How to trade stocks online

Understanding online stock trading

Definition of online stock trading

Online stock trading involves buying and selling public company shares through internet platforms. This means everything happens digitally and in real time, as opposed to offline trading, where you’d have to call a broker or trade on the exchange floor.

When you trade stocks online, you’ll use a platform to access the stock markets and take a position on whether you think a share’s price will rise or fall. If your speculation is correct, you’ll earn a profit. If not, you’ll incur a loss.

Stock trading is different to investing. Stock investing involves owning stocks for the long term, while trading involves speculating on their short-term price movements without necessarily owning the shares themselves.

Reasons to trade stocks online

First thing’s first – why trade stocks online? Here are some benefits of online trading:

• Accessibility: The internet has made stock trading easier and more accessible than ever – all you need is an internet connection and a brokerage account (and a bit of trading know-how!), making it ideal for beginners
• Lower costs: Online platforms typically charge lower fees than traditional brokers, which means more of your money stays in your account and can be allocated to your trades
• Flexibility: Online trading platforms give you more control over your investment portfolio compared to using a traditional brokerage
• Trade in real time: You can monitor your portfolio and buy or sell stocks in real time, through either your computer or your phone

What is a stockbroker?

Before you can begin trading stocks online, you'll need to open a new brokerage account with a stockbroker who can give you access to stock exchanges like the New York Stock Exchange (NYSE) or NASDAQ. Because individuals can’t directly trade on these exchanges, stockbrokers act as an intermediary that places buy or sell orders on your behalf.

There are two main types of stockbrokers: full-service brokers and discount brokers:

• Full-service brokers offer personalized investment advice, retirement planning, and portfolio management, but they usually charge higher fees.
• Discount brokers offer lower-cost access to the markets without any added services. Most online brokers fall into this category.

Choosing a trading platform

Not all online stock brokers are the same, and it’s important to choose one that suits your goals, needs, and preferences.

What to consider when choosing online trading platform

Here are some things to consider when choosing a trading platform:

• Fees and commissions: Trading fees can quickly add up over time. Some platforms charge flat commissions while others use tiered pricing based on how often you trade. Look for a broker that’s transparent about their fees and doesn’t sneak in hidden charges for things like inactivity (we’ll cover fees in more detail later in this article).
• Execution speed and reliability: Fast execution is important because it means your trades go through at the price you expect. Delays can lead to missed opportunities or losses, especially when markets are moving fast. Look for a platform with fast and reliable trade execution.
• User experience: If you’re a beginner, it helps to choose a platform with a clean and easy-to-use interface that makes trading easy. You may also want a platform that offers mobile trading apps so you can trade anywhere, anytime.
• Investment selection & available markets: Even though this article focuses on stock trading, you may want to choose a platform that offers access to other markets, like currencies, ETFs, or crypto. If you want to diversify, look for a platform that lets you trade across multiple asset classes and regions.
• Security and regulation: In the U.S., trustworthy brokers should be registered with the Securities and Exchange Commission (SEC) and regulated by the Financial Industry Regulatory Authority (FINRA).
• Research and education: Finally, you might want to choose a platform that offers additional tools beyond trading, including educational resources, charting tools, market news, and analyst insights. 

Learning how the stock market works

What stocks can be traded online?

You can trade virtually any type of stock online, including:

• Blue-chip stocks: These are shares of large, well-established companies like Apple, Microsoft, or Coca-Cola.
• Growth stocks: These are shares in companies expected to grow faster than the market average, but they come with higher risk.
• Penny stocks: These are low-priced stocks from small or emerging companies. They can offer big returns but are very volatile and illiquid, making them riskier.

Depending on the platform you choose, you can also trade international stocks in different markets, including the U.S., Europe, Asia, or Australia.

What is a pattern in day trading?

In day trading, a pattern could mean a chart formation, but it also refers to a specific rule called the pattern day trader (PDT) rule. In the U.S., the PDT rule applies to margin accounts and kicks in when a trader makes four or more day trades within five business days, so long as those trades make up more than 6% of the account’s total trading activity.

If you’re flagged as a pattern day trader, you’re required to maintain at least $25,000 in equity in your account at all times. If your balance falls below that, your broker can restrict your ability to make further day trades.

Understanding trading costs and fees

What is zero commission trading?

Zero commission trading means a broker doesn’t charge a fee to execute your trade. This can sound great for new traders who want to reduce costs, but it doesn’t necessarily mean that trading will be free.

Some brokers that offer commission-free trading will make money in other ways, such as through spreads or charging for premium services. It’s important to check your platform’s fee schedule for any small print.

