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ith more than 160 brokerage firms offering online investing, it's no wonder millions of Americans
are investing online. By 2003, Forrester Research, Cambridge, Mass., predicts 9.7 million U.S.
households will manage $3 trillion in online brokerage accounts.
So how can you tell if online investing is for you? The answer depends on how comfortable you are
managing your money, investing your money, and making financial decisions on your own. Other factors
may contribute to your decision about investing online; reading the pros and cons may help you decide:
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Useful resources
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The rewards of investing online:
1. Low cost—Increased competition among online firms causes competitive pricing. This
could mean more savings for you, but do your homework before choosing a brokerage. "A lot of times
there are costs underneath the price that's advertised. For example, will you pay extra for limit
orders? Is there a cost for quotes? You have to look not just at the trade price, but the overall cost
involved," says John Henry, vice president of member service sales, for CUNA Mutual Group in
Madison, Wis.
Discount brokerages generally charge between $7 and $15 per trade. Keep in mind, the lower the
price, the fewer services that may be available. You may want more customer service, mutual fund
trading, or "real-time" quotes that could cost extra. Mid-priced services range from $15 to $20 and
high-end brokerage firms charge anywhere from $20 to $30 per trade. High-end brokerage firms usually
offer 24 hour phone support, help features, and more in-depth research.
2. Convenience—You can access your account information, monitor your investments, and
initiate trades 24 hours a day, seven days a week. However, don't assume that when you click the mouse
to buy or sell that your transaction is processed immediately. Sometimes, especially during heavy
trading periods or after markets close, your transaction isn't processed until minutes or hours later.
So, the order you wanted for stock at $10 per share could go up or down by the time your purchase
actually is executed.
3. Unlimited information—It doesn't matter what skill level you're at—beginner or
a long-time professional—the Web has answers to almost all your questions. Many online brokerage
firms have education sections. Other Web sites not associated with brokerage firms also offer
investing information and tools to help you learn the online investing process.
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Not every
online brokerage firm
offers a full array
of customer services,
so you may not
be able to
ask questions
or for advice.
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The risks of investing online:
1. You're in control—A double-edged sword, you decide how much you want to invest,
where, and how much research you want to do before investing. Not every online brokerage offers a full
array of customer services, so you may not be able to ask questions or for advice. Know the rules of
investing first and seek assistance when needed. Ignorance of trading rules has cost online investors
needless expense and lost profits.
2. Potential technical glitches—Be prepared for possible computer crashes, screen
freezes, and sluggish sites that may not complete your transaction. Experts say it's best to have
alternate methods of getting through to your broker.
3. Too easy access—Online investing could be too convenient. Some investors may
want to move in and out of the market more often. "There is evidence to suggest, at least initially,
when people have access to these trading opportunities they're likely to use them and use them in such
a way that they actually lose money, or at least they don't make as much money as they would with the
buy-and-hold strategy. The temptation is too great for some people," says David Brown, professor of
finance at the University of Wisconsin-Madison.
4. It could lead to trouble—Trading online could become a game to some people,
according to Linda Barbanel, a Manhattan, N.Y., psychotherapist and the author of "Sex, Money & Power." There
are warning signs if you begin to think of online trading as a game: If you have to borrow money, take
out a second mortgage, create credit card debt, quit a job to devote more time to trading, or if you
have to make trades every day.
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Start with
a smaller amount
and, once your
confidence grows,
decide whether
or not you wish
to add more.
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So how do you start investing online?
Investing online is easy, but take certain steps and acquire some knowledge before you begin:
Understand investing: Read and comprehend financial reports and be familiar with the
terminology investors use. Attend investing or financial seminars that may be sponsored by a brokerage
firm, university, or through your credit union. You also could take a college course about personal
finance.
Reading financial newspapers or financial Web sites also will help you learn about investing (see
Useful resources). "There are many sources online you can rely on besides
the brokerages. You can read financial newspapers, for example, The Wall Street Journal, Investor's
Business Daily, or Barons. There are Web sites specifically created for educating
investors—Motley Fool, CBS MarketWatch, Red Herring, and many others," says Brown.
You also should know your investment personality. Set up a test portfolio, with no real money
involved, of equity and fixed-income funds that reflect your investment personality—risk-taker or
slow and steady—and how much money you want to make from investments. Monitor it for a while to
see how your choices are performing. Once you feel comfortable with the choices you've made, try
investing a small portion of your money. Or take a quiz to determine if you're ready to invest online
at www.investingonline.org.
