Contributed article in our global business series. Enjoy! – Kimberly
Savers in the UK face challenging times ahead with the Bank of England cutting its base rate. Long-term investments such as pension funds have been devastated by the change in rates. In fact, pension fund deficits have increased to about £26,000 per household in the UK. There are a few options available to those who wish to consider alternatives to returns on their investments, and one of them is online trading.
Online trading is becoming increasingly popular. One reason for the rise in its popularity is the virtual trading platforms that some broker houses provide. These virtual platforms simulate the real market and offers the man on the street a chance to become familiar with trading. The user is then exposed to real-life practices without real-life risk and thus begins the user’s path in online trading.
One such option is peer-to-peer (P2P) lending. P2P platforms are a novel way where investors in the platform lend their money pre-approved clients. Interest on money lent can be up to 6.7% depending on the risk and the platform used. Such an option is often seen as safe, but investors must be aware that the Financial Services Compensation Scheme does not cover this type of lending. Users see this as a relatively low-risk investment option because the lenders are vetted, and it gives them a false sense of security.
Online trading does provide the investor with lower fees because of lower administration costs. With online trading, the middle man is once again cut away and therefore you will avoid paying broker’s fees. The obvious disadvantage here is that the broker’s knowledge and experience is a crucial element in financial trading. A financial institution, such as CMC Markets, provides invaluable insight as to the complexities of today’s market.
Beginner investors love the speed and ease that online trading provides. One is able to make quick on-the-spot investment decisions based on current trends at the time it is happening. There is no waiting time, and this gives the user a feeling of control. The downside to this is impulse trading. New investors often fall into the trap of over investing or not fully understanding the investment that they are making. The speed of the click becomes your signature on the dotted line, and too often poor decisions are made. Investors can place a limit on their accounts which would help them to curb their investments and allow them to think through transactions more carefully.
Online trading portals have built-in shiny gadgets which the novice investor loves taking advantage of. These tools provide up-to-date information and helps investors make sound investment decisions. Once again, tools do not provide the necessary understanding of what this information means. You cannot build a relationship with the tools the way that you can with a broker. New investors need to be able to research independently, without broker bias, into what the trends actually are, and then be able to consolidate this information to ensure that they make sage decisions with regard to their savings.
The instantaneous nature of online trading has an immediate impact on the brain’s pleasure centre. A study done by the journal Addictive Behaviours, found that online traders experience a high which is similar to what gambler’s experience. This is particularly true when investors choose to invest in high-risk short term trades which have the potential for high yields. The parallel between gambling and online trading and its effect on the brain has to be noted as very close.
The very nature of online trading puts you at the mercy of the Internet and computers. Computers are volatile machines at best, and if you have an internet connection which lags, this could set you up for computer errors and glitches. An example would be if you thought your transaction had not gone through, and you click for the investment to be made again. Now you have made the same investment twice, and all because of a slow Internet connection.
Although interest rates have been cut, savers should be savvy with their money. Just because conditions are favourable for spending in this climate, it doesn’t mean that they should spend. And just because online trading seems easy, it doesn’t mean that they should go into it blindly. Researching and planning investments will offer the highest rewards for wise investors.
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