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Key Messages:

  • Lower commission fees, increased accessibility, convenience and an increasing array of value-added services are some of the factors contributing to the rising popularity of online trading.
  • However, investors should carefully consider the limitations and drawbacks of online trading platform before trading through this channel.

Advantages of online trading

Lower commission rates

A lower commission rate is often the biggest attraction to investors. Online brokerages usually charge lower commissions than traditional brokerages because online services involve lower operating costs.

Convenience and round-the-clock trading

Online trading is not restricted by the opening hours of the respective stock exchange. You can place your order globally wherever and whenever you like.

Quick execution

Fully automated from the instant you click "ENTER". The online order record also means fewer mistakes of the kind that can occur when an investor relays an order to an account executive verbally.

Value-added services

Services including real-time price quotes, market news, company information, market research and analytical tools are provided free or cheaply. The increasing availability of other brokerage-related services including margin financing and stock borrowing and lending also improves the flexibility of online investing.

Drawbacks of online trading

Reliability

A major cause of investor frustration is outages and delays, which often happen during volatile markets and around the time for the market to open or close. These may result in investors losing market access and trading opportunities. These problems may arise from the brokerage's online system or the investor's internet service provider. A way to protect yourself is to find out what alternatives you have when online trading is temporarily unavailable because of a system failure.

Security

Beware of hackers attempting to breach firewalls, passwords and other security measures to access confidential information. Before opening an account with an online brokerage, check what security measures are in place. These measures may include encryption and firewalls.

As an investor, you should pay attention to the following as well:

  • Keep the unique password assigned by the online brokerages safe, change it regularly and do not disclose to anyone including your brokers. For additional protection, some brokerages may even require their clients to use an e-certificate for identity verification when they log on to the online trading system.
  • Avoid entering a brokerage's website via links posted on search engines or other websites since bogus websites are prevalent. A better approach is to key in the website address carefully for the first time and bookmark it in your browser for future use.
  • Bear in mind not to access your trading account via a public terminal as spyware or keystroke-logging software can be installed readily to steal your personal information.

Privacy

Privacy issues include, amongst other problems, leakage of private information during the trading process and the unauthorised and illegitimate use of customer information. Under the Personal Data (Privacy) Ordinance, the online trading service provider is obliged to protect your personal data. You can go to the website of the Office of the Privacy Commissioner for Personal Data to learn more about your rights.

Information risk

Information technology is levelling the playing field for retail investors, giving them access to information previously available only to specialists or professionals. While more financial information is offered online, the accuracy and reliability of the information cannot be guaranteed. Just because it is broadcast online does not mean the information is credible. As investor you should be wary of potentially misleading statements, either intentional or unintentional.

Self-reliance

When trading online, you rely more on your own investment and trading skills than when trading through traditional means. You must take full responsibility for the decision-making process and input of instruction since you are accountable for the content and timing of all orders placed. If you wish to withdraw or modify an instruction, the brokerage may try to do so, at discretion, provided that the transaction has not been executed. You will also be responsible for the costs incurred in any withdrawal or modification.

Familiarising yourself with the securities dealing process will help you avoid misunderstanding or holding unrealistic expectation.

Liability

If you give the account password to a third party, you will probably be held liable for the losses and consequences stemming from the unauthorized use.