Forex is a portmanteau of the two words “foreign” and “exchange,” and implies the purchase or sale of one particular currency for another. Although Forex trading might at first glance seem like a form of gambling, the tools, strategies, and skills involved with Forex trading do not rely on chance and sheer luck to the degree they do in gambling activity.
Learning the terminology and basics of Forex trading is like learning any new language. Some of the most important terms in Forex trading include currency pairs, pip, and margin. These are some basic Forex terms that you should know when you are looking to venture in trading. Having a working knowledge of basic Forex terminology is a great way to build a solid foundation for trading.
Pips and their value
In the English language, a pip is another word for a small, hard seed in a fruit. In terms of currency exchange, it has another definition entirely. To answer the question, what is a pip in forex, it is the smallest unit of measurement to denote the change in value of two designated currencies. Pips are price increments that have a value dependent on the particular currency you are trading.
For example, if you are trading between Euros and United States dollars, the pip extends out to four decimals, or .0001. In other words, it is one-hundredth of one percent. However, the value is different for other currencies such as if you are dealing with United States dollars and Japanese yen, where a pip will be worth .01. Pip calculators are valuable tools to help do the math for specific currency pairs.
Currency pairs – major, minor, and exotic
To start off the list, currency pairs are just like the name suggests – they are the two currencies that comprise the exchange rate like GBP/USD, which is the currency pair for British pound sterling and United States dollars.
Another major currency pair is EUR/USD, which is the currency pair for Euros as the official currency of the European Union’s nineteen member states and United States dollars. Major currency pairs are one of the three types of currency pairs in Forex trading, along with minor and exotic.
Margins – what they are
In Forex trading, the margin is the amount of currency that is required for a trader to commence a transaction. As a general rule of thumb, a margin above 100% is considered to be acceptable, but it is better and safer to shoot for a margin that is 200% at the minimum.
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Investing in the stock market has never been more accessible than it is today. Thanks to a wide array of online brokers, you can now trade stocks, ETFs, and other securities right from the comfort of your own home or even on the go. But with so many options available, how do you choose the right one?
We’ve broken down the top online brokers for stock trading, considering factors such as cost, user interface, customer service, and the range of available investments.
Whether you’re a seasoned investor or a beginner just looking to dip your toes into the financial markets, our guide will help you navigate this essential decision. Let’s get started!
7 Best Online Brokers
Check out our list of 2023‘s best stock trading platforms. You’ll find all the details you need in this accessible guide so you can get right to the good part: starting your trades.
Robinhood
Robinhood is a trading app that provides commission-free options, ETF, and cryptocurrency trades. For a long time, the company stood out as one of the few online stockbrokers offering commission-free trades, but it has become more common in the past year.
Robinhood is still one of the best online brokers for anyone looking to get started with investing. And it’s still one of the few apps that allows you to trade cryptocurrency.
Many people like Robinhood for its simplicity. There is no account minimum to get started and no annual fees. In addition, the company offers a web-based and mobile app and customer support options.
However, a common complaint about Robinhood is that the company’s offerings are very light on the research. And while the app is easy to use, there is very little offered in customizations.
Learn more by reading our full Robinhood review.
Charles Schwab
Charles Schwab requires you to start with a bit of skin in the game, with a minimum opening deposit of $1,000.
You can, however, check for promotions that often allow you to waive the minimum if you sign up for monthly $100 deposits. It’s an easy entry point for beginning trade enthusiasts.
When you’re ready to start trading with Charles Schwab, you can enjoy lower costs of just $4.95 per trade and $4.95 plus $0.65 per contract for options trading.
ETF lovers will appreciate the 200+ commission-free funds in addition to 3,000+ mutual funds with no transaction fees. In addition, you get to skip any kind of annual or inactivity fee on your account, but it’s $50 if you ever decide to close your account.
While you can choose from two different trading platforms, StreetSmart Edge is the more sophisticated version for frequent stock traders.
Don’t let the easy customization fool you. You can perform in-depth research and monitor your stocks with features like streaming market data and your account buying power.
Additionally, they provide countless reports, from its own equity ratings to third-party data from industry stalwarts like Morningstar, Market Edge, Capital IQ, and more.
For access to all of this at your fingertips anytime, anywhere, the mobile app carries just about all the same features as the web version.
Data-centric traders could definitely gain many insights by choosing Schwab for their online stock trading.
Fidelity
Fidelity may require a rather hefty minimum deposit of $2,500 but makes up for it with its attractive commissions.
It’s just $4.95 for each trade and the same amount for options, plus $0.65 per contract. This is a recent drop, so if you previously discounted Fidelity, it’s time to take a second look.
Do you want extensive NTF mutual funds? You’ll find about 3,600 with Fidelity. There are also about 91 commission-free ETFs, which is certainly encouraging but not the most we’ve seen.
One interesting feature with Fidelity is that you can do forex trading along with more standard securities. Like many of the brokerages we’ve reviewed, there are no account fees or inactivity fees.
Looking for a robust trading platform?
Check out Fidelity’s Active Trader Pro. To get access, you will need to make at least 36 trades in a 12-month period. If you fit the bill, you’ll get a fully customizable account with real-time streaming and market updates.
You can also look at historical trends and use the Strategy Ideas tool. It can even help you craft an exit strategy when the time comes.
In terms of additional research, Fidelity actually gets its research from over 20 firms, such as Recognia, McLean Capital Management, and Ned Davis. You can even get an aggregate picture from all the data available through Fidelity’s Equity Summary Score on each stock quote page.
Merrill Edge
Owned by parent company Bank of America, you can actually access all of your accounts from the same login if you’re a B of A customer.
This can be a huge draw for some, but Merrill Edge comes with both pros and cons, just like any other trading platform.
Let’s take a look.
First, Merrill Edge has excellent customer service and powerful research and trading tools.
Commissions are somewhat high, coming in at $6.95 for stock trades plus an extra $0.75 per contract for options. They offer 2,000+ NTF mutual funds, but unfortunately, don’t have any commission-free ETFs. This may be a deal-breaker for some traders.
You can, however, qualify for 30 commission-free trades on individual stocks or ETFs each month by meeting a balance minimum.
You can qualify if you have at least $25,000 in either a Merrill Edge self-directed account or a Bank of America cash deposit account.
E-Trade
You will need at least $500 to open up an E-Trade account, but many traders agree that the volume discounts and easy-to-use platforms are well worth it.
In fact, each platform appeals to two types of investors: beginners and more seasoned pros. So, it’s a great place to start with a bit of cash, which also allows you to take advantage of more sophisticated tools as needed.
But, there is a catch.
