We’ve been hearing a lot in recent years about data breaches and online security threats. It often seems as if anytime we go online we’re stepping into a “cyber haunted house.” Now, that may be more than a little bit of an exaggeration, but it does make you wonder if it’s safe to trade stocks online. After all, if you’re a regular trader, you’re putting yourself at risk every time you go online to make a trade.
Rest assured that concrete steps are being taken by your online broker to minimize the many threats that plague the web. But that’s only half the battle. The other half is the strategies you implement to keep your online trading safe on your end. There’s plenty you can do, and most of it involves basic common sense.
Let’s take a look at the risks of trading stocks online, what brokers are doing to protect you, what you can do to protect yourself and some potential threats that don’t come from cyber bad guys.
What Are the Risks of Trading Stocks Online?
Unfortunately, there are several risks involved when you trade stocks online, just as is the case anytime you engage in any internet-related activity. Some of the more common ones include:
Identity theft. What’s not always fully appreciated is the degree to which identity theft is an inside job. It actually makes perfect sense. People inside an organization have access to your information. When you trade stocks online, the potential is real for an insider to compromise one of your most valuable asset accounts.
Computer viruses and malware. Often the main purpose of viruses and malware is to install spyware on your computer. Thieves can use this to gain access to your passcodes and other information. One way they do this is by installing spyware that enables them to engage in key logging. This allows thieves to track your keystrokes, giving them access to valuable information.
Data breaches. There were 1,579 data breaches in 2017. This represents an increase of 44% over 2016. You’re probably familiar with the Equifax data breach, but that’s just one example. The problem is major financial institutions are a treasure trove of valuable information. That makes them a gold mine for cyber hackers.
Phishing schemes. Thieves have become adept at duplicating official-looking documentation from different financial institutions. In fact, they can copy a webpage or email with exact precision. You can receive a convincing-looking email from what looks like your online broker. But it’s really just a copy, directing you to log into your account by clicking a link. But the link doesn’t go to your online broker. It goes to a duplicate webpage that’s designed to collect your passcodes. Your real account then becomes immediately vulnerable.
How Brokers Protect You in the Online Trading Process
Virtually all brokerage firms maintain strong security procedures to protect you while you’re accessing your account. As well, companies and security experts regularly monitor the online environment for new threats. Most threats, old and new, will be stopped by your broker’s own security measures.
Common broker security measures include:
- Secure sockets layer (SSL) encryption. This typically includes the use of a 128-bit key to encrypt and decrypt data files. In fact, 128 bit encryption is generally considered unbreakable. It would require a massive computation that could take thousands of years to break.
- Secure servers. Encrypted data is stored behind secure and monitored firewalls, in fully secured facilities.
- Two-step authentication. This feature is an additional login step, over and above your passcodes. You should take advantage of this step — see below.
- Automatic logout. Your account is set up to automatically log out of your secure session following a period of inactivity. For example, after 10 minutes of inactivity, the platform may ask you if you wish to continue. If you don’t respond, it automatically logs you out of your account.
- System monitoring. The financial institution regularly monitors its entire system for potential security breaches and other threats such as malware, fraudulent apps and phishing schemes.
Security features, such as the following example from Betterment‘s website, is common among financial institutions, including investment websites:
It’s likely any online broker you’re working with will have similar security measures in place. But never make that assumption. Always review the “Security” link on a broker website. And if you can’t find it, contact the company directly and find out where it’s stated. It’s important information that should never be taken casually.
What You Can Do to Protect Yourself When You Trade Stocks Online
Even with the best broker-implemented security measures in place, your account can never be completely safe without your cooperation. You should take basic precautions to protect yourself:
Install good anti-virus and anti-spyware programs on your computer. This will be your best protection against viruses, malware, spyware and other online threats. It’s also important to make sure your security programs are regularly updated.
Use strong passcodes. Most people create passcodes that are user friendly. There’s a strong preference for passcodes that are easily remembered. Even worse, many users employ the same passcodes across several financial websites. Rather than using easy-to-remember passcodes, create the type that make no sense at all.
None of the words or numbers in an effective passcode should be easily connected to you personally. That means don’t use family names, street address or common numbers, such as your phone number or your date of birth. Use a mix of both uppercase and lowercase letters, numbers and symbols. It will be less convenient for you, which is exactly why it will be much harder for hackers.
Participate in two-factor authentication. This adds another layer beyond your passcodes. Many financial institutions make two-factor authentication available to you. You should always take advantage of it. It requires you to enter a verification code after entering your passcodes. Your broker will send you the code by either email or text, and you then type that code to gain access to your online account.
Guard your account information. Be aware of who’s around when you’re logging into your account. Never leave your computer unattended when you’re logged in. Log out of your account immediately after you’re finished. And never leave account documentation where anyone else might find it.
Though they don’t fall under the category of online security threats, trading stocks online does have the potential to create behavioral risks.
Perhaps the biggest is the potential for it to become an addiction. The internet makes trading easy. This could tempt you to trade more than is necessary or reasonable. This is largely the force behind day trading, which would not be possible without online trading.
Whether or not day trading is profitable is open to debate. But one fact that isn’t is that it generates a lot of trading fees. That’s good for brokerage firms but not for traders. Frequent trading can cause investor profits to be eaten up by a large volume of small fees, the kind that don’t seem particularly threatening at the time they’re being incurred. But over time, with excessive trading, they can seriously reduce return on investment.
Another significant threat is that online trading — like just about everything on the internet — is deceptively easy. It may cause you to underestimate the risks you’re incurring with your investing activities.
In the end, the quality of your investments, not the ease of trading, is what drives investing success. The speed and ease of online trading could even cause you to ignore important research in favor the perceived pursuit of quick profits.
These are not the types of problems that can be solved with advanced firewalls or passcodes. They require a keen awareness of the risks involved in online trading, a commitment to investment fundamentals and a strong dose of self-discipline.
Is It Safe to Trade Stocks Online
Generally speaking, it’s safe to trade stocks online. But that doesn’t mean you’ll never be affected by threats. Online brokers are doing all they can to minimize those threats. But as a responsible online trader, you also have to do your part to implement your own security measures.
Despite the potential security threats, the benefits of online trading certainly outweigh those threats. Online trading enables you to participate in true self-directed investing, the kind where you not only choose your investments but also execute the trades. And there’s no question online trading enables you to avoid the complicated paper trail that was required back in the days before online trading was a thing.
Review your broker’s security measures, implement your own and use common sense when trading and you should come out unscathed.