Internet technology has connected the world in an unprecedented fashion. The ability to transfer information at near light-speeds has revolutionised communication creating an exclusively digital space.
Perhaps the largest application of this technology has been in the arena of commerce. Producers, retailers and consumers can now interact via online platforms 24 hours a day, 7 days a week. Given that more than 3 billion people worldwide access the internet regularly, the money making potential is seemingly boundless.
The global financial markets have been receptive to the rapid advancement of internet connectivity. Once existing as only brick-and-mortar institutions, every prominent financial venue in the world now functions in an online capacity. This has given rise to several potentially lucrative market-related professions:
- Active trading
- Brokerage services
- Market analytics
Each of these disciplines adds value to the online financial environment while generating revenue in the process.
Active Traders And Investors
The active trading and investing of financial securities is one of the most popular ways of making money online. Currencies, equities, futures and options are a few of the most commonly addressed products in the pursuit of profitability.
The vast number of traders execute day-to-day operations remotely in an independent capacity. Given that most markets are easily accessed via software platform, it stands to reason that the overwhelming majority of these participants are doing so online. A 2015 study projected 54 million out of a total 90 million investors in the United States functioned as self-directed online traders.
Online traders and investors fall under two primary classifications:
- Professional: Professional traders operate in an institutional capacity as either fund or money managers. It is estimated that only 6% of all online traders are considered to be professionals.
- Retail: Retail traders typically do so remotely, either as broker-assisted or self-directed market participants. Studies show that for U.S. adults with internet access, about 25% are retail online traders. This statistic illustrates the robust growth the industry has experienced over the course of the internet era.
The compensation structure for each type of trader is vastly different. Independent retail participants realise gains directly from the growth of their account balance. The money made by retail traders can vary wildly. As a general rule, however: the larger the account, the greater the potential returns.
Depending on the position, professional traders may receive compensation according to a predetermined salary or commission-based structure.
Online brokerage services afford traders and investors market access in return for a specified compensation structure. In the days before the rise of the electronic marketplace, revenues for brokerages firm depended on high commissions and fees associated with the provision of a full-service suite to the customer.
Today, the digital marketplace has revolutionised the role of brokerage firms. Costs associated with conducting business have reduced dramatically. As a result, brokerages secure profits according to a volume-based business model:
- Commissions: No matter which market or asset is being traded, commissions are the bread and butter of the brokerage industry. They can come in the form of flat per-trade fees, bid/ask spreads or a percentage of both.
- Assorted fees: Fees vary depending on the market, asset and service level being provided. For instance, a full-service online brokerage will have a higher fee structure than a deep discount brokerage. Additional fees also apply to latency-reducing technologies and market connectivity options.
- Portfolio management: Many brokerage firms offer clients access to their own selection of managed funds. Commodities, equities and currencies offer a diverse array of options, each with their own compensation structure. In the online arena, the traditional industry standard known as "2 and 20" has given way to discounted fees in the neighborhood of 1.5%.
The online platform has brought a wide-range of opportunities to market analysts. The growth of active trading as a discipline created an abundance of new traders seeking viewpoints and opinions from experienced professionals.
In place of the traditional newsletter, many forms of digital media analyse the markets and provide content on a 24/7 basis:
- Information Services: In the mold of the traditional newsletter, subscription-based e-mailers and premium web content are significant sources of revenue in the online trading environment.
- Signal Providers: The rise of social trading platforms has created the profession of the signal provider. In return for a flat fee or percentage of gains, a signal provider allows other individuals to copy the trades of a designated account. ZuluTrade and MetaTrader 4 are two examples of prominent social trading platforms.
- Analytical Engines: Big data technology has become a popular discipline among financial market traditionalists. Proprietary high-frequency trading (HFT) and systems based on complex algorithms have become sought after pay-to-play commodities.
The growth of electronic trading has dramatically increased both the size of markets and the related industries. While the utility of that expansion is a frequently debated topic, it is undeniable that opportunities to profit in the online financial arena have matured exponentially.
Any opinions, news, research, analyses, prices, other information, or links to third-party sites are provided as general market commentary and do not constitute investment advice. FXCM will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Risk Warning: Our service includes products that are traded on margin and carry a risk of losses in excess of your deposited funds. The products may not be suitable for all investors. Please ensure that you fully understand the risks involved.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…