My friend and I were texting each other about the Red Sox World Series rout the other night -- way to go Sockies, how to beat 'dem Rockies! -- and, both being Boston natives, were having a grand old time.
My pal won some money on the Series and had a strange question for me. Or maybe my friend is strange without the question. He told me he was interested, now that he had some seed money, in entering the online stock trading world, and did I have any tips?
I'm not a huge fan of novice investors trading online -- at least on a constant basis. Too many day traders bit the bullet after the dot.com bust for me to recommend it. But, I'm not my buddy's nanny and he deserves a fair response.
With that in mind, here's my take on online trading:
First, beware the addictive nature of investing online. Studies show that online stock traders use the Internet an average of 11.6 hours per week; non-traders long on for only 8.4 hours every week. And, during most of those hours, money is changing hands. So you have to be ultra-careful trading online.
Of course, it is the Web we're talking about so the benefits are plentiful. Thanks to the Internet, superior financial advisory services are now available to larger base of customers – not just the $1 million-and-up crowd. With the technological advances and increasing competition that the Internet has created in the financial services industry, the average American now has access to financial planning tools and resources that were once available only to the rich, if at all.
That's a good thing.
Even more important that its broadening of the base of financial service options for consumers, the Internet has been instrumental in educating investors on the complexities of stocks, bonds, and mutual funds, and how to properly incorporate them into an investment portfolio (like yours truly and The Money Pit). Rare is the investment Web site that doesn’t offer investment tutorials, interactive classrooms, and plain old descriptions of investment terms and how they impact investors.
Investment company sites, in particular, have had great success hammering home basic investment tenets like investing fro the long term, investing on a regular basis, and creating solid investment goals. Twenty years ago, when most Americans depended on their company pension and Social Security income for their retirement savings, investors weren’t paying much attention to mutual funds and financial markets. Today, thanks in part to their own self-empowerment and the evolution of technology and the Internet, investors are more highly educated than ever and are subsequently playing a greater role in their long-term financial choices.
More Advantages of Investing Online
Risk aside, and I'll get to that key issue, there are many advantages of investing online. If you choose to go that route, you will find more as you pursue your investment strategy using the many Internet resources available to investors. Here are just a few of the benefits of trading and investing online:
Control. You don’t have to rely on your brokers’ being in the office at 9:30 AM, when the markets open, and you don’t have to worry about a broker’s being out to lunch when you want to make a purchase. If you're knowledgeable about investments and are comfortable making and living with your own decisions, control over your portfolio should be an advantage. It's your portfolio and you should ultimately be responsible for making it grow. You're the one who researches funds and initiates buy and sell transactions. And with online services, you won’t have to call your broker, wait for a call back, or listen to a spiel about the mutual fund the broker’s company is trying to sell. Plus, if you’re busy during the day, you place your trades any time you’re able to log in.
Access to Information. The Internet provides you with previously unavailable information on financial products and services. Investors interested in trading online can receive breaking industry news, analyst’s reports, and real-time stock quotes and account updates all from one Web site. You can take stock of your investments, review trading activity and initiate trades 24-hours-a-day, not just during daylight hours.
Convenience. The Internet gives you the ability to access your financial information from anywhere at any time. By employing the Internet, consumers are no longer restricted to making financial transactions at a physical location or during a firm’s hours. The Internet is especially convenient for customers who travel frequently.
Efficiency. The Internet gives you a platform for managing all of your finances. With a click of a mouse, consumers have access to past account statements and transaction histories without stockpiling paper. And the Internet now gives consumers the ability to review information from multiple financial providers on one site.
Low cost. Because of heated competition among online brokers, you’ll enjoy commission rates that have gone through the floor. Purchasing 50 shares of stock from a traditional broker may cost you $80. You could do it online for $10 to $15 -- even lower. By taking the online route, you could buy another three shares. And those buys can really add up.
Cons of Investing & Trading Online
You can lose all your money.
Seriously . . . you can.
Ironically, the ease of use of the Internet is the main reason. When it's so easy to trade online, you tend to trade online a lot. Many people get addicted to it. And trading all the time is a bad thing, especially for average investors. Warren Buffett had it right -- pick a handful of stocks and stick with them, he said. He also said that overtrading and taking on too much risk was foolish.
So know going in that trading online is like going to Vegas. Have a pre-determined amount of money you can afford to lose. If you lose it, walk away.
That's the trick. But like Vegas, where too often the action leads to a visit to a cardiologist and a ride home via Grayhound bus, online trading can leave you with nothing but lint in your pockets if you don't know what you're doing.
So the more education, the better. In my next blog, I'll provide some pointers on what to look for in a good investment web site.