To upgrade from the basic E-Trade Web platform to the E-Trade Pro platform, you’ll need either a large account or an active trade history.
So, you’ll either need a minimum of $250,000 in your account or make 30 or more trades per quarter. If you do make that amount of quarterly trades, you can still qualify for some other benefits as well — including discounted commissions.
Just how much?
For stock trades, your commission per trade will drop from $6.95 to $4.95. For options trading, it’s typically $6.95 plus $0.75 per contract, but for active traders, your fee drops to $0.50.
And while you’ll enjoy 100+ commission-free ETFs and 2,500 no-transaction-fee mutual funds, any others cost $19.99.
Ally Invest
Known for their great customer service that’s available 24/7, Ally Invest is one of the best online brokers providing low barriers to entry in the trading game.
There are no account minimums and low commission fees. Not only are stock and ETF trades just $4.95 each, but you can also receive a discount when trading in volume.
The bottom line for getting cheaper trades?
Make either 30+ trades per quarter or keep a minimum of $100,000 in your brokerage account. That drops the commission fee to just $3.95 per equity trade. The standard options trade of $4.95 plus $0.65 per contract drops to $3.95 plus $0.50 per contract for active traders.
In addition to the traditional securities found at most online brokers, Ally Invest also offers forex and futures trading.
You can take advantage of free data if you make at least one forex trade within a 90-day period. Instead of paying a trade commission, you’ll instead be charged on your forex trades based on the spread markup.
What kind of platform can you expect from Ally?
There’s just one web-based trading platform, so you can log in from any device. Like most other online trading platforms, Ally’s gives you live-streaming of quotes and data plus a dashboard you can completely customize.
You can also access your brokerage account through their iPhone or Android mobile app.
Ally also shines when it comes to investing tools. Options traders, for example, can utilize the pricing calculator to compare current prices to forecasts.
You can also pick your own criteria within the strategy scanner to help identify various options strategies.
Interactive Brokers
Beginners beware: Interactive Brokers is an advanced online broker with a high account minimum to the tune of $10,000, so don’t jump into this one until you’re ready.
But if you’re 25 or younger, you can open an account with just $3,000. Still, you need to know what you’re doing because Interactive Brokers doesn’t house a huge resource pool for beginners.
Unlike most other online stock brokers on this list, Interactive Brokers charges commissions per share rather than per trade. So while you can get a volume discount, the standard stock trade costs are $0.005 per share.
There’s a minimum charge of $1 and a maximum of 0.5% of your trade value. Options trades also carry a $1 minimum and charge $0.70 per contract.
You may also be charged fees for certain situations. For example, if you have an IRA, you’ll be charged a quarterly fee of $7.50. If you’re inactive in your account, you may be charged a fee between $3 and $20.
Interactive Brokers has about 30 ETFs to choose from that you won’t pay commissions on. There are, however, almost 3,000 NTF mutual funds available for trading. They also offer forex trading, but you’ll need at least $10 million in assets to access this feature.
Best Online Stock Trading Platforms FAQ
How much do online brokerage firms charge?
For active traders who want to minimize costs, an online stockbroker can save you a lot compared to a traditional brokerage. When you go with a full-service brokerage, you’re usually charged a percentage of the trade amount. With a discount brokerage account, you pay a low commission on every trade.
But with an online brokerage account, you typically get charged a flat fee for each trade, which can save you a lot over the long run. Depending on the type of transaction, you can expect to pay anywhere between $5 and $20 per trade.
What is the best stockbroker for beginners?
Most beginner traders incur losses because of several factors, including choosing an unsuitable online broker. Consequently, it is advisable to start with a platform designed to make trading easier. Some factors to consider when choosing an ideal platform for beginners may include:
Dedicated advisers to help you make better decisions through comprehensive analysis and one-on-one guidance.
A demo account with which you can practice as you learn and prepare for real-life trading.
A dedicated customer support desk to help you overcome complications with the platform or the markets.
Learning materials to familiarize you with the platform and the markets (fortunately, most offer updated learning materials).
A diverse range of trading options.
An easy-to-use trading interface.
Affordable fees and account minimums.
This guide includes excellent online brokers for beginners, such as Robinhood and Charles Schwab. However, don’t be afraid to cast your net further as you look for the ideal platform for your needs.
Which online trading platform is best?
All online trading platforms advertise themselves as the best. However, some offer better trading options and overall superior quality of services than others. Additionally, you will find that some platforms suit your investment needs and preferences better than others.
Consequently, it is advisable to consider what each platform offers based on your needs. Some questions to ponder when choosing an ideal online brokerage platform may include:
What do I know about online trading?
Will I need someone to guide me through some (or all) of my trades?
How much money do I need to invest?
Can I trust the platform with my money?
For example, you will need a beginner-friendly online broker if you are new to trading. Additionally, a platform that requires a high account minimum may not be right for you if you don’t have a lot of money to start with. You will also benefit from our guide on choosing a suitable online broker as you continue reading.
What is the most profitable trading platform?
It is true that some trading platforms offer better investment options and terms than others. However, it is a common misconception that some platforms can make you more money than others. While some platforms can save you money, but they will not automatically make you more money.
How much money you make on any trading platform depends on your overall trading strategy and accuracy. Online brokers don’t influence market directions—the markets do!
Here are some tips on how to develop a winning and profitable trading strategy:
Take classes about stock trading (and investment in general) before diving in with the sharks. You want to continue to learn throughout your trading career.
Always have a trading plan, including comprehensive money management criteria for every trade. It is also a general rule of thumb never to trade more than you can afford to lose.
Leave emotions out of trading and treat it like a business (one that can change your life if managed well).
Take advantage of trading tools and other technologies to improve your accuracy and timing.
Know when to stop trading and always use a stop loss.
This FAQ includes a comprehensive guide on choosing an ideal online trading platform. Fortunately, there are hundreds of high-quality online brokerage platforms.
Which online broker has the lowest fees?
Some online brokers charge exorbitant fees, while others charge pennies. To this end, you can save thousands of dollars per year by choosing an online broker that offers affordable fees.
With such variation, it is critical to identify your broker’s fees for different services and do the math. Most people focus on commissions. However, it’s also important to consider charges such as margin rates, finance rates, spreads, and conversion fees.
Traders looking to work with online brokers charging minimum fees may be interested in discount brokers. This is because a discount broker executes orders at a fraction of what other stockbrokers charge. As a result, discount brokers are wildly popular and constitute a considerable portion of the fintech industry.
However, it is worth noting that discount brokers don’t offer a full range of services. Most notably, they don’t provide investment advice, unlike full-service brokers. Consequently, the cost savings may not be worth it unless you are an excellent trader with a winning strategy.
