Online Trading – Who Makes the Real Money?

Online Trading – Who Makes the Real Money?

Have you noticed how over the last couple of years or so, there seems to have been a serious spike in the number of online trading platforms? In addition, more airtime on business channels seems to be allocated to shows about trading and investing, particularly trading and investing in the stock markets, whether directly (buying shares) or indirectly (trading derivatives). It’s not just a coincidence and good on you if you have indeed noticed what seems to be a serious drive to get people to invest their money in the Stock Exchange.

The truth is you’re still effectively taking a chance if you invest in the financial markets, whether as an investor who’s buying stocks outright or if you’re a trader seeking to take advantage of the liquidity of the markets (the short-term movement of the value of shares). While a lot of people make a lot of money playing the markets in this way, a whole lot more lose a lot of their money.

It’s perhaps a bit of an overly simplistic way of putting it, but it’s true that for every winner there has to be a loser. In the case of Contracts For Differences (CFDs) which are essentially derivatives, and I suppose in the case of outright shares investing as well, this view tends to be markedly skewed against the majority. For every big winner there are effectively a lot of losers, many of whom only lose a little bit of their money at a time and so don’t really feel the losses in the grander scheme of things.

The biggest winner however is the house and I refer to it as being the “house” because quite frankly, online trading is not unlike gambling. Nobody can ever say with absolute certainty whether or not a particular stock is going to go up or down. The only people who have this type of information are those operating on the inside and they’re not allowed to make use of it to trade as that would equate to insider trading, which is a criminal offence.

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But yes, the biggest winner is indeed the trading platform over which everybody is chasing their own personal profits – the broker. It’s as simple as this – for every trade that is executed by each trader, whether buying or selling, the online trading platform (broker) charges a fee, so they are the ones who make the real money.

Imagine a scenario where just a modest total of 2,000 trades are made in just one hour, which is not uncommon. Say the broker charges what appears to be a very low service fee of $2 per trade. That would equate to $4,000 made in just one hour, better yet (for the brokers) if those were derivative trades such as CFDs.

The broker holds on to the value of the real shares they own, while derivatives traders slug it out over whether or not the price of those shares is going up or going down.

I’m in no way trying to discourage anyone from chasing their personal fortune through trading, but perhaps investing in brokerage companies themselves (getting a share of the ownership of an online trading platform) is a better avenue to pursue if you want a little bit more of a predictable manner in which to build up some good earnings. So I’d encourage investing in an actual start-up brokerage over the act of trading itself, although I must add that it is indeed possible to make some good money as a trader or an investor in shares. For many people, trading is just a convenient way of catering to the high risk portion of diversifying their investment portfolios.

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Katie

Katie

Finance and Business Blogger at Payday Bunny
Kate is a finance blogger and currently works for one of the big high street banks.In her spare time she likes to educate people on finance and business matters.Married with 3 children she enjoys travel and family time when not in the office.
Katie

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