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:
The rewards of investing online:
1. Low costIncreased 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. ConvenienceYou 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 informationIt doesn't matter what skill level you're atbeginner or a long-time professionalthe 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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The risks of investing online:
1. You're in controlA 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 glitchesBe 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 accessOnline 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 troubleTrading 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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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 investorsMotley 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 personalityrisk-taker or slow and steadyand 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 truewhile 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 itbut 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 boardsthey'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 markethowever you do it and however easy it may bewill 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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|© 2000 Credit Union National Association Inc.|