What does a stockbroker do?
A stockbroker executes orders in the stock market on behalf of clients like yourself. Stockbrokers also offer their clients sound financial advice, but they are obligated to follow their clients’ directions. They are also commonly called investment advisors or registered representatives.
You must be fully qualified and licensed to work as a stockbroker. Additionally, you must be a member of a stock exchange (such as the New York Stock Exchange) to buy or sell on their platforms. Consequently, not everyone can buy or sell directly from the platform. Stockbrokers function as the go-between as their license automatically qualifies them as members.
Interestingly, many stockbrokers today mainly specialize in financial advisory and planning, thanks mostly to the rise of online stockbrokerage platforms. These platforms have eased access to the stock markets. Essentially, anyone with access to the internet and genuine interest in the markets (and some capital) can start trading in minutes.
Should I hire a stockbroker?
Trading stocks and other securities has never been easier, thanks mainly to the rise of online brokerage platforms. To this end, it is common for many people to view stockbrokers as redundant. However, they are not. Even experienced traders ensure that they always have a stockbroker on speed dial.
So, why should you hire a stockbroker? Here is an overview of three irrefutable reasons why a stockbroker could be invaluable:
First, stockbrokers can read the markets with accuracy. They can also give you tips on profitable trades before the rest of the market can dilute the trend.
Second, stockbrokers can manage all of your investments if you don’t have the time to do it yourself. This allows you to facilitate a passive investing strategy and potentially lucrative passive income.
Finally, stockbrokers can give you deep financial advice that extends beyond investing. This can help you better manage your personal and business finances.
Ultimately, a stockbroker’s services pay their fees several times over if you put their advice to good use. However, it is prudent to pick a competent and intelligent stockbroker to ensure that you get sound investment and financial advice.
How do I choose an online brokerage?
Online brokerage platforms make it easy and affordable for anyone to trade stocks and other securities. There are hundreds of online brokers, and some offer better terms and services than others. Hence, it is advisable to choose your online brokerage platform wisely. Here is an overview of three factors to consider when choosing one:
Account Fees & Minimums
All online brokers charge fees to use their platforms, just like you would pay a stockbroker. Additionally, many online brokerage firms require their clients to maintain a minimum amount of money in their accounts. Therefore, it is advisable to ensure that the amounts in both cases are low and affordable.
Investment Options
It is always advisable to diversify your investments across multiple securities and other investment options to spread (and minimize) risks. Consequently, it is vital to ensure that your chosen online broker provides access to as many securities as you need. Some of the main investment options include stocks, mutual funds, ETFs, bonds, and cryptocurrencies.
Support
Trading stocks can prove complicated, and most people find themselves wishing that they had a professional to guide them. Fortunately, many online stockbrokers offer access to individual stockbrokers for one-on-one investment and financial advice.
Stock Trading Fees Explained
You have to pay to play in the stock market, metaphorically speaking. You pay for the services provided by online brokers or brokerage platforms when you trade stocks. Stock trading fees come in varying types, and some of the most notable ones include:
Commission
Most brokerage platforms charge a commission for every trade, which is usually a dismal fraction of the trade’s cost. The commission can be charged as a flat fee or based on the volume of your trades. However, it is worth noting that more and more online brokers are eliminating commissions.
Spread
The spread is the difference between the bid and ask prices. Ideally, you would incur a loss if you bought and sold a trade simultaneously. This loss depends on the difference between the sell and buy prices.
Finance Rate
A finance rate refers to the cost incurred when you hold a leveraged position for longer than 24 hours. A leveraged position essentially is borrowed money, and your broker will charge you interest for this loan in the form of a finance rate.
Margin Rate
Trading on margin entails trading using money borrowed from the broker. The broker will also charge interest on this money in the form of a margin rate.
Conversion Fee
Do you need to convert your money to another currency to start trading? The broker will charge you a small conversion fee every time you convert currency for deposits or withdrawals.
How much money do you need to start investing?
It is easier than ever for folks to start investing, and often you can start with as little as $500. Some online stock brokers don’t require any account minimums at all. Where they do, the minimum investment amount will depend on your broker and the type of investment.
For example, most mutual funds have minimum investments of around $1,000, so if mutual fund trades are a priority for you, keep that in mind.
Is Stock Trading Safe?
While it is generally safe to trade stocks, that doesn’t mean there aren’t risks involved. The best trading platforms will work hard to keep you informed and minimize those risks.
As an online trader, it is also your responsibility to practice good security habits. Use the same security steps with a brokerage account that you would with your bank account. Additionally, always use common sense when trading.
What Are the Risks of Online Trading Platforms?
By virtue of being an online activity, there are several risks involved when you trade with online stock brokers. Let’s take a look at the most common risks:
Identity theft: As is the case for any online account you use, it is possible for your brokerage account to be hacked by scammers who obtain your personal identifying information. This is why it’s always vital to keep your passwords secure. You should also use two-factor authentication wherever possible to protect your accounts.
Computer viruses and malware: It’s important to ensure that the computer you use to access your brokerage account is always clean, secure, and free of malware. Hackers can use spyware to gain access to your passwords and personal information. So, protecting yourself means using a quality anti-virus program and performing routine checks.
Data breaches: Data breaches are a major risk for companies and customers alike, and unfortunately, they seem to be on the increase. As a customer, the most critical step you can take to protect yourself here is to only do business with reputable companies. Ideally, you want to choose one that has never had a previous data leak.
Phishing schemes: This often comes in the form of an email or text message which claims to be from your brokerage firm, but is actually an elaborate scam. Always pay close attention to the details in any communication you receive from your online stock broker. Never click on any links until you are certain the sender is legitimate.
Bottom Line
Your online stock broker is your gateway to investing, so it’s not a decision to take lightly. When searching for an online stock broker, it’s important to consider your unique investment needs.
You’ll need to compare costs, available investment options, account types, and how well the stock broker works for your investment style. Any of the online stock brokers above could be a great fit for your investing and trading goals.
In your search for online brokers for stock trading, make sure you take the time to figure out your priorities. Then, you can find a brokerage account that truly serves you. There are a lot of great online stock brokers out there, but being clear about your goals will make it easier to choose.
Ready to get started investing but not sure where to start? We’ve compiled a list of the best online stock brokers for beginners that we recommend for 2023.
Whether it is customer service, affordability, or platform versatility, each of these online brokers shines in its own way.
Be sure to compare the most important differentiators, such as trading costs and account minimums before you make your choice. As a beginner, you may also place more value on educational resources and customer support while you’re still learning the ropes.
