Every financial choice has the potential to go wrong. Online trading is no exception. To minimize the impact of risk of going wrong. The fundamentals of risk management are applied. The process of risk management includes- identification, assessment, and Controlling Risk. This article focuses on risk management and online trading.
What is Online Trading?
Nowadays, Online trading is one of the popular ways to deal in securities. The internet has made it easier. Brokers have gone online, and their platforms now provide a wide range of financial products such as equities, commodities, bonds, exchange-traded funds, and futures. To trade online, one needs to open an online Demat account with any online trading site and start trading. Then the user needs to place an order on the stock of his choice on the online platform, his order is recorded in the trading member platform’s and exchange platform’s databases. Online trading has eased the process of trading for everyone.Online trading removes the boundaries of place and time. You may sit at your home and start trading Unfortunately, there are drawbacks of online trading as well.
Risks of Online Trading
- Automated inventory systems can be counterproductive
Online trading has the feature of automated inventory systems to help investors in making their investment choices. These systems are often marketed with impressive performance profiles designed to make investors believe that they are sure to generate guaranteed returns. However, these logs are usually created by “backing up” the program with previous data. In other words, promoters go back to old transaction records and see what worked in the past. Automated inventory systems do two things: First, they refine the data you use to make investment decisions. Second, they apply a fixed rule from the array data to form an investment decision. Unfortunately, the main concerns in the market are constantly changing. An investment which seems profitable could result in total loss tomorrow. For a while, these systems seemed to work, but that was often a coincidence.
- Security concerns
Online stock trading has the biggest concern of security risk. Despite the security precautions taken by the sites with different security pins and questions. Guarantee of infiltration into your online Demat account is not promised. This raises the risk of losing a large amount of money. So choose a unique pin and change it frequently.
- Technical difficulties
Technical difficulties with the website can delay transactions, leading to undesirable consequences. You may have placed an order through your Demat account, but a system error could cause the trade to be invalidated. By the time you fix the technical issues, the stock price might change drastically. As a result, the purchase becomes expensive for you. When looking for an online broker, check out the guarantees they offer to protect you should this type of problem occur.
Apply the fundamentals of risk management to online trading
- One percent rule for all- It is recommended to put not more than one percent of your capital in one stock.
- Plan your trade- Plan your trade before placing an order through your online Demat account. Choose the right online trading site which has a good interface, check its history of technical issues, and then open the online Demat account.
- Diversify your portfolio – Invest in different companies, do not include just one stock or two stocks in your portfolio. faced with
Online trading is confronted with different risks. These risks could land you in financial trouble. To avoid losses, a deep study into hedging your losses is risk management. Before starting to trade, one needs to be aware of the different risks of online trading. Opening a Demat account is the first step into the world of trading. The second is to equip yourself with the fundamentals of risk management in online trading and you are good.
Also read:- Meaning and Basics of Trading in Stock Market