Answers to the Most Frequently Asked Questions About online trading

Online trading has become very popular because it is a way of making money. Despite its popularity, there is still a lot that people don’t know about forex trading. CMC Markets would like to help you make wise decisions when it comes to matters of online trading. If you are a beginner and would like to learn more about online trading, read through the answers to these frequently asked questions.

What is online trading?

Online trading is a form of trading financial securities such as bonds and stocks, financial derivatives or foreign exchange electronically. Advancements in technology make it possible for people to buy and sell these securities through an electronic platform and network. There are numerous virtual markets where people trade online. They are commonly referred to as Electronic Communication Networks.

What is the difference between online trading and day trading?

A common misconception about online trading is that it is the same as day trading. The difference lies in the methods used. In online trading, an investor buys and sells securities via the internet while day training is about speaking with a broker by telephone. An individual makes transactions on the same day.

What are the advantages of online trading?

Online trading is the fastest method of trading. Since investors use computers to make transactions, it gets done so quickly. Information technology has given rise to high-speed internet connections and computers. It means that you can easily trade stocks, bonds, currencies, futures or options online.

Secondly, online trading has improved the speed at which transactions can be made and settled. Initially, people had to deal with a lot of paperwork. It took long for the documents to be copied. Now they can just be filed electronically.

How can I become an online trader?

It is so easy to begin trading. All you need is a computer and some money enough to open an account. It is one of the best methods of investing especially if you have a good financial history. However, this doesn’t mean that you must have a disposable trade or a personal broker to do it. The virtual markets have become more accessible. Despite this, there is a still a lot that an online trader has to consider. The first step is to choose a stockbroker.

Before you begin, educate yourself about the twelve different types of trade that can be placed. These include market orders, limit orders, All-or-none orders, day and GCT orders, extended hours trading, trailing stop orders, bracketed orders, selling short and buy to cover orders, and stop order and stop limit order. Familiarize yourself with all these types of orders so that you can understand how the market works. It is important because it will help you avoid making big and expensive mistakes.

Are there risks in online trading?

Any method of trading securities has some risks of potential losses. It doesn’t really matter if you are doing it online or not. If you are new to this business, take some time to understand the principles. What are your investment goals? Also, think about your own risk tolerance. Another factor that may affect your ability to execute transactions is high internet traffic. Try to avoid the temptation to ‘overtrade’ as it can have negative repercussions.

What is the meaning of “trade on margin”?

You will have to open a margin account if you wish to borrow some money from a firm. There is a certain amount of the purchase price that you will have to deposit in the account. It acts as your initial equity. Trading on a margin simply means that you can purchase more securities. However, you have to fully understand this concept since there are risks of incurring losses.

How do I open an account online?

There are many brokerage firms online that you can open an account with. To activate an account, you have to sign an application document. Some firms allow you to do this electronically while others demand a hand-written one. Ensure that you understand all the specific guidelines.

How long does it take for an order to be executed?

If you are doing it electronically, the process is fast. However, there may be delays especially if there are high trading volumes. A delay can cause a significant difference in the price. The speed at which an order gets executed also depends on the firm’s level of access. If their system is complicated, the process may be slow. Also, ensure that the speed of your internet connection is fast as this may impact on the speed of transaction.

 

Will a Dividend Capturing Strategy Yield Free Money?

We all like free money, right?

I know I sure do, which is why I immediately became interested in a strategy called dividend capturing. It works something like this.

You find a stock that pays a very generous dividend. Right before that dividend gets paid, you buy some shares. The stock pays the dividend, and most of the time, shares tend to recover to at least the same level as before. After paying commissions–which are basically nothing these days–an investor is left with the profit from the dividend.

Here’s a real life example, something that just happened. Cominar Real Estate Investment Trust (TSX:CUF.UN) has a monthly dividend of 12.25 cents per month for each share. At the end of each month, the company declares a dividend to be payable on the 15th of the following month. This declaration is announced well in advance.

Because stock trades take three days to settle, you can’t just go on the last day of the month and buy up shares. You have to get in on (or before) the ex-dividend date, which is two business days before the dividend declaration date.

Getting back to Cominar, this means you would have to buy your shares on April 27th to get the dividend which was declared on April 29th.

On April 27th, Cominar shares traded at a range of between $17.20 per share and $17.34, closing at $17.33. Say you split the difference, and got in at $17.27.

On April 29th, Cominar shares spent the day in a range between $17.20 and $17.30 per share. Let’s say you got lucky, selling your shares at $17.30.

In total, you’d have a profit of $0.1525 per share, less any commissions. You would have made $0.03 per share in capital gains, and $0.1225 per share in dividends. 15 cents per share doesn’t sound like much, especially after commissions, but getting a 0.8% return in two days translates into close to 160% annualized.

Unfortunately, life isn’t quite that easy. Here’s why a dividend capturing strategy is difficult to pull off.

Pennies in front of a steamroller

The big issue when it comes to dividend capturing is the upside potential versus the downside.

Again, let’s go back to Cominar as our real-life example. If you wouldn’t have sold out on April 29th for a slight profit, it look more than a week for shares to get back to the point where you were making money on this move. Yes, shares did get back to that range, but human psychology is a powerful thing.

Dividend capturing is supposed to be a quick strategy. You get in, collect the dividend, and then get out, making a slight profit. All it would take is for Cominar shares to fall $0.13 each–less than 1% of its market price–for the strategy to turn from a guaranteed money maker into a loser.

Essentially, the strategy turns into something akin to trying to pick up pennies in front of a steamroller. Sure, most of the time you’ll get your pennies. But when things go badly, they’ll go really badly.

Are ETFs a better solution?

There are certain investors who swear by an alternate dividend capturing method. It goes a little something like this.

At the end of the year, many ETFs pay out accumulated dividends in one lump sum. Depending on the ETF, that can be a windfall of anywhere from 2% to 5% of the value of the fund.

Let’s look at one I personally own, the Market Vector Russia ETF Trust (NYSE:RSX), an ETF which tracks the biggest companies with significant exposure to Russia.

This ETF collects dividends from these companies throughout the year and then pays them out right before the year ends. In 2015, this payout was $0.519 per share, which worked out to a yield of 3.6%.

Rather than try to trade in and immediately out of this stock, an alternative strategy would be to buy it as a longer-term investment right before the ex-dividend date. You’d get a nice 3.6% boost without having to do anything. And since it’s a long-term hold, you wouldn’t have to worry about short-term price movements. It’s a small move that won’t make you rich, but it will slightly boost returns.

Dividend capturing isn’t a great strategy. Sure, it can work, but for me, it’s just too much effort for the small reward. If I had $10 million to invest maybe things would be different, but at this point I can’t recommend it as a viable strategy for regular folks. It’s better to stick to the same boring principles everyone else says.