6 Best Online Stock Brokers for Beginners
Robinhood
Robinhood is aptly named, offering commission-free stock and ETF (exchange-traded funds) trades. Not just some of the time—all the time.
On top of this, they don’t have an account minimum. If you want to get started trading, there’s no reason to wait. Robinhood also offers fractional shares.
Robinhood has a great mobile app team. It’s so good there’s no reason for you to ever hop on a PC. It takes new investors five minutes to set up and only an hour for them to activate your brokerage account.
By industry standards, that’s pretty fast. (Keep in mind this is a brokerage account, not a Twitter account you’re setting up.)
When you transfer $1,000 to Robinhood, it is available immediately for you to invest. If you upgrade to Robinhood Instant (a free upgrade), any proceeds you make from selling stocks or ETFs can be immediately used to buy stocks or ETFs elsewhere.
Read our full review of Robinhood.
Merrill Edge
Merrill Edge is a great option for beginning investors. You can open an account with $0 minimum investment. They also offer excellent customer service, strong education and research, and low fees.
You can get unlimited free online stock, ETF, and options trades with their Preferred Rewards program, or pay just $2.95 per trade with no trade or balance minimums.
Merrill Edge offers flexible tools with customizable features and the best part is they are there to guide you step-by-step.
They have dedicated advisors who will work with you one-on-one to help you build a comprehensive financial strategy.
Their advisors can give you recommendations based on your needs to help you grow and preserve your wealth.
If you prefer to meet with them in person, Merrill Edge has over 2,000 Bank of America locations where an advisor will be more than happy to work with you.
Charles Schwab
There are only a few online brokers out there where we can honestly say are well suited for both beginning and advanced investors, but Charles Schwab is one of them. It has the tools to satisfy anyone, no matter their level of expertise.
Are ETFs your thing? Charles Schwab offers over 200 commission-free ETFs. Are you an absolute beginner? Schwab objectively selects what it believes to be the best ETF in every category, so you don’t have to go down rabbit holes of information and research.
On top of this, if you are just starting to build your portfolio, Schwab also offers recommendations based on your chosen risk tolerance. Take the safe road and know that your money is in good hands.
If you need to speak with a representative, you may do so no matter the time of day, via phone or online chat. That said, Schwab is a full-service broker that has a pretty large brick and mortar presence. You can schedule an appointment to speak with a representative or attend invaluable workshops.
A downside to Schwab is that they do have an account minimum. While several online brokers we’ve discussed require no account minimums, Schwab does require that its investors maintain at least $1,000 with them.
If you don’t have that, you can have the minimum waived when you sign up for an automatic monthly deposit of $100.
Vanguard
Perhaps one of the best online stock brokers for low-cost investing, Vanguard is frequently utilized by buy-and-hold and retirement investors with high account balances.
Its expense ratios on index funds and ETFs are quite below the national average, so it is the go-to broker for long-term investors.
Retirement-minded investors can find many resources with Vanguard through its website. They list safe and healthy investment options that promise long-term growth.
It also gives helpful hints on where you should prioritize your time and energy if you’re just getting started.
They also have a sophisticated program that can estimate when you’ll be able to retire and can help calculate your monthly expenses (sudden or otherwise) once you do.
If you have some money to invest, you can save by choosing Vanguard. For brokerage accounts with at least $50,000, trades only cost $7 regardless of how big they are. When the brokerage account hits $500,000, trades only cost $2. When it surpasses a million dollars, many trades become free.
Want to make active trades? Keep looking.
If you’re an active trader and don’t have nearly that amount of money lying around, however, Vanguard isn’t the best stock broker. It doesn’t have any software to support its traders (meaning there aren’t any trading tools or platforms to utilize).
Furthermore, investors who frequently trade (say, more than 25 times a year) are penalized with fees (assuming, of course, they don’t have $1 million invested with Vanguard).
Fidelity
With low $4.95 commissions per trade, Fidelity is one of the most affordable online stock brokers, considering what it offers to its customers.
Utilizing top-notch research from over 20 companies, Fidelity provides its investors with some of the best investment advice that money can buy.
It could be a lot of information to wade through, but after a few quick questions, Fidelity can match you up with providers that resonate with your personal investment style.
Though it’s not considered the best customer support in the industry, Fidelity still offers some pretty sharp service for its customers. Investors can meet with representatives in physical branch locations, as well as attend investor seminars throughout the year for free.
The seminars cover a wide array of topics, such as Social Security and technical analysis. Plus, if in person doesn’t appeal to you, you can still study and expand your knowledge via webinars.
Looking for a solid online broker? Fidelity is truly among the best.
It offers both online and mobile support, and if you are an active trader, you can even get real-time feeds displayed on your desktop. Each trading platform is intuitive and easy to use and provides tools to help you get a leg up on your competition.
For those interested, Fidelity also offers a premium tool called Wealth Lab Pro, which offers customizable strategies and 20 years of historical data.
Ally Invest
If you’re a seasoned investor, you may never have heard of Ally Invest, but its newness to the scene shouldn’t make you discredit it.
In 2016, Ally invest bought out TradeKing and has only recently emerged into the online brokerage game. That said, it’s quickly become very clear that everything that was great about TradeKing has only gotten better.
Ally offers automated portfolio management and forex trading. There is no account minimum, commissions on trades are $4.95.
Are you a frequent investor?
Ally Invest offers discounts to members who trade 30 or more times per quarter. At that point, the fee drops to $3.95.
Whether you use a PC or a smartphone, Ally has a great online stock trading platform for its users. Trade fast, get current, 24-hour quotes and data, make your own unique dashboard, and get a diverse set of trading tools at your disposal.
Here are some of our favorite helpful features:
Profit-and-loss calculator
Maxit Tax Manager, which informs you of any changes to your taxes based off of trades
Probability calculator to tell you of the likelihood of your desired targets for each share
Worried about trading from work? Don’t be. Ally Invest’s web platform doesn’t require you to download anything.
Simply log in and you are ready to trade. Considering everything they offer online, this is quite an achievement in and of itself.
Why Beginners Should Consider Online Stock Brokers
Diving into the world of stock trading can be both exciting and intimidating. As a beginner, you might have certain apprehensions, especially with traditional stock trading often being associated with experienced and wealthy individuals.
However, with the advent of online brokerages, the investment landscape has dramatically transformed, making it more accessible for everyone. So why should you, as a beginner, consider going the online route? Let’s break it down.
Leveling the Playing Field
Traditionally, stock trading was a complex system with many barriers to entry. It was time-consuming, requiring regular phone calls with brokers, and often demanded a substantial initial investment.
