Tips For Trading Online.
When you are trading online you are going to need an online broker to execute your trades. The growth in online trading over the past 20 years has been staggering and as a result, there are hundreds of online brokers to choose from. Most online brokers will usually be promoting low-cost commissions as an enticement to gain your business and the cost to trade online is getting cheaper and cheaper and the consumer is now genuinely getting a fair deal with the vast majority of online brokers offering low-cost trading options. But what many novice investors fail to consider is the security of their money once they deposit their funds into the online broker’s account. Following are some important questions you should know the answer to when trading online.
- Where is my money held?
- What bank does the broker bank with?
- Can I visit the brokers office in my country or city?
- Where is my brokers head office?
- What financial regulations is the broker required to abide by?
- What currency is my account denominated in?
Many novice traders fail to read the fine print and see that many online brokers are based in countries such as Malta, Cyprus and Belize. It begs the question why would an online broker be based in a county such as Malta rather than Sydney, London or New York. The answer is the financial regulations are less strict in those countries, the online broker based in Cyprus is not subject to the same financial rules and regulations as a broker based in Australia, the UK or USA. Read the fine print and know where your broker is based.
If you deposit your money into an offshore online brokers bank account, outside the country you reside, your funds are not protected by your local financial regulator. Your money is at high risk and if the broker goes out of business then the probability of you getting your money back is slim.
Currency conversion costs are also something that many novice investors fail to consider when opening an offshore online broking account. Let’s say you live in Australia and have chosen an online broker based in the USA. You deposit your money into the broker’s account and unless you stipulate or negotiate with the broker to have your account denominated in AUD your money will be valued in US Dollars. There may be a transaction cost to convert your money to US Dollars when you open the account. There are risks associated with holding a US Dollar account if you are living and residing in Australia. If you’ve deposited $10,000 AUD into your US online brokers account and the AUD v USD is 0.75c the best case scenario is you would have $7500 US Dollars in your online trading account when you start. Over the coming 6 months if the AUD v USD rises to 0.83c your Australian Dollar withdrawal value is nearly 10% less than what it might have been just because you have your money in US Dollars. In this example, if you live in Australia and use a local Australian regulated online broker your account would be in Australian Dollars and not at any currency fluctuation risk. Please consider using a local online broker in the country you reside.
When trading online your broker should give you access to your own online client portal where you can view the exact amount of money that is in your account. You should also be able to withdraw funds using the portal at no cost and request those funds to be deposited back to your nominated account within 48 hours. If you are having to pay transaction costs to have your money returned too you, then it is highly likely your broker is offshore in another country and there are transaction costs associated with sending you your money.
Your online trading account should have no monthly fees, no entry or exit fees and you should be able to request a demo account to practice some trades before executing any real money trades. You should also be able to call your brokers office 24 hours a day. If you cannot call your brokers office 24 hours per day then it is highly likely the broker is a small broker that does not have a 24-hour dealing desk. When you open your account with an online broker request to have a direct phone number to your personal account manager, someone you can call at any time and ask a question.
People are enticed into the online trading world to make money but far too many give little thought to the security of their funds. Use a local broker in your country or a broker based in a developed country such as Australia that has very tight financial regulations. Visit their office if you can and please make sure you know exactly which bank your broker uses to hold your funds. Do your research and visit some of the broker comparison websites to find out the answers to the questions above.
Good luck and happy trading.
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