Get online – but tread carefully

published 16 October 2014

Exactly when the first online stock trade took place is harder to pin down than you might think, since the answer depends on how you define online'.

As early as the first part of the 1980s, some US brokerages were allowing clients to dial directly into their trading systems. But that type of arrangement bears little resemblance to the internet as we know it today.

So, if we take our starting point to be the first trade placed through a web interface, the consensus is that it happened just over 20 years ago, in August 1994.

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The company behind this breakthrough was an American brokerage called K Aufhauser

& Company. It later became part of TD Ameritrade, which remains one of the world's largest brokers for retail (individual) investors.

However, it was E*Trade, another US heavyweight, that did most to shape the nascent market when it launched an internet trading platform the following year.

By focusing on cost-cutting and automation, it sparked a price war that drove trading costs down from around $25-$30 per trade to well under $10 per trade just five years later.

Of course, that was in the go-go years of the dotcom bubble. When the Nasdaq index plunged back to earth, trading activity did too, and many of the pioneer online brokers fell by the wayside. That was probably a good thing. The firms that survived were forced to innovate to win customers.

In the years since, we've seen enormous changes, both in the sophistication of trading platforms and in the range of markets and assets we can trade. While early online trading focused heavily on stocks, today it's possible to deal in almost anything from your iPad.

The UK lagged slightly behind America. Charles Schwab Europe is usually given credit for hosting the first web-based trade in this country, back in December 1998. Back then, the minimum commission was around £20 per trade, but that too was rapidly eroded, albeit more slowly than in America.

Even today, the typical commission among UK brokers is around £12, compared to around $7 (about £4) across the Atlantic although it is possible to get better rates by looking beyond the handful of large firms that dominate the UK brokerage industry.

On the plus side, the UK market has developed in a way that gives traders here access to a wider range of tools than almost anywhere else in the world. A favourable legal and tax regime has helped the development of increasingly popular services, such as spread betting and contracts for difference (CFDs), that give us easy access to a wide and growing range of asset classes.

And there are gradual signs of progress in areas where the UK still lags: for example, the recent launch of IG's new stockbroking service means a welcome new entrant to the small field of direct market access (DMA) providers.

The one caveat is that these tools make it easy for novice traders to get in over their heads. Plentiful leverage, the ability to short (bet on falling prices) and chance to trade esoteric markets can be a costly combination. New traders taking the plunge should be cautious. Begin by paper trading in a demo account.

When you finally commit real money, only speculate with much less than you can afford to lose. Treading very carefully early on will greatly increase the chances that you're still in the market to see what the next 20 years of online trading will bring.

Stay informed

Picking an online trading service is only half of the decision. You also need to think about where you'll get the data you need to make good trading decisions, whether that's price charts or fundamental data.

While most providers offer at least some data via their websites, the quality is often poor and most investors will need other resources at least some of the time. Here are a few services to consider.

If you need fundamental data and screening tools for shares, give the highly acclaimed Stockopediaa trial. It currently covers UK, US and European stocks; other markets should be added soon.

For fundamental data analysis and price charting for the UK stockmarket, Sharescoperemains the market leader. A web-based version is expected to launch shortly. And for price data feeds covering almost every global exchange and instrument, eSignalis usually the place to go.

None of these are cheap; the reality is that good, reliable data cost money. But there are also a handful of useful tools available for free.

If you have an iPad or Android tablet, the Bloomberg app provides a solid overview of price data, fundamental data and news. If you're looking for free end-of-day price data from exchanges around the world, many are available via Yahoo Finance.

Yahoo can be used as a data feed for Ninja Trader charting software, the basic version of which is free. Lastly, Morningstar has up to ten years of fundamental data and financial ratios for thousands of international stocks for free on its site.

Cris Sholto Heaton is an investment analyst and writer who has been contributing to MoneyWeek since 2006 and was managing editor of the magazine between 2016 and 2018. He is especially interested in international investing, believing many investors still focus too much on their home markets and that it pays to take advantage of all the opportunities the world offers. He often writes about Asian equities, international income and global asset allocation.

Cris began his career in financial services consultancy at PwC and Lane Clark & Peacock, before an abrupt change of direction into oil, gas and energy at Petroleum Economist and Platts and subsequently into investment research and writing. In addition to his articles for MoneyWeek, he also works with a number of asset managers, consultancies and financial information providers.

He holds the Chartered Financial Analyst designation and the Investment Management Certificate, as well as degrees in finance and mathematics. He has also studied acting, film-making and photography, and strongly suspects that an awareness of what makes a compelling story is just as important for understanding markets as any amount of qualifications.