However, online stock trading platforms have simplified this process, allowing anyone with an internet connection to participate in the market. They’ve effectively democratized stock trading, enabling a broader demographic to engage in investment activities.
Cost-Effectiveness
Cost has been one of the biggest hurdles for beginners interested in stock trading. High brokerage fees were once a significant barrier to entry. Online stock brokers have dramatically reduced this burden by offering lower trading fees compared to their traditional counterparts.
Many even offer commission-free trades, which is especially beneficial for those who are just dipping their toes in the investment waters and may not have a significant amount to invest yet.
Flexibility and Control
With an online broker, you get the advantage of real-time trading from the comfort of your home, or anywhere else for that matter. You have more control over your trades, with the ability to review and modify your orders whenever you see fit. This flexibility can be a game-changer for beginners who are still learning the ropes and need the freedom to make adjustments as they see fit.
Access to Tools and Education
Most online brokers provide a wealth of resources to help you understand the stock market better. These resources often include educational articles, webinars, video tutorials, and even simulated trading environments. You can learn at your own pace, apply your knowledge in a risk-free environment, and then proceed with more confidence when you’re ready.
Busting the Myth: Stock Trading is Not Just for Experts
You might be thinking, “Sure, these benefits sound great, but isn’t stock trading still a field best left to the experts?” This is a common misconception, but it couldn’t be further from the truth. While knowledge and experience undoubtedly play a role in successful investing, the barrier to entry has significantly decreased with online brokerage accounts.
They’ve built platforms that cater to investors of all experience levels, with easy-to-use interfaces, educational content, and customer support to guide you through your investment journey. In fact, the rise of online trading has given birth to a new generation of investors who’ve started with little to no knowledge of the stock market.
Choosing Your Online Broker: Essential Criteria to Consider
Selecting an online broker as a beginner can seem daunting. However, by focusing on the right criteria, you can make a well-informed decision that suits your individual needs and goals. Here are the key factors you should consider when choosing your online stock broker.
User-Friendly Platform: Navigate with Ease
As a beginner, the last thing you want is to grapple with a complicated platform while trying to understand the intricacies of stock trading. Hence, a user-friendly interface is essential.
An intuitive platform will make navigation a breeze, allowing you to focus on your investment decisions rather than struggling with complex tools. Look for brokers that offer clear layouts, easy-to-find features, and streamlined processes for trading.
Educational Resources: Your First Step Towards Mastery
Education is paramount when you’re embarking on your investment journey. The best online brokers provide a variety of learning materials, including tutorials, webinars, articles, and even a glossary of trading terms.
These resources can help demystify complex financial concepts, making it easier for you to understand market trends and make informed decisions. Ensure the broker you choose places a strong emphasis on education and continuous learning.
Customer Support: Guidance When You Need It
No matter how user-friendly a platform is, you’re likely to encounter queries or issues that need resolution. This is where robust customer support comes in.
A good online broker should offer responsive, efficient, and friendly customer service, ready to assist you via multiple channels – be it phone, email, or live chat. Remember, as a beginner, having readily available support can be a significant confidence booster.
Fees and Commissions: The Impact on Your Investments
Even the smallest fees can add up over time and eat into your returns. So, it’s essential to understand the fee structure of any online broker you consider. This can include trading fees, account maintenance fees, withdrawal fees, and more. Many online brokers now offer commission-free trades, which can be particularly advantageous for beginners starting with a smaller investment.
Account Minimums: Barrier or Welcome Mat?
Some online brokers require you to deposit a minimum amount to start trading. This can be a hurdle for beginners who are looking to start small. Therefore, finding a broker with low or no account minimums can be a significant advantage when you’re just getting started. It allows you to dip your toes into investing without committing a substantial sum upfront.
Diverse Investment Options: The Power of Choice
While you might start with trading stocks, having a range of investment options can be beneficial as you grow and diversify your portfolio. Look for an online brokerage account that offers a variety of investment products, such as bonds, ETFs (exchange-traded funds), mutual funds, and more. Having these options at your disposal allows for more flexibility in your investment strategy.
Security: Safeguarding Your Investments
With the increasing number of cyber threats, security has never been more critical. You want to ensure that the online broker you choose uses top-tier encryption and security measures to protect your personal information and investments. This can include two-factor authentication, biometric recognition, and advanced encryption technologies.
Tips for Getting Started With Online Stock Trading
Stepping into the world of online stock trading can be thrilling. The possibility of seeing your money grow can be enticing, but it’s also crucial to approach this journey with a strategic and educated mindset. Here are some practical tips to get you started on the right foot.
Understand Your Investment Goals
Before you make your first trade, take some time to understand your investment goals. Are you saving for retirement, a down payment on a house, or your child’s college education? Having a clear idea of your goals will help you make informed decisions about the type of investments you want to make.
Start Small and Gradually Increase Your Investments
As a beginner, it’s wise to start small. You might be eager to dive in, but starting small allows you to get a feel for trading without risking too much. As you become more comfortable and experienced, you can gradually increase your investments.
Diversify Your Portfolio
Don’t put all your eggs in one basket. Diversification, or spreading your investments across a variety of assets, is a key strategy to manage risk. By diversifying your portfolio, you can protect yourself from significant losses if one of your investments underperforms.
Practice with a Demo Account
Many online brokers offer demo or “paper” trading accounts. These accounts allow you to practice trading with virtual money. It’s a great way to learn the ropes, try out different strategies, and understand the dynamics of the market without risking real money.
Keep Emotions in Check
Investing can be an emotional rollercoaster. The value of your investments can go up and down, but it’s crucial to stay calm and stick to your investment plan. Avoid making impulsive decisions based on short-term market fluctuations.
Develop a Disciplined Investment Strategy
Having a disciplined investment strategy means making thoughtful and researched decisions rather than chasing ‘hot’ tips or trends. This strategy involves regularly reviewing and adjusting your portfolio, reinvesting dividends, and not being swayed by market volatility.
Embrace Continuous Learning
The investment world is dynamic and ever-changing. Make an effort to learn continuously about different investment products, market trends, and trading strategies. Take advantage of the educational resources offered by your online broker.
Consult a Financial Advisor
While online stock trading can be done independently, consulting a financial advisor can be beneficial. They can provide personalized advice tailored to your financial goals and risk tolerance.
Frequently Asked Questions for Online Stock Trading Beginners
Here are some commonly asked questions that beginners often have when they’re starting out with online stock trading.
What is a brokerage account?