What fees should you look for?

Some different fees to look out for in a trading platform include:

• Platform/account fees: Ongoing subscription or account-keeping fees
• Spreads: The built-in cost between a stock’s buy and sell price
• Inactivity fees: Charged if your account remains inactive for too long
• Withdrawal fees: Fees for transferring funds out of your account
• Currency exchange fees: When trading in international markets or different currencies
• Trading limits: Some platforms only offer commission-free trading on a set number of trades or dollar amount per month.

What are expense ratios?

Expense ratios are an annual fee charged by exchange-traded funds (ETFs) or mutual funds to cover management and operational costs, expressed as a percentage of your investment.

For example, a fund with a 0.04% expense ratio will charge $4 per year for every $10,000 invested. This might seem small, but expense ratios can add up in the long term.

Developing a trading strategy

Now that you know the basics of trading stocks, let’s talk about how to develop a trading strategy.

How to set trading goals

First of all, it’s important to define your trading goals. Think about both short-term and long-term goals: do you want to make quick gains from daily price swings or are you focused on long-term growth?

Not all trading goals need to be financial. You can also set goals related to performance, like improving your risk-reward ratio, reducing drawdowns, or being more consistent over time. Sometimes the best goal is to just stick to your trading plan. This might seem simple, but when emotions take over it’s easy to deviate from your strategy.

Some performance-related trading goals might include:

• Staying disciplined with your trading plan
• Limiting emotional decision-making
• Reviewing and learning from your past trades
• Tracking your progress and identifying areas for improvement.

Once you’ve defined your goals, you can consider your risk tolerance and time commitment. Some things to ask yourself include:

• How much capital can I afford to risk?
• Do I have a financial buffer or emergency fund?
• How do I respond to sudden market shifts?
• Do I have the time to actively monitor trades or do I need a more passive approach?

How to choose a trading style

Next, you can choose a trading style that reflects your goals, personality, and the time you can dedicate to trading. Three styles to consider are:

• Day trading: This involves opening and closing positions within a single trading day to capitalize on short-term price movements. Day trading requires you to dedicate time to technical analysis, make decisions quickly, and be comfortable with fast-paced market shifts. It’s not recommended if you’re risk-averse or uncomfortable with making decisions under stress.
• Swing trading: This involves holding positions for several days to weeks to capitalize on short-to-medium-term price movements. Swing trading is less intense than day trading but still requires you to keep an eye on the market and dedicate time to analysis.
• Position trading: This involves holding positions for months or years, with a focus on long-term trends and fundamentals. Position trading (or long-term trading) is more suitable if you have limited time for trading.

What stocks are best for day trading?

Day trading works best with stocks that are highly liquid and volatile:

• Liquid stocks are traded at high volumes. Volume is important when trading because it ensures your orders are executed quickly to minimize slippage (the difference between what you expected to pay and the actual price at time of execution).
• Volatile stocks are those that have frequent price movements. The more a stock’s price fluctuates up and down, the more opportunities there are for profit. That said, when stocks are too volatile then it can be difficult to trade them successfully, increasing risk.

Large-cap or mid-cap stocks tend to have better liquidity and tighter spreads, making them more suitable for trading. Some examples include Tesla (TSLA), Apple (AAPL), Amazon (AMZN), Nvidia (NVDA), Microsoft (MSFT), and Palantir Technologies (PLTR).

Practice before going live

How to use a demo trading account

If you’re new to trading, it’s a good idea to start with a demo trading account. A demo trading account lets you practice trading in real market conditions without risking any actual money. Instead of funding your account with real capital, you'll trade using virtual funds in a simulated environment.

Demo trading accounts can be useful for:

• Learning the basics of stock trading
• Getting comfortable with a trading platform’s features
• Testing new strategies without any financial risk
• Exploring new markets, like forex or commodities

Demo accounts are excellent tools because they allow you to practice your trading skills without the risk of losing any money. That said, if you make excellent trades you also won’t earn any real profits either!

You can open a free FOREX.com demo trading account here. Enjoy 90 day risk-free trading with $50,000 in virtual funds.

