The online trading revolution

Online stock trading first arrived in Britain 15 years ago this year. Looking back, it’s no exaggeration to say that those 15 years have utterly revolutionised the opportunities available to the average private investor.

Back then, placing a trade meant calling up your broker – at the time, mine was some long-since rebranded arm of Barclays – and paying at least £25–£30 in commission for even the simplest trades.

Afterwards there was the messy process of receiving and sending paper contract notes and share certificates, which occasionally got lost in transit, causing all sorts of hassle.

No wonder we embraced the low costs and greater efficiency of the pioneer online brokers – in my case IMIWeb, which later became iWeb, now owned by Halifax.

Despite some very rudimentary dealing platforms and widespread fears about the safety of making financial transactions online in the early days of the internet, online trading gradually became the method of choice for most British investors.

Over that time, competition and technology have seen services become ever cheaper and more sophisticated. If your goal is simply to minimise costs, anyone can now deal in UK shares from as little as £5 per trade – and you can reduce that even further to as low as £1 if you’re happy to give up control of exactly when the trade is executed.

If you want to diversify your portfolio, you can now trade in more than 20 international markets just as easily as buying shares on the London Stock Exchange and at a comparable cost.

Meanwhile, the online data and research services that have grown up alongside the brokerages allow us to analyse financial information in a way that was unimaginable in the days when everything came printed in vast books or piles of company reference sheets.

For more active traders, recent years have also seen the growth of online spread betting, CFD trading, FX trading and options and covered warrants. All of these products existed in one form or another before the internet, but online providers have helped to bring them into the mainstream.

By giving us the ability to sell stocks short, use leverage, and trade markets and instruments that we would otherwise not be able to access, they have opened up a huge range of new investment strategies to retail investors. Overall, there’s no question that online trading has delivered huge benefits.

However, if you’ve considered opening a new account or branching out into an area such as spread betting for the first time, there is one cautionary note to bear in mind.

Trading too frequently is one of the most common mistakes for retail investors and online trading has made this far easier than it used to be – at least, telephone calls, paper certificates and contract notes forced us to slow down and think more carefully.

Make sure you avoid falling into this trap. In particular, don’t be tempted to trade more often because your broker offers discounted rates for frequent traders.

And if you’re trying spread betting or foreign exchange trading for the first time, trade with the demo accounts that all providers offer for several weeks to get an idea how everything works before risking any real money.

Merryn

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