A brokerage account is an arrangement between an investor and a licensed brokerage firm that allows the investor to deposit funds with the firm and place investment orders through it. Essentially, it’s the account you use to make trades and hold your investments. The brokerage acts as the intermediary between you and the markets.
In a typical brokerage account, you can invest in a wide variety of securities, including stocks, bonds, mutual funds, and ETFs (exchange-traded sunds). There are also different types of brokerage accounts, like individual or joint accounts, retirement accounts, and education savings accounts, each serving different investment purposes and offering varying tax benefits.
Why should I consider online stock trading?
Online stock trading offers a host of benefits, including easy access to financial markets, lower transaction costs, real-time trading, a wealth of educational resources, and the ability to trade at your own pace and convenience.
How much money do I need to start online trading?
The amount needed to start online trading can vary greatly depending on the broker you choose. Some online brokers require minimum deposits, while others do not. It’s possible to start trading with a small amount, but remember that it’s crucial to only invest money that you can afford to lose.
What are the risks of online stock trading?
Like any investment, online stock trading comes with risks. The value of your investments can fluctuate based on market conditions, which can lead to losses. It’s also possible to lose money due to poor investment decisions. It’s important to educate yourself, develop a solid investment strategy, and consider diversifying your investments to manage these risks.
What is a stockbroker?
A stockbroker is a professional who executes buy and sell orders for stocks and other securities on behalf of clients. Online stock brokers offer platforms where you can conduct these transactions yourself.
How do online stock brokers make money?
Online stock brokers make money in several ways. Some charge commissions on trades, while others offer commission-free trades but may charge other types of fees, such as account maintenance fees or withdrawal fees. Some brokers also earn money from interest on cash in trading accounts or by lending out securities in margin accounts.
What is diversification?
Diversification is a risk management strategy that involves spreading your investments across various types of assets, such as stocks, bonds, ETFs, etc. The idea is to reduce risk by investing in different areas that would each react differently to the same event.
Is my money safe with online brokers?
Most reputable online brokers are members of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC), which provide certain protections for investors. However, while these protections can safeguard your money if the brokerage fails, they do not protect against losses from trading.
A financial instrument is simply a contract between entities that represents the exchange of money for a certain asset. Financial instruments include most types of investments: cash, stocks, bonds, mutual funds, exchange-traded funds (ETFs), certificates of deposit (CDs), loans, derivatives, and more.
Financial instruments facilitate the movement of capital through the markets and the broader economic system. While this may take different forms, the flow of capital remains a central feature.
What Is a Financial Instrument?
Generally Accepted Accounting Principles (GAAP) defines a financial instrument as cash; evidence of an ownership interest in a company or other entity; or a contract. A financial instrument confers either a right or an obligation to the holder of the instrument, and is an asset that can be created, modified, traded, or settled.
Investors can trade financial instruments on a public exchange. The New York Stock Exchange (NYSE) is an example of a spot market in which investors can trade equity instruments for immediate delivery. 💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
Financial Instrument vs Security
A security is a type of financial instrument with a fluctuating monetary value that carries a certain amount of risk for the individual or entity that holds it. Investors can trade securities through a public exchange or over-the-counter market.
The federal government regulates securities and the securities industry under a series of laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.
All securities are financial instruments but not all financial instruments are securities.
Like financial instruments, securities fall into different groups or categories. The four types of securities include:
• Equities. Equities represent an ownership interest in a company. Stocks and mutual funds are examples of equity securities.
• Debt. Debt refers to money lent by investors to corporate or government entities. Corporate and municipal bonds are two examples of debt securities.
• Derivatives. Derivatives are financial contracts whose value is tied to an underlying asset. Futures and stock options are derivative instruments.
• Hybrid. Hybrid securities combine aspects of debt and equity. Convertible bonds are a type of hybrid instrument.
Recommended: Bonds vs. Stocks: Understanding the Difference
Types of Financial Instruments
Financial instruments are not all alike. There are different types of financial instruments in different asset classes. Certain financial instruments are more complex in nature than others, meaning they may require more knowledge or expertise to handle or trade.
1. Cash Instruments
Cash instruments are financial instruments whose value fluctuates based on changing market conditions. Cash instruments can be securities traded on an exchange, such as stocks, or other types of financial contracts.
For example, a certificate of deposit account (CD) is a type of cash instrument. Loans also fall under the cash instrument heading as they represent an agreement or contract between two parties where money is exchanged.
2. Derivative Instruments
Derivative instruments or derivatives draw their value from an underlying asset, and fluctuate based on the changing value of the underlying security or benchmark.
As mentioned, options are a type of derivative instrument, as are futures contracts, forwards, and swaps.
3. Foreign Exchange Instruments
Foreign exchange instruments are financial instruments associated with international markets. For example, in forex trading investors trade currencies from different currencies through global exchanges.
Asset Classes of Financial Instruments
Financial instruments can also be broken down by asset class.
4. Debt-Based Financial Instruments
Companies use debt-based financial instruments as a means of raising capital. For example, say a municipal government wants to launch a road improvement project but lacks the funding to do so. They may issue one or more municipal bonds to raise the money they need.
Investors buy these bonds, contributing the capital needed for the road project. The municipal government then pays the investors back their principal at a later date, along with interest.
5. Equity-Based Financial Instruments
Equity-based financial instruments convey some form of ownership of an entity. If you buy 100 shares of stock in XYZ company, for example, you’re purchasing an equity-based instrument.
Equity-based instruments can help companies raise capital, but the company does not have to pay anything back to investors. Instead, investors may receive dividends from the stock shares they own, or realize profits if they’re able to sell those shares for a capital gain.
Are Commodities Financial Instruments?
Commodities such as oil or gas, precious metals, agricultural products and other raw materials are not considered financial instruments. A commodity itself, such as pork or copper, doesn’t direct the flow of capital.
That said, there are certain instruments whereby commodities are traded, including stocks, exchange-traded funds, and futures contracts.
A futures contract represents an agreement to buy or sell a certain commodity at a specific price at a future date. So, for example, an orange grower might sell a futures contract agreeing to sell a certain amount of their crop for a set price. An orange juice company could then buy a contract to purchase oranges at X price.
For the everyday investor, futures trading in commodities typically doesn’t mean you plan to take delivery of two tons of coffee beans or 4,000 bushels of corn. Instead, you buy a futures contract with the intention of selling it before it expires. 💡 Quick Tip: It’s smart to invest in a range of assets so that you’re not overly reliant on any one company or market to do well. For example, by investing in different sectors you can add diversification to your portfolio, which may help mitigate some risk factors over time.
