is important that anyone who invests is clear about their goals, time frame and risk tolerance before they invest, so their choices reflect their individual goals and needs.”
Today, traders and investors can access a full suite of trading products across global markets using their computers – buying and selling financial securities through an online brokerage firm. A trader who uses an online brokerage service is provided with an online trading platform and a computer software program to place orders for financial products.
Trading platforms act as the hub, enabling investors to buy and sell stocks, bonds, options, futures, CFDs and currency (forex) pairs. Included in the platform are tools used to track and manage securities, indexes and portfolios as well as research aids, live-streaming quotes and updated news releases from multiple vendors, all of which are necessary for profitable trading.
Despite the tremendous impact of technology on investing, education and reliable information remains vital.
“The extent of the online investor’s financial literacy is essential,”
cautions Dr. René Wells, CFA, finance instructor at the Haskayne School of Business at the University of Calgary. “The investor’s financial grasp to take investment decisions that are reasonable in term of the risks borne and achieving personal, specific goals are important. Unfortunately, many investors overestimate their financial literacy or are too easily influenced, leading to ill-advised investment decisions.”
He also cautions that conventional trading avenues may have built-in Canadian security features not available for online trading. “In various ways and with regulations, investors in Canada are protected if they are egregiously taken advantage of by service providers. But they are not protected at all from bad investment decisions they made on their own or by acting based on advice received.”
Online trading experts echo the urge for research and realism in planning and expectations.
“There are some common mistakes that we see typically new investors make when they first start,” Sandre warns. “The first is not identifying investment goals. If you are looking to use the proceeds of your investments to pay for a goal that is approaching within a short time frame, that usually means considering products or balancing your investments to be lower in risk than if you are preparing for longer-term goals. Whether targeting to buy a home or prepping for a child’s education, it influences the approach needed.
“Understanding some of the basics around the types of investments (like stocks, mutual funds, ETFs) and where they can be held (like cash accounts and registered plans) will help confidently invest towards achieving defined goals,” he suggests.
“Investor knowledge and confidence are vitally important factors,” Kholodenko emphasizes. “If the individual is educated and confident enough to make their own investment choices, then they can open a self-directed account. However, if they want someone to manage it for them by investing in a diversified, preselected portfolio of ETFs matched to their needs, then they might choose a product like Questwealth Portfolios – which is one of the best robo-adviser offerings in Canada. Investors should acknowledge their level of experience when choosing an investment, and choose one that fits their personal needs.”
Kholodenko and Haskayne’s René Wells are unanimous about some key factors of online trading: the information, research and homework necessary to develop sound investment strategy about the optimal asset mix for personalized goals – equities versus bonds, domestic versus international – and the amount of tolerable risk.
“It’s important to do research and choose the suitable online trading platform from many. Some trading platforms (like Interactive Brokers) might be too sophisticated and complex for many individual investors,” Wells explains. “The good thing is that most platforms will allow ‘test runs’ with a hypothetical portfolio. It is quite easy, quick and very inexpensive to implement a generic but well-diversified portfolio using ETFs.”
Sandre urges newbie and experienced online traders to adopt the mantra of conventional stockbrokers: diversification. “It can’t be overstated! The old saying about not putting all your eggs in one basket is truer than ever when it comes to online trading,” he emphasizes. “Too often we hear about new investors trying to chase a hot stock or sector and risking a large amount of their funds in that investment. It’s important to take a step back, reflect on how that investment helps achieve the defined goal and, based on that, adjust how much is invested in that stock or ETF.”
Although the exciting action of online trading trumps the time needed for research and homework, analysts caution about common DIY online trading mistakes:
- Anticipating quick, easy and huge profits.
- Trading with little preparation and training.
- Neglecting the importance of record keeping.
- Not calculating the risk-reward ratio.
- Poor timing.
- Failing to place stop-loss orders wisely.
- Getting too emotional and ending up with reckless decisions.
- Not knowing when to stop.
Questrade’s Kholodenko is supercharged about the constant technology changes and the future of online trading. “Canadians want access to their investments in real time on intuitive and easy-to-use platforms. Mobile application across multiple devices – phone, tablet, desktop or laptop. Today, many online traders use their mobile device to monitor their portfolio. It won’t be long when they will be able to manage end-to-end, all from their mobile device.”