ECN's and Online, Day and Active Trading


If the thought of your broker making money off the bid/ask spread makes you less than thrilled, you should be aware that there are alternatives for trading, such as Electronic Communications Networks (ECNs). Electronic Communications Networks (ECNs) represent orders in Nasdaq stocks; they internally match buy and sell orders or represent the highest bid prices and lowest ask prices on the open market.
The benefits you get from trading with an ECN include after-hours trading, avoiding market makers (and their spreads), and anonymity (which is often important for large trades).

Online Trading

You might also want to try trading online. Although trading online does not eliminate the role of market makers and specialists, it can provide you with many other conveniences, such as the ability to trade from your desk at work or at home. You should be aware, however, that online trading is not instantaneous, so you still might find yourself wanting to use limit orders instead of market orders. If there is a computer glitch and you are not sure that the order went through, try to contact your broker or issue a cancellation before re-submitting the order. You don't want to end up owning twice as much stock as you had originally planned on buying.

After Hours

The stock markets in New York have traditionally been open for trading from 9:30 am until 4 pm EST, every Monday through Friday (with the exception of certain holidays). As interest in the stock market has grown, however, there has been greater and greater demand for additional trading hours after the markets close. The markets actually do allow trading after the closing bell -- it is known as "after hours" trading. For many years after hours trading was limited to individuals with a high net worth and to institutional investors such as pension funds, but it is becoming more common nowadays as systems like electronic communications networks (ECNs) make it easier for individual investors to access the after-hours market . Before you decide to trade shares after hours, however, you should be aware that trading stocks after hours can be a much different experience than trading during normal hours. For one thing, volume after hours is extremely low, since most investors do not trade after 4 pm. Low volume can lead to high volatility and large bid/ask spreads, and often times there are larger than normal price fluctuations in after hours trading. Until after hours trading becomes more common, it is probably something that should be left for more experienced investors.

Day Trading

Day traders are individuals who are trying to make a career out of buying and selling stocks very quickly, often making dozens of trades in a single day and generally closing all positions at the end of each day.

Day trading can be costly given the impact of commissions and the bid/ask spread. Day traders will typically select a discount broker in order to mitigate the cost of commissions on overall profits. Here are some tips for day trading:

Active Trading

Active traders buy and sell stocks frequently but haven't pursued it as a full time job. Unlike day traders, active traders trade once or twice a day, and don't close out all their positions at the end of the day. While a day trader might only hold a given position for a few minutes, active traders often hold onto their stocks for days, weeks or even months. Also, while a day trader generally pays a large fee to their firm to use special trading software as well as a commission, an active trader usually sticks with a deep discount online broker or Level II Nasdaq quotes.

A few more tips about active trading:
This article was brought to you by the InvestorGuide Staff Writers and Editors.

Copyrighted 2015. Content published with author's permission.

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