Uses of Financial Instruments
Investors and businesses may use financial instrument for the following purposes:
1. As a Means of Payment
You already use financial instruments in your everyday life. When you write a check to pay a bill or use cash to buy groceries, you’re exchanging a financial instrument for goods and services.
Likewise, business entities may charge purchases to a business credit card. They’re borrowing money from the credit card company and paying it back at a later date, often with interest.
2. Risk Transfer
Investors use financial instruments to transfer risk when trading options and other derivative instruments, such as interest rate swaps. With options, for example, an investor has the option to buy or sell an underlying asset at a specified price on or before a predetermined date. A contract exists between the individual who writes the option and the individual who buys it. This type of financial instrument allows an investor to speculate about which way prices for a particular security may move in the future.
3. To Store Value
Businesses often use financial instruments in this way. For example, say you default on a credit card balance. Your credit card company can write off the amount as a bad debt and sell it to a debt collector. Meanwhile, businesses with outstanding invoices they’re awaiting payment on can use factoring or accounts receivables financing to borrow against their value.
4. To Raise Capital
Companies may issue stocks or bonds in order to get access to capital that they can invest in their business. In this case, the financial instruments could be a means of raising capital for one party and a store of value for the other.
Importance of Financial Instruments
Financial instruments are central to not only the stock market, but also the financial and economic system as a whole. They provide structures and legal obligations that facilitate the regulated exchange of capital via investing, lending and borrowing, speculation and growth.
In short, financial instruments keep the financial markets moving, and they also help businesses to keep their doors open and allow consumers to manage their finances, plan for the future, and invest with the hope of future gains.
For example, you may also have a savings account that you use to hold your emergency fund, an Individual Retirement Account (IRA) that you use to save for retirement and a taxable brokerage account for trading stocks. Your checking account is one of the basic tools you might use to pay bills or make purchases.
You might be paying down a mortgage or student loans while occasionally using credit cards to spend. All of these financial instruments allow you to direct the flow of money from one place to another.
The Takeaway
Financial instruments are integral to every aspect of the financial world, and they also play a significant part in business transactions and day-to-day financial management. If you trade stocks, invest in an IRA, or write checks to your landlord, then you’re contributing to the movement of capital with various financial instruments. Understanding the different types of financial instruments is the first step in becoming a steward of your own money.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
Invest with as little as $5 with a SoFi Active Investing account.
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SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing. Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Foreign exchange trading, also known as forex or FX, is a global marketplace where participants trade national currencies.
Options trading allows participants to benefit from asset movements by trading puts and calls with less cash outlay than required to buy the underlying asset.
Both markets are characterized by the use of leverage with many other similarities as well as differences, and traders often engage in both markets.
What Is Options Trading?
Options are financial contracts that give the holder the right but not the obligation to buy or sell an underlying asset at a predetermined price and time, while creating a potential obligation for the option seller to buy or sell the underlying asset (if and when the buyer exercises the option contract).
Calls and puts are the two option types. Calls are the right to purchase an underlying asset while puts are the right to sell an underlying asset.
Options can be found on stocks, exchange-traded funds (ETFs), and on futures. With options trading vs. forex, an important distinction is that the options market is a derivatives market.
Recommended: Guide to Trading Options
Options trading online has increased in popularity now that commissions are so low. There has been huge growth in this market. Drawing traders to options is the potential for big profits over a short period. With options, you gain beneficial ownership of a large amount of an underlying security, like a stock, with a small amount of capital.
Some investors use options to protect their long-term holdings, such as a long stock position, by purchasing puts when they believe a near-term dip might take place. You can also increase your portfolio’s income by selling covered calls.
Overall, options trading can provide protection, generate income, and offer leverage. But options also come with risks.
When comparing options vs. forex, options trading can be more versatile than forex due to the vast number of options strategies. With forex trading, you simply go long or short a currency. Options trading offers the chance to profit in a variety of market conditions, too.
One downside to options trading is that it can take a long time to learn the ins and outs of options trading. Another drawback is that many options are illiquid, so it is hard to buy and sell quickly at a competitive price.
Finally, user-friendly options trading is here.*
Trade options with SoFi Invest on an easy-to-use, intuitively designed online platform.
What Is Forex Trading?
Forex trading is the buying and selling of national currencies in a 24-hour market. In general, the forex market is considered the most liquid market in the world. While many currency pairs feature strong liquidity, there are still some that do not have a lot of buyers and sellers.
Trading forex vs. options often involves higher leverage and volatility risks.
When looking at forex vs. options, forex often offers more leverage. That means brokers allow you to trade with more capital than you have deposited in your account. With leverage comes the potential for massive gains, but also the risk of steep losses.
Brokers want to keep your risk in check, though. They often do that by requiring forex traders to enter stop-loss orders immediately once they take a position.
Another aspect that can make brokers nervous is volatility. The forex trading market can feature periods of relative calm followed by explosive volatility. When volatility strikes, currency pairs can become less liquid, leading to difficulties when attempting to exit trades. Forex options can be used to profit from volatility, however.
Comparing Forex vs Options
Let’s dive into some of the key similarities and differences in forex vs. options. It can help you decide which trading arena might suit your style better.
Similarities
A key similarity is that supply and demand drive both forex and options. If a tremendous amount of bullish sentiment arises, an option or currency pair can skyrocket in value. That can lead to big gains in both markets.
Before you jump into trading, doing your homework is important. In currency and derivatives markets, for every long there is a short, that means there is someone on the other side of the trade losing significantly. Remember always, that “someone” could be you.
Comparing options vs. forex, both offer leverage, but in different ways. Options, depending on the strategy, can allow you to control a large amount of stock with a small amount of capital. In forex trading, you can use margin to trade with leverage. You can even trade with up to 1,000x leverage with some forex brokers.
Today’s technology allows you to access many options and forex markets. That can make researching ideas and deciding on a single trade tough since there are so many tradable assets and strategies.
Both markets are regulated to help protect traders and brokers.
Differences
There are many differences in forex vs. options trading.
Forex involves trading currency pairs while options trading involves buying and selling contracts on an underlying asset. Hence, options are derivatives.
The options market is confined to normal trading hours while forex is a 24-hour market.
A final key difference in options vs. forex is liquidity. Many currency pairs have a large depth of buyers and sellers present, but there might just be a handful of traders in a particular options market.
There are also differences in forex vs. binary options, but you can trade forex binary options which are forex derivatives that pay out all or nothing.