How to build daily trading habits

Like any other skill, building good habits around trading can help improve your results over time. Here are some daily trading habits you may want to consider:

• Stick to a routine: Start your day by reviewing market news, setting trading goals, and outlining your day’s strategy before the markets open. Sticking to this morning routine can help improve your focus and reduce emotional decision-making later on in the day.
• Keep a trading journal: A trading journal is a great way to track your trades so you can understand what’s working and what isn’t. You can record your entry/exit points, why you took a trade, its outcomes, lessons learned, and any emotions that came up during or after the trade. Looking back on your entries over time can help you spot patterns and avoid repeating mistakes.
• Review and refine: Review your trades at the end of each day or week, and ask yourself if you followed your plan and what could be done better next time. Regular review is essential if you want to improve in the long term.
• Take breaks: Finally, don’t forget to take breaks! Trading can be taxing, so make sure to give yourself time to disconnect and rest your mind before you dive back in.

Managing risk and protecting capital

Once you start trading real money, risk management is essential to protect your capital.

How to manage risk

Some ways to manage risk when trading stocks online include:

• Using stop-loss and take-profit orders: These are two of the most common risk management strategies. A stop-loss order automatically closes your trade if the market moves against you to help limit potential losses. A take-profit order does the opposite, locking in profits once your trade hits a certain level. You can also use trailing stops, which automatically adjust upward as the price moves in your favor. This can protect gains while leaving room for further upside.
• Diversify your portfolio: Diversification means spreading your capital across different stocks, sectors, or asset classes to reduce the impact of one investment performing poorly. This won’t necessarily prevent losses, but it’s an essential part of risk management.
• Control your position size: Position sizing is how much of your capital you allocate to a single trade. A general rule of thumb is to risk no more than 1% to 2% of your account on a single position. This can prevent one bad trade from damaging your overall portfolio.
• Understand your risk/reward ratio: The risk/reward ratio compares how much you stand to lose versus how much you could gain. A common ratio is 1:2, which means you risk $1 to potentially make $2.
• Practice emotional discipline: Being able to control your emotions is an important part of risk management. It’s easy to let emotions like fear and greed drive you to make impulsive decisions, so focus on your trading plan and try to avoid making emotional decisions.

Is it safe to use online trading platforms?

One of the biggest concerns when using your own capital to trade is whether online trading platforms are safe. Generally, yes, it’s safe to trade stocks online – but only if you use a reputable, regulated broker and take a few steps to protect your account.

In the U.S., legitimate trading platforms are regulated by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Most brokers are also members of the Securities Investor Protection Corporation (SIPC), which covers up to $500,000 in securities (including up to $250,000 in cash) if a broker fails financially. This doesn’t mean that SIPC can protect against market losses but it can protect your funds if the broker was to go insolvent.

Beyond these regulations, trusted platforms use strong security measures to keep your information safe. This might include SSL encryption, two-factor authentication (2FA), and real-time alerts for any account activity or changes.

You can also take a few of your own safety precautions to keep your account secure. For example, avoid using public Wi-Fi when trading, use strong passwords (and update them regularly), and enable 2FA to prevent unauthorized account access.

Exploring additional markets and tools

What other markets can be traded online?

Most online brokers offer access to markets beyond stocks, such as:

• Foreign exchange (FOREX): You can access the forex market to trade currency pairs like EUR/USD or GBP/JPY 24 hours a day, 5 days a week.
• Exchange-traded funds (ETFs): ETFs track baskets of assets and they can be traded like stocks.
• Options: You can use options to speculate on an asset’s price movements without having to own the asset itself.
• Contracts for difference (CFDs): Like options, CFDs can be used to speculate on price movements without owning the underlying asset. These are only available for traders outside the U.S.
• Cryptocurrencies: The crypto market is open 24/7, allowing you to trade volatile digital currencies like Bitcoin or Ethereum.

What tools help with online stock trading?

Trading tools can be extremely helpful for speeding up research and analysis, identifying potential trading opportunities, managing risk, and enhancing your trading performance in general. Some of the most popular tools used in stock trading include:

• Charting tools: Charting tools help you visualize price movements so it’s easier to identify patterns, analyze historical data, and make informed trading decisions. Traders often use charts to apply technical indicators like moving averages or Relative Strength Index (RSI) and identify potential entry and exit points.
• Stock screeners: Stock screeners filter stocks based on specific criteria, such as price, volume, sector, earnings, or technical indicators. They can speed up the time it takes for you to research and identify these stocks yourself.
• Economic calendars: Economic calendars track upcoming data releases that can impact the markets, like interest rate decisions, employment numbers, or inflation reports. These events often cause volatility in the market, so keeping an eye on the calendar can help you prepare and avoid surprises.
• News feeds: Sometimes the simplest tool can be the most powerful. Staying up-to-date with live news feeds can help you react quickly to major events or breaking headlines that could impact your trades, while also identifying potential opportunities based on what’s happening in the world.