Saxo Bank Abu Dhabi head Fadi Mehdi explains the ins and outs of investing online

The rapid development of the internet has triggered the rise of online trading over the last two decades. As the market started to understand the benefits that the internet offered, the shift to online trading was a natural step. Since the financial world is known for its dynamism, fast pace and ability to instantly connect people around the globe, online trading was the perfect outcome.

The first online trade is believed to have taken place in 1994 by the company K. Aufhauser & Co, later acquired by what was to become Ameritrade. E*TRADE and Saxo launched their online trading platform only years later.

Innovation in technology is now empowering a new generation of traders and, in doing so, it is revolutionising trading behaviour. This generation is using the latest technology to make their trading decisions, drawing on more dynamic sources of information than ever before.

The trend towards the democratisation of trading and ease of access to information through the internet has levelled the playing field. The days when only the privileged few had easy access to this information have gone.

Today's investors are looking to seize trading opportunities regardless of where they are. They want to do this with the same efficiency as they buy a book on Amazon. This consumer-driven trend is leading to greater use of mobile devices, which is disrupting the traditional financial services distribution model. Access to portfolios every minute at every hour of every day is a must.

The growing influence of social networks such as Facebook and Twitter is the motivating factor for the proliferation of a new investing arena - social trading platforms. Social trading empowers investors in a way not previously seen and creates a unique level of transparency. On social trading platforms, investors can have a public profile. This offers complete transparency around their investment strategy, stock picks and performance. Trading was previously a solitary activity but now, through social trading, investors can benefit from the exchange of ideas, inspiration and strategies with peers.

Choosing a platform

Online trading needs a powerful and highly versatile platform that allows you to fully customise your trading environment to cater for your product interests, style and strategy. You want a multi-asset platform that allows you to make the best use of available screen real estate - whether you are working on a laptop or have multiple monitors. You also want a platform provider with an adequate mobile and tablet offering, delivering intuitive and powerful user interfaces.

Placing an order

If you have multiple trading accounts, you first select the account you want to place the trade or order from. A good selector makes it easy to select an instrument. Typically you enter a few letters of the instrument's name or symbol and the instrument selector will offer a list of filtered instruments matching the criteria. For example, if you want to trade United States dollar versus the Japanese yen, known as USDJPY or DollarYen, you enter that. Once you have selected USDJPY in the trade ticket, the tabs in the trade ticket show the available trades for the selected instrument. For this instrument, the available trades would be a spot order
(a direct trade on a live streaming price) or an option.

Investing in currencies

Currencies - or forex - are an extremely liquid market that can be traded around the clock. Many investors trade forex as means of hedging, as among the major currencies. This is because market moves are generally without the gap risks that are present in some other markets. One example is the effect that an overnight earnings announcement can have on an individual stock. That liquidity means positions can be entered and exited at any time in the Monday to Friday period. Forex trades always involve the simultaneous buying of one currency and selling of another. For example, when you buy EURUSD you buy the euro and sell the US dollar at the same time. Technically, unlike a physical equity trade, you do not actually own anything when you make this trade; you are simply taking risk. This is based on the amount of the currencies involved in the trade and the future direction of an exchange rate. Forex is no more or less risky than any other market but it can be extremely risky for traders that use excessive leverage. Unfortunately, many retail forex providers make this readily available.

Investing in commodities

Portfolio diversification is a key reason for investing in commodities like oil and gold. Although, it is a volatile asset compared to some of its peers. An exposure to a single commodity carries a greater risk than a sector or a whole asset class exposure. As a novice investor in commodities, you want to gain exposure through exchange-traded products. ETPs or exchange-traded funds, as they are also called, offer a wide range of opportunities within the commodity sector. Generally the investment is also not leveraged, which means $100 invested gives the investor $100 exposure. This is a safer option from a risk management standpoint.

Investing in equities

Equity trading is the buying and selling of company stock shares and represents the actual ownership of part of a company. Investing money always involves risk and investing in emerging markets is typically more risky than developed markets. Currency effects also add even more volatility to returns. Investing in foreign equity markets works in the same way as buying domestic equities with an added currency effect. If currency effects are not hedged, it is always mathematically more risky to invest in assets that are not denominated in your base currency. Another way of trading in the equity markets is through a contract for difference. CFDs mirror the benefits and risks of owning equity without actually owning it. They offer a versatile approach to trading including the opportunity to apply leverage and the ability
to short sell.

Investing in Sharia compliant stocks

Islamic products are available to regular savers, investors and homebuyers but unlike standard deals they do not charge interest. Islamic finance is one of the fastest growing sectors in the world today and most reliable online trading specialists offer Sharia compliant stocks online. The compliance reasoning should be based on the commonly accepted Islamic guidelines defined by IdealRatings and the Shariah Review Bureau. More than 12,000 stocks and ETFs are screened and researched on a monthly basis by IdealRatings. It is the industry's most trusted source for identifying and researching Sharia-compliant stocks.

© Gulf Business 2015