Forex
Options
A 24-hour trading market of currency pairs
Contracts derived from an underlying asset
The most liquid trading market in the world
Trade during normal market hours
Ability to trade on leverage
Used for portfolio protection, income generation, and leverage when trading
Pros and Cons of Forex Trading
Pros of Forex Trading
Cons of Forex Trading
Stop losses help control risk
Losses can occur quickly due to leverage
Easier to trade and learn
Volatility can cause illiquidity on some pairs
Extremely liquid market pairs available
Lower middleman fees
Pros and Cons of Options Trading
Pros of Options Trading
Cons of Options Trading
Can be a highly leveraged play on stocks and other underlying assets
Many options are illiquid, which means high bid/ask spreads
Ability to profit from both price changes and time decay
You might not be approved to trade more complex options strategies
Traders can benefit from volatility spikes
Complex strategies can be difficult to learn
Is Forex or Options Trading Right for You?
Your trading preferences drive the decision of whether to engage in options or forex trading. Options offer defined risk strategies, but forex markets are often very liquid and trade 24 hours a day. You can also combine options trading with your stock trading account while forex could provide diversification.
Another market to consider is forex binary options. This market can feature the benefits of both forex and options, but you should always weigh the risks, too.
The Takeaway
There are many similarities and differences in options vs. forex. Options can be used on many underlying assets, and you can define your risk and reward strategy. When trading forex, you can profit from the rise and fall of national currencies and enjoy 24-hour markets. Both markets can be volatile, and there are risks associated with these strategies, so it’s important to recognize that before jumping in.
Qualified investors who are ready to try their hand at options trading, despite the risks involved, might consider checking out SoFi’s options trading platform. The platform’s user-friendly design allows investors to trade through the mobile app or web platform, and get important metrics like breakeven percentage, maximum profit/loss, and more with the click of a button.
Plus, SoFi offers educational resources — including a step-by-step in-app guide — to help you learn more about options trading. Trading options involves high-risk strategies, and should be undertaken by experienced investors.
With SoFi, user-friendly options trading is finally here.
FAQ
Is options trading more profitable than forex?
When analyzing profit potential in forex trading vs. options trading, some contend that there is greater profit potential in the forex market due to very high liquidity and fast execution of trades. A key difference between forex vs. options is that forex can feature tremendous leverage, so huge profits can come quickly, but losses can also result in fast ruin.
Others say that options can be more profitable since this type of derivatives trading offers so many customized strategies that can have defined risk. You can also take advantage of time decay and volatility changes.
Is forex trading less risky than options trading?
It depends on your trading style. When analyzing forex vs. options trading, forex often requires position limits, so that can cap your risk. With options, risk is determined by your trading strategy and the positions you construct and execute. For example, selling a naked call features unlimited risk, but buying a deep in-the-money call can be relatively low risk.
A key difference in options vs. forex is that options markets have a finite time horizon — the option expiration date. Forex trading allows positions to be held longer. Another aspect of forex trading vs. options is that forex trading, despite being a liquid market, can have slippage costs when volatility strikes. That’s a risk to always keep in mind.
How do you invest in forex?
It is easy to start investing in forex. You simply open a brokerage account to hold a foreign currency. From there, you then fund your account, research a strategy, and execute an order. It’s important to always monitor your portfolio as the market can change quickly.
Photo credit: iStock/fizkes
SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes. Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Carry trade is a strategy used by some traders who invest in currency markets to take advantage of differences in interest rates. In a carry trade, an investor buys or borrows a security or asset at a low interest rate, and then uses it to invest in another security or asset that provides a higher rate of return.
Carry trades have some clear uses in the foreign exchange market, or “forex” market. Given that they can be used to drive returns, they can be important for investors of all stripes to understand.
What Is a Carry Trade?
In a carry trade, forex traders borrow money at a low interest rate in order to invest it in an asset with a higher rate of return. In the forex markets, the currency carry trade is a bet that one foreign currency will hold or increase its value relative to another currency.
Of course, this investing strategy hinges on whether or not interest rates and exchange rates are in the traders’ favor. The wider the exchange rate between two currencies, the better the potential returns for the investor.
Recommended: What Is Forex Trading?
Even so, a carry trade strategy can be a relatively simple way to increase an investor’s returns, assuming they understand the difference in interest rates. In that way, it’s similar to understanding “spread trading” as they relate to stocks. 💡 Quick Tip: The best stock trading app? That’s a personal preference, of course. Generally speaking, though, a great app is one with an intuitive interface and powerful features to help make trades quickly and easily.
How Do You Execute a Carry Trade?
Executing a carry trade can seem nebulous without an example. Here’s a runthrough.
Carry Trade Example
Imagine that the U.S. dollar has a 1% interest rate, but the British pound has a 2% interest rate. A trader could take 100 U.S. dollars, and then invest that 100 dollars into the equivalent number of pounds (according to the exchange rate), and earn a higher return in interest. The discrepancy in interest rates allows traders to take advantage and earn higher returns.
This is a rather simplistic carry trade example, professional traders and investors can engage in complex carry trade strategies, and even employ the use of a carry trade formula to help them figure out expected returns, and whether the strategy is worth pursuing in a given situation.
Rather than simply buying one currency with another, traders often execute a carry trade that involves borrowing money in one currency and using it to purchase assets in another currency. In this scenario, traders want to borrow the money at the lowest possible interest rate, and do so using a weak or declining currency.
That can create higher profits when they close the deal and pay back the borrowed money. In general, carry trade is a short-term strategy, rather than one focused on the long-term.
Recommended: Short-Term vs Long-Term Investments
Is a Carry Trade Risky?
The concept of a carry trade is simple, but in practice, it can involve investment risk.
Most notably, there’s the risk that the currency or asset a trader is investing in (the British pounds in our previous example) could lose value. That could put a damper on a trader’s expected returns, as it would eat away at the gains the difference in interest rates could provide. Currency prices tend to be very volatile, and something as mundane as a monthly jobs report released by a government can cause big price changes.
The greater the degree of leverage an investor uses to execute a carry trade, the higher the potential returns — and the larger the risk. In addition to currency risk, the carry trade is subject to interest rate risk. Given the risks, carry trades in the currency markets may not be the most appropriate strategy for investors with a low tolerance for risk. 💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.
The Takeaway
Carry trades are one way for investors or traders to generate returns, although the approach involves some risks that aren’t present in other types of investment strategies. While the carry trade concept is straightforward, it can quickly get complex when institutional investors put it in place.
Carry trades can be advanced trading tools or strategies. For that reason, they may not be appropriate for all investors or traders. If you feel like you’re in over your head, it may be a good idea to speak with a financial professional for guidance, or to do some more homework to further your understanding.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
For a limited time, opening and funding an account gives you the opportunity to win up to $1,000 in the stock of your choice.
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SoFi Invest® The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results. Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below. 1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
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