Don't drop your broker or mutual funds just yet: The biggest risk to online investing is
inexperience. If you won't have time to research a brokerage firm or a company you want to invest in,
or the time to monitor your portfolio, consider using a full-service firm or other investing options.
Experts say those who use Internet trading as a substitute for a long-term financial strategy may one
day wish they had used other investing options.
Do your homework: Research online investing and online brokerage firms thoroughly. Compare
prices and keep in mind that the lowest price brokerage firm could end up costing you more due to
hidden fees or trading frequency.
Check with your credit union to see if it offers options such as investing online. It's convenient
to have your investing service, credit union home branching, and online bill presentment all in one
place so you don't have to jump around to two or three different sites, according to Henry.
What you need to get started: To begin investing online, you'll need a computer with Internet
access, at least a 128-bit compatible Web browser such as Netscape 3.0 or Internet Explorer 3.0 or
higher, and money. Some brokers require as little as $1,000 or securities of equivalent value to open
an account.
Start small and diversify: Don't invest your entire life savings in an online account. Start
with a smaller amount and, once your confidence grows, decide whether or not you wish to add more.
Many people assume investing online only means investing in stocks or that stocks are the only way
to make large amounts of money. This is not necessarily true—while stocks may earn large amounts
of money, they also can cause you to lose just as much, if not more. Have a diversified portfolio that
contains stocks, mutual funds, bonds, and cash. Keep in mind your risk tolerance and time frame, or
how soon you want to use the rewards of your investments.
Use limit orders and remember that frequent trading can harm you: Limit orders specify a
maximum price for buying or a minimum for selling. For example, if you put in a $25 limit order for a
stock trading at $26, you may not get it—but you won't pay $125 for it either. Online brokerage
firm E*Trade, for example, will not take an order for an initial public offering (IPO) unless it's a
limit order.
Investing online makes it easy to trade and to trade often but, financial experts say, the more you
trade, the worse you do. According to Newsweek, when investors go online they start trading
twice as often as they did before and remain 30% more active even after they settle down. As U.S.
Securities & Exchange Commission (SEC) chairman Arthur Levitt said last year, "the stock market is
best used for investing, not trading."
Protect yourself: Brokers make it easy to open an account online, but they don't always make
it clear just what you're getting into. Read the fine print, ask questions, and research a firm
thoroughly before you invest. Forrester Research predicts three in four Web-only brokerages eventually
will go bankrupt or be acquired.
Use the Internet wisely and don't rely on Internet chat rooms or bulletin boards—they're
sources of unreliable information. "Illegal promotions have always been around and they'll continue to
be around. One has to ask, Does something seem too good to be true? Most likely it is too good to be
true," says Brown.
SEC chairman Levitt says it's important to keep in mind that "Investing in the stock
market—however you do it and however easy it may be—will always entail risk. Keep in mind the three
golden rules for all investors: Know what you are buying, know the ground rules under which you buy
and sell a stock or bond, and know the level of risk you are undertaking. Online investors should
remember that it's just as easy, if not more, to lose money through the click of a button as it is to
make it."
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Look underneath
the price.
For example,
will you pay extra
for limit orders?
Is there a cost
for quotes?
"Investing in
the stock market—
however you do it
and however easy
it may be—
will always
entail risk."
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| Useful resources |
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The Internet provides much information about investing online. Here are just a few sites that can
help you get started:
- U.S. Securities & Exchange Commission
The primary mission of the SEC is to protect investors and maintain the integrity of the securities
markets. This site has an investor education and assistance section and a section called the Edgar
Database where you can read filings from public companies.
- North American Securities Administrators Association Inc. (NASAA)
This international organization provides investor protection through education. If you wish to
protect yourself from securities fraud, you'll find the information on this site useful.
- National Association of Securities Dealers Inc. (NASD)
This site offers important information about how to invest wisely, avoid Internet securities scams,
resolve disputes with brokers or brokerage firms, learn about the rules available to protect investors
when stockbrokers call, and find out about your broker. (See next month's issue of Home & Family
Finance Online for information about how to check up on your broker.)
- American Association of Individual Investors (AAII)
Education is available here about stock investing, mutual funds, portfolio management, and
retirement planning. It's a not-for-profit organization that provides investors with the knowledge and
tools needed to manage their finances effectively and profitably.
- The Motley Fool
This site provides information about investment strategies, retirement planning, personal finance
management, and how to manage your portfolio.
- Investing Online Resource Center
This independent, noncommercial organization provides information and tools to consumers investing
online or considering doing so.
Online publications:
Books:
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