Investing Unit 9: Investing on the Internet

December 01, 2008 Print Friendly and PDF




The computer databases and information for investment decisions are no longer reserved for big institutional investors. The Internet has dramatically changed investing by opening Wall Street to every individual investor with a computer and Internet access.

Several things make the Internet appealing to investors. Once you have the hardware, software, and connection to the Internet, the cost of getting information is low. In fact, many of the financial newspapers, magazines, and financial network sites are free. Depending on how elaborate and detailed the information you want, you can get lots of free information and some information for minimum monthly fees.

Contents

Advantages of Investing Resources Online

Going to the Internet for investing information is appealing because you are in control. The Internet is very hands-on. If you want to be actively involved, just point and click. Internet investing is also very private and can be done at home anytime. You can do many different kinds of financial transactions on the Internet. You can buy and sell stocks, bonds, and mutual funds as well as find the best rates on insurance, mortgages, credit cards, and airline tickets. The list of items you can buy and sell on the Internet is growing all the time. You can move money from one bank account to another, you can check on the value of your portfolio, and you can get an instant report on a hot new company. By eliminating the salesman, the broker, or the financial adviser, you’ve also accepted all the risks of the investment decision.

What kind of investing help is available on the Internet? First, printed information in the form of magazines and periodicals is present in cyberspace, including major publications such as:

  • Investor’s Business Daily
  • McGraw-Hill’s Business Week
  • Wall Street Journal
  • Smart Money Magazine
  • Time Warner’s Money magazine
  • Fortune magazine

Newswire services and television broadcasters are also delivering investing information online.

The Internet is not necessarily a passive medium. You can receive personalized updates about investments and have business and industry news sent to you automatically—weekly, daily, or several times a day depending on your interests and needs (e.g., through RSS feeds or automated e-mail messages).

Through the Internet, you can find out what other investors are doing. Too busy to join a club but want to ask questions or "listen" to conversations of other investors? You can do that through organized e-mail sessions called "chat rooms" and discussion forums. Chats on investing and other financial topics are available through the eXtension personal finance community (see www.extension.org/personal_finance).

The Internet can aid the individual investor or investment club in the decision-making process. You can study stocks and mutual funds, read annual reports, and obtain stock quotes—available free through many sites. You can also set up a portfolio of investments you own or are "watching."

Disadvantages of Investing Resources Online

There are also disadvantages of online investing resources. The ease of the Internet can be a burden. Unless you resist the addictive nature of trading activity, you can find yourself trading simply because you can, rather than because you should. Investment discipline is an issue. To avoid the pitfall of the easy trade, a sound financial strategy is more important than ever.

News via the Internet reaches everyone very swiftly. But that urge to act on the financial news, or "hot tips," gets many investors in trouble. Research shows that among buyers of more volatile stocks, those who ignored the news earned more than twice as much as news junkies.

Research in the Quarterly Journal of Economics published in 1997 compared investors who watched stock funds monthly and those who checked once a year. The monthly watchers concentrated on interim volatility and moved money into lower-earning bond funds, whereas the yearly group stuck with the stock fund and ended up with twice as much money. The more you check your investments, the more they’ll seem to bounce up and down. Remember, investing is a long-term proposition. You don’t have to watch the market and your investments every day. And don’t rush to buy a stock "in the news" on the Internet.

"Churning" is a term for turnover of your portfolio. Individuals should beware of investment professionals who are constantly selling and buying investments within a portfolio—churning to make money on commissions. But when you are in charge of your own portfolio, you can also be susceptible to selling and buying too frequently. By forgetting your long term strategy, you, too, will be guilty of wasting money on commissions—even if online commissions are low. Some individual investors have reported increasing their trades from six a month to 60 a month. Don’t let this happen to you.

Investing Online: Choosing an Internet Brokerage Firm

A number of brokerage services have started online trading services. Some are new companies established for Internet trading only, while others are the newest offering in service from some long-standing brokerage firms. The major issues in choosing an online broker are cost, access, service, and support. Whichever you choose to use, there are several criteria you might consider before you actually "trade" online.


Features to look for are:

  • Low commissions
  • Available technical support
  • Low monthly fees
  • Variety of products and research links
  • Free and unlimited real-time quotes
  • 24-hour access to place trades


Online brokerage firms may advertise a low-cost online trade, but be sure to investigate all the costs. Some firms charge a flat fee plus some pennies, for example two cents, per share traded. Another firm may charge a low fee for a market order but more for an odd lot order (a round lot is an even multiple of 100 shares, anything else is an "odd" lot). Some firms charge an "activity fee" which is assessed on an annual basis. This fee is charged to account holders who are less active than others. Be sure to see how you fit that definition or ask to get the fee waived.

Some brokerage firms offer special offers for investment clubs that establish an account with them and trade the club’s investments through the online broker. Shop around and compare at least three competing firms. Be sure to read the fine print before your club chooses one online broker over another.

What about online security, an issue most commonly mentioned by people new to online investing? The first issue is protection. What will you do if your online broker goes out of business? Most brokers have Securities Investor Protection Corporation (SIPC) account insurance of $500,000 as a base amount. Many firms add secondary coverage raising the protection to millions of dollars. The second issue is online security of the financial transactions. The computer software referred to as a browser is the system that allows you to navigate the Internet. Online security is accomplished by encryption, or coding, that occurs between the browser and the Internet site. Encryption makes it nearly impossible for someone to enter unauthorized trades or observe your account details on the Internet. Some online brokers offer dual password access, meaning that the partners in the investment club, for example, can view the online account and investments and use the brokerage resources. A second password is required for actually executing a buy or sell order.

How to Get Started Investing on the Internet

To get started investing online, go to the online investor Web sites and take a "test drive" or a demonstration which you’ll find on most of the Web sites. After you’ve selected the online broker of your choice, you’ll need to complete an account application. You can do this by completing the online application form or by printing the form, filling it in, signing and mailing it with a check. The minimum to open an account is usually between $1,000 and $15,000. An online application may speed up the process of opening your account but will require you to fund the account with your credit card, not a debit card. You will be notified by e-mail when your account is established and you may begin placing buy and sell orders online.

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USDA / NIFA

This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.