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Before You Fall in Love with Online Trading

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Effective online trading requires many activities including a supplemental version of the Know Your Client process.

The move to doing many activities online that we formerly did in real-time has been one of the biggest upheavals resulting from the penetration of the Internet. And by all accounts the shift to online will continue increasing at the expense of real-time activities in years to come. It can be very appealing on a cold Winter day to stay home at your computer, order what you need from a broad selection of online merchants displaying their products on webpages and have it arrive at your door shortly afterwards, often with no added cost for shipping.

Going online appeals to many who want to save money, effort and time, whether for preliminary research for buying a home, booking travel or buying books, food, clothes or furniture.

Going online for stock trading has all of those appeals but with the added attraction of independence, self-determination, and for some, a smattering of the glamor suggested by advertising.

Those advantages, always appealing, became that much more attractive to those who felt disappointed in the fallout of the financial crisis that began in early 2008 and exploded full-blast with the bankruptcy of New York-based Lehman Bros. in November of that year.

The crisis seemingly divided investors into broad groups, with of course, many sub groups. One group became so concerned about their investments and financial health that they began to place a greater value on expert advice than ever previously and probably would not dream of handling investments on their own. Another group believes that financial experts, whether analysts or their financial advisors, let them down in the crisis and became determined to take greater charge of their affairs.

Online trading has other emotional appeals — including the processes by which an individual determines what is important in financial decision-making.

Independence leads to control. Television commercials for online trading sites point up the control in the hands of the investor, boosted by investor tools and ease of operation. Just think it over, press a few buttons and voila! You’re a hot market trader and the money comes rolling in!

Not necessarily.

I have not seen it lately but one of the most ridiculous television commercials in recent memory was the one in which a baby sits at a keyboard and punches a few keys. The voice-over says “A stock! I bought a stock! You just saw me buy a stock! No big deal! If I can do it, you can too …”. (There was a series of these commercials and they are still on YouTube.)

The message being telegraphed is that trading online is so easy anyone can do it.

Not necessarily.

There is ultimately nothing wrong with online trading but it requires a more realistic approach.

With emotional appeals come emotional risks. These include the flip side of independence since the online trader may not have access to a knowledgeable financial advice as a buffer in the decision-making process and a possible emotional inability to deal with daily or hourly swings in share price movements. That particular aspect becomes ever more important this year, given the high degree of volatility in the markets these days.

Moreover, the online trader may not have the self-discipline to deal well with the commitment entailed by online trading. While online trading sites trumpet their offerings of quality research and investor tools, these facilities do not help an investor who finds reading detailed reports a bore, dislikes navigating through the tools or simply does not have enough time and focus to approach online trading like any other complicated task.

The emotional risks also include the stress involved in watching stocks rise, fall and rise again – or just keep falling — during a trading day, compounding the stress of a market environment in which volatility has become the new normal and appears likely to remain volatile for at least another two years.

Related: Facing the Markets: Moats and Money

An otherwise intelligent choice can become a severely eroded holding with a sudden development that even the most careful online trader could never have foreseen. During the recent American federal election campaign, pharmaceutical stocks sank when then-Presidential candidate Hillary Clinton outlined her plans to rein in drug companies if she became President of the United States. More recently, the markets sank dramatically when American President Donald Trump announced trade tariffs. Certainly, they largely recovered afterwards but the quick deep plunge ‘from out of nowhere’ frightened many who are not accustomed to the impact that Washington can have on the stock market.

As I’ve said previously in these blogs: the first goal of investing is not to make money. Making money for your general investment portfolio or your RRSP or for your retirement plan is the second goal.

The first goal of investing is not to lose your money, or phrased more formally: the first goal of investing is capital preservation.

This is not to imply that you should automatically dismiss online trading from your plans. It may very well be suitable for you in terms of your temperament, outlook and ability to give it the time required. However, before you go online and fill in the questionnaires, it might help you if you undertake a slightly different version of the Know Your Client process and use a series of questions for an honest self appraisal in order to understand what you bring to online trading.

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