Online investing

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Investing online, or self-directed investing, has become the norm for individual investors and traders over the past decade with many, if not all brokers now offering online services with unique trading platforms.

Overview

In the past, investors had to call up their brokers and place an order on the telephone. The broker would then enter the order in their system which was linked to trading floors and exchanges.

With the advent of the internet, investors can now enter orders directly online, or even trade with other investors via electronic communication networks (ECN). Some orders entered online are still routed through the broker allowing agents to approve or monitor the trades. This step assists in the protection of both the client and brokerage firm from unlawful or incorrect trades which could affect the client’s portfolio or the broker’s license.

Online brokers are most often referred to as discount brokers, due to their lower fees as opposed to full service brokers who also give advice to clients.

Before choosing to invest or trade online it is important for investors to research the online brokers that they plan to employ, assuring that they are licensed within their state or provincial jurisdiction. This step will help to protect investors from falling victim to unlawful or illegal securities schemes (e.g. Boiler Room scams). The USA Federal Government provides practical tips to avoid investment scams via their OnGuard Online website. One tip is "Don't believe everything you read in online newsletters, investing blogs, or bulletin boards. Fraud artists often float false information and "hot tips" as part of their efforts to rip-off investors or manipulate the market for a particular security." They also advise that one "Turn to unbiased sources when researching investments, such as the U.S. Securities and Exchange Commission (via their EDGAR database), your state securities regulator, and securities industry self-regulatory organizations (including the Financial Industry Regulatory Authority (FINRA), Amex, and Nasdaq)." ^[1]

Investors must also fully understand the potential risks of investing without the help of a trained Stock Broker or Investment Advisor. These professionals are experienced both in trade and education and forgoing their advice could be costly. For this reason, most online brokers offer a number of investment tools.

Once the above two steps are complete it is dually important to research the sector, business and financial statements of each company whose stock they plan to purchase. This, along with diversification and basic portfolio theory, will assist to mitigate some of the risks associated with the volatility in both the stocks and the stock markets.

Once investors have chosen an online brokerage that best suits their needs, they will be provided a trading platform. This platform acts as the hub, allowing investors to purchase and sell securities (fixed income and equities), options, mutual funds, and foreign exchange. Included with the platform are tools to track and monitor securities, portfolios and indices, as well as research tools, real-time streaming quotes and up-to-date news releases; all of which are necessary to trade profitably. Often, more robust research tools are available such as full, in-depth analyst reports and analysis, and customized backtesting and screeners to see how particular investment strategies would have been realized during different historical periods.

Some of the popular online brokers include: E*Trade, IDealing, Scottrade, TD Ameritrade, and Fidelity. Schwab is an example of a hybrid broker combining a traditional, brick-and-mortar brokerage house with discounted trading online, with the usual benefits of both available to customers. Commissions vary from broker to broker, depending on the services included with the account.

References

External links

• List of brokerage firms by country
• Addressing the risks in online stockbroking - UK FSA (Financial Services Authority)
• EDGAR database - U.S Securities and Exchange Commission