There is no doubt that you have probably heard or read or spoken to somebody who has an opinion or insight into online trading and more importantly why you should or should not do it. As with any new venture – there always exists a substantial amount of speculation – and more so than with most – around the online trading industry. There are some interesting myths surrounding online trading – so in order to answer your questions and debunk the myths surrounding the industry here are 5 responses to some of them!
1 – Online trading is riskier than investing in stocks:
The truth of the matter – and you can research this one – is that options were in fact created as a means to reduce the risk of online trading and investments, certainly not to increase it. In reality options allow investors and or traders to invest in the stock market with significantly less capital, thus decreasing the potential risk that comes with investing a lump sum in a stock. Online options trading and stock trading hold the same amount of risk if the trader concerned is not familiar with the respective strategies as well as the knowledge of what you stand to lose on the trade before it is made.
2 – Option trading is what was responsible for the stock market crash:
In 2008 – following the financial crisis for the market crash itself – the truth is, however, in reality crashes are not caused by a leveraged product, but rather the misuse of the leverage itself. Options are defined as a derivative and can therefore be identified as the financial catalyst that allows for investment leverage. For the most part, it is understood that any investment product presents some risk – some more than others – and it is generally based on the amount of leverage it offers. Options are not the only type of derivative – there are literally thousands to choose from. 2008 saw a collection of bankers and traders taking unnecessary risk with various derivative investments, particularly in the credit default swaps and mortgage derivatives – ultimately leading to the crisis.
3 – You need a lot of money to trade options:
In order to succeed as an investor or trader you need to start somewhere – and putting down millions of dollars certainly isn’t it. To start out with a trading margin account, however, all you need is $3000. This will provide you with all the basic options strategies and is more than enough to start you off. As with any financial pursuit, it is always better to start out with less money in your trading account – especially while you learn from your trades and become more confident with your trading strategies.
4 – Online Trading is only for professionals:
Before online retail trading platforms were created, online trading may very well have been reserved for professionals, however, now it most certainly not the case. Trading options has always been available to investors, but they were not as widely used due to the lack of supporting technology. Now, following the advent of a variety of online trading platforms and technology being made available to anyone interested, trading options is something absolutely anyone can do.
5 – Online trading is an easy way to make a quick profit.
It is easy to think that trading options online is a way to “get rich quick” – especially when news of people investing in options and end up making a substantial profit. And while these situations do and can happen – they are most certainly not commonplace. Approaching options trading or any online trading platform with a “get rich quick” attitude is the wrong way to go about investing. In anything that is, and online trading should certainly not be recognised as a solution to financial woes. It is, in fact, just another tool to help manage one’s finances. If anyone claims they can teach you how to make a lot of money and quickly using online trading – politely decline the offer.
About the author
Daniel Quinn is a freelance writer with passion for blogging. Besides maintaining his blog, he writes for publications that focus on small business, marketing and finance.