Online investing

What Is Online Investing?

Online investing refers to the act of buying and selling financial assets, such as stocks, bonds, mutual funds, and Exchange-Traded Funds (ETFs), through digital platforms accessible via the internet. This approach falls under the broader category of Investment Management, enabling individuals to manage their own investment brokerage account without direct intervention from a traditional human broker. Online investing platforms provide tools and resources, allowing investors to research, execute trades, and monitor their portfolios from virtually anywhere.

History and Origin

The evolution of online investing is closely tied to advancements in technology and deregulation within the financial industry. Before the rise of the internet, investors typically relied on full-service brokers, who provided advice and executed trades for a fixed commission. A pivotal moment occurred on May 1, 1975, known as "May Day," when the U.S. Securities and Exchange Commission (SEC) abolished fixed commission rates on stock transactions, leading to the emergence of discount brokers.²¹, ²² These discount brokers offered lower fees by providing fewer services.

In the 1980s, trading began to transition towards electronic systems. However, it was the explosive growth of the internet in the mid-1990s that truly catalyzed online investing. Companies like E*TRADE and Ameritrade (now Charles Schwab) were pioneers, offering the ability for individuals to place orders and manage their investments directly online, bypassing traditional intermediaries and significantly reducing transaction costs.¹⁹, ²⁰ This shift democratized access to financial markets, making investing more accessible to a wider population. The SEC has since published investor bulletins on online investing, highlighting both its opportunities and risks.¹⁸

Key Takeaways

• Online investing allows individuals to buy and sell financial assets via internet-based platforms.
• It provides direct access to markets, often with lower commission fees compared to traditional brokerages.
• Investors are responsible for their own research and decision-making on these platforms.
• While offering convenience, online investing requires investors to understand associated risks, including market volatility and potential technical issues.
• The rise of online platforms has significantly broadened access to investment opportunities for retail investors.

Interpreting Online Investing

Online investing empowers individuals to take a hands-on approach to their portfolios. It means that an investor, after opening an account with an online brokerage, can directly choose and purchase various securities. This direct control requires an understanding of one's risk tolerance and the principles of asset allocation to construct a suitable portfolio. The interpretation of online investing largely revolves around self-direction, meaning the investor makes all trading decisions and manages their portfolio without constant guidance from a human advisor. This contrasts with traditional models where brokers often provide personalized advice.

Hypothetical Example

Consider Sarah, a new investor interested in buying shares of a technology company. Instead of calling a traditional broker, she decides to use an online investing platform.

1. Account Setup: Sarah opens a brokerage account with an online investing firm, funding it with $5,000.
2. Research: She uses the platform's research tools to analyze various companies, checking their financial statements, news, and analyst ratings. She identifies "Tech Innovations Inc." as a promising company.
3. Order Placement: Sarah decides to buy 10 shares of Tech Innovations Inc. She logs into her account, navigates to the trading section, enters the stock ticker symbol, the number of shares, and chooses a market order to execute the trade immediately at the current market price.
4. Execution and Monitoring: The order is executed within seconds, and the shares appear in her portfolio. She can now monitor the stock's performance in real-time, set alerts, and access news updates directly through the platform. Sarah appreciates the ability to manage her investment at her convenience and the low commission fees associated with the online platform.

Practical Applications

Online investing is broadly applied across various facets of the financial world, from individual financial planning to market analysis. Retail investors use these platforms to build and manage diversified portfolios, selecting from a wide array of asset classes, including stocks, bonds, and various funds. The accessibility and typically lower costs of online platforms facilitate greater participation in capital markets.

Furthermore, online investing platforms often provide extensive tools for market analysis, enabling investors to conduct their own due diligence before making decisions. They offer real-time data, charting capabilities, and news feeds, which are crucial for understanding market liquidity and trends. Regulators like FINRA also provide guidance and resources for investors navigating the online investment landscape, emphasizing the importance of understanding risks and ensuring platforms are legitimate.¹⁶, ¹⁷ This widespread adoption has also spurred innovations in diversification strategies, as investors can easily access a broader range of assets.

Limitations and Criticisms

Despite its advantages, online investing comes with several limitations and criticisms. A primary concern is the potential for investors, particularly those new to the markets, to engage in over-trading or make impulsive decisions driven by real-time market fluctuations. The ease of executing trades can sometimes lead to decisions based on emotion rather than sound financial analysis.¹⁵

Another limitation involves the absence of personalized financial advice that a human advisor can offer. While online platforms provide ample resources, they generally do not offer tailored guidance specific to an individual's complex financial situation or changing life goals. This can be a significant drawback for investors who require comprehensive financial planning or navigating complex market conditions. Technical glitches, internet outages, and cybersecurity risks also pose challenges, potentially disrupting trading activities or compromising personal information.¹⁴ Regulatory bodies continuously monitor online investment activities to protect investors, issuing warnings about potential scams and emphasizing the importance of dealing with licensed entities.¹², ¹³ The Federal Reserve Bank of San Francisco has noted the implications of online brokerage growth, including its intersection with robo-advising.

Online Investing vs. Robo-advising

While both online investing and robo-advising rely on digital platforms, they differ significantly in their approach to portfolio management.

Online investing gives the investor maximum control, allowing them to choose specific stocks, bonds, or funds and execute various order types like limit orders. Robo-advisors, conversely, automate the investment process based on an investor's stated goals and risk tolerance, often using algorithms to rebalance portfolios and optimize for taxes. The confusion often arises because both operate digitally, but robo-advisors are a specific type of automated online investment service, whereas online investing is a broader term encompassing any self-directed trading via the internet.

FAQs

What types of investments can I make through online investing?

You can invest in a wide range of financial instruments through online investing platforms, including individual stocks, bonds, mutual funds, Exchange-Traded Funds (ETFs), options, and sometimes even cryptocurrencies, depending on the platform.

Is online investing safe?

Online investing can be safe if you use reputable, regulated brokerage account platforms. These platforms employ security measures like encryption and two-factor authentication. However, safety also depends on your own investment decisions and understanding of market risk tolerance. Investors should be wary of unregulated platforms or unrealistic promises.

How do I choose an online investing platform?

When choosing an online investing platform, consider factors such as the fees charged (e.g., commission fees, account maintenance fees), the range of investment products offered, the quality of research tools and educational resources, customer service availability, and regulatory compliance. Look for platforms registered with financial authorities like the SEC and FINRA.

Can beginners use online investing?

Yes, beginners can use online investing platforms. Many platforms offer user-friendly interfaces, educational materials, and even simulated trading accounts to help new investors learn the ropes. However, it's crucial for beginners to start with a clear understanding of investment basics, diversification, and their personal risk tolerance before committing real capital.

What are common order types in online investing?

Common order types in online investing include market orders, which execute a trade immediately at the best available current price, and limit orders, which allow you to set a specific price at which you want your trade to be executed. Other types include stop orders, stop-limit orders, and trailing stop orders, each designed for different trading strategies.¹, ²³⁴⁵, ⁶⁷⁸, ⁹¹⁰, ¹¹