What are Investing, Online Trading and Stock Broking and How are They Different?
One of the most exciting aspects of the web is that it has democratised financial markets and lowered the barriers for entry to everybody. Where once only established traders, professional stockbrokers and rich hedge fund managers could take advantage of trading the markets, now everybody can.
But what is the difference between investing, online trading and stock broking? What are the advantages and disadvantages of each? And is trading better than investing?
In this article, we’ll give a brief overview of exactly what investing, online trading and stock broking are. So, you’ll have a better idea of which one is right for you and how you can get started.
What is Investing?
There are many ways to invest your money; some relatively well known and others more exotic. You will have heard of investment options like Shares, Funds, Bonds, Government Bonds and Property Investments.
However, there is a whole world of specialty investments too. Investors often collect high value objects which require specialist knowledge, like vintage cars, artworks, rare wine and whiskeys, stamps and first edition books.
More recently, exotic investments have included things like cryptocurrencies and digital artworks like unique, one-of-a-kind NFTs (non-fungible tokens).
When you invest in something, whether it is a rare artwork or a property, you are buying something of value which you hope will rise in value over time, offering you a good return on your investment. You can either choose to hold on to your asset or investment as it grows in value, or can sell it for a profit if the price reaches a high enough point.
No matter what you choose to invest in, having a good knowledge of your chosen subject or object is critical to success.
What is Stock Broking?
Traditionally, trading stocks through a broker was the only way for most people to trade Shares on the stock market.
A stockbroker is somebody who buys and sells actual Shares for clients and often works for a stock brokerage firm. When a stockbroker trades on a client’s behalf, the stock brokerage will take a percentage of profits. Тhere is little flexibility in terms of choice for the individual.
A stockbroker may also give financial advice or even manage a portfolio of shares on behalf of a client and will do so according to that client’s appetite for risk.
Trading through a stockbroker can remove some of the risk in trading Shares, as you will be entrusting a professional to manage your positions and react to market moving events, volatility or changes in market sentiment.
Because you’re buying actual Shares, the initial investment when trading via a Stockbroker is generally large. This will vary from brokerage to brokerage, but often starts at a few thousand dollars.
What is Online Trading?
Online trading is a more accessible way to trade the financial markets. It offers a broad array of instruments to choose from, including FX, Indices, Commodities and Shares.
You can trade online using a CFD account with an online trading platform. When you trade with a CFD account, you’re trading on price movements in the underlying market, rather than directly in the asset itself.
So where, in a traditional investment, or if you choose a Stockbroker, you’d be buying a physical asset or real shares, with online trading you’re speculating in the price movement of the underlying market without ever owning anything.
This means your trading is far more flexible and you can choose to go long as well as short on any market. The initial investment required is also much lower. This is because you’re able to trade on margin to increase the value of your positions.
Is online trading more profitable than investing?
Online trading and traditional investments offer different levels of returns and different risks.
Online trading may be more profitable in the short term, as you can profit for every point a market moves in your favour. It is also more flexible. You will have the option to both buy (go long) or sell (go short), so you can profit from both rising and falling markets.
Investing, on the other hand, requires larger initial capital to get started and returns can be slower. You will often need to wait for dividends to be paid or for the market to move enough in your favour in order to sell at a profit.
Try online trading today
You can learn more about how to trade with a CFD account in our Trading Education Hub, where you can find out about which markets may suit your trading style, how to manage risk intelligently and how to actively manage your open positions.
Remember, like with any other trading or investment option, online trading carries risk as well as the potential for reward. Having a smart trading plan in place with a well-built portfolio and a deep understanding of the markets is crucial to success. You can practice trading without any risk for your money by opening a demo account with Eightcap.
Trading on margin is high risk.