Made some money over the summer and have it sitting in the Credit Union savings account?. You might be better off with your money in the stocks, bonds, or money market accounts. On-line brokerages have made investing much more accessible and simpler. The purpose of this article is to describe some benefits and detriments of investing in stocks and bonds through an on-line brokerage.
Benefits of On-Line investing
Low commissions: Whereas a full-service brokerage such as Merrill Lynch or Smith Barney charges a percentage of the transaction amount (commonly more than $100), on-line brokers charge a flat commission per trade. Charles Schwab, most voluminous on-line broker, charges a minimum of $39 a trade. Brokerages like Scottrade or Suretrade, on the other hand, charge as little as $7 per stock trade.Easy access to information: The websites of on-line brokerages allow users to obtain stock quotes, usually with a twenty minute delay (although some brokerages provide real-time quotes either for free or fee). In addition, you can configure your on-line brokerage to notify you of new items relating to stocks you own or are considering. Stock screening tools allow you sort and filter a large amount of stocks according to prescribed criteria (such as finding the computer companies with the highest margins). Graphing tools allow you to compare stock prices over time.
Constant monitoring of accounts: Instead of waiting until the end of the month for your Merrill Lynch account statement, you can monitor their portfolios continuously. This convenience is advantageous during periods of high volatility, when stock prices are experiencing large swings, because investors can make investment decisions with up-to-date information.
Commitment to research: Although a stockbroker can provide valuable advice, the absence of a stockbroker forces the on-line investor to research stock ideas alone. In the process, on-line investors become more disciplined and discriminating in their stock selection. Investors can use the variety of tools provided by their on-line broker and other investment services to perform this research.
Potential Detriments of On-line Investing
Operational failure: During periods of heavy volume trading (when many investors are executing trades during a small time period), some on-line brokerage websites have become non-functional. For example, if the market is crashing (or soaring), you may not be able to log on to your on-line brokerage so that you can sell (or buy) your stock holdings.
Delayed trade execution: Your trade, more often than not, will not be executed at the time you click the buy or sell button. There is often a lag between the time trades have been submitted and trades have been executed. This is not significant for long-term traders, however, for day-traders a trade submitted at one price may vary greatly from the actual executed price.
Lack of advice: The larger brokerages like Merrill Lynch and Charles Schwab can give valuable advice on individual securities, distribution of investments, suitability of investments, gauge the risk of your portfolio. On-line brokerages do not provide these same services, but instead provide the tools for you to do your own research.
Gunslinger mentality: If on-line trading appeals to you to get a quick buck take your money to Atlantic City. The ease-of-use and quick access to trading may cause some individuals to hasty decisions without performing diligent research. If you, however, keep in mind that investing requires diligence, analysis, and reasonable judgement. It is the opinions of the authors that investing for the long-term is the most profitable strategy.
For more background information on on-line investing, and investing in general, the Motley Fool website is excellent. The March 15, 1999 issue of Barron's magazine reviews and ranks various on-line brokerages. Learning about investing and beginning to invest now are essential to a successful financial future. Employers usually provide employees with 401(k) plans, which is basically a retirement plan composed of securities. Learning the basics of investing now will allow you to make informed decisions about your future 401(k) plans, individual retirement accounts, and pension plans. If you have any questions about investing or personal finance please send your questions to Gene Yoshida or Adam Rashid and we will attempt to answer them in this space in the future.