Investing online
Encyclopedia
Investing online, or self-directed investing, has become the norm for individual investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...

s and trader
Trader (finance)
A trader is someone in finance who buys and sells financial instruments such as stocks, bonds, commodities and derivatives. A broker who simply fills buy or sell orders is not a trader, as they are merely executing instructions given to them. According to the Wall Street Journal in 2004, a managing...

s over the past decade with many, if not all broker
Stock broker
A stock broker or stockbroker is a regulated professional broker who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors...

s 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
Internet
The Internet is a global system of interconnected computer networks that use the standard Internet protocol suite to serve billions of users worldwide...

, investors can now enter orders directly online, or even trade with other investors via electronic communication network
Electronic communication network
An electronic communication network is the term used in financial circles for a type of computer system that facilitates trading of financial products outside of stock exchanges. The primary products that are traded on ECNs are stocks and currencies. The first ECN, Instinet, was created in 1969...

s (ECN). Some orders entered online are still route
Routing
Routing is the process of selecting paths in a network along which to send network traffic. Routing is performed for many kinds of networks, including the telephone network , electronic data networks , and transportation networks...

d 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
Discounts and allowances
Discounts and allowances are reductions to a basic price of goods or services.They can occur anywhere in the distribution channel, modifying either the manufacturer's list price , the retail price , or the list price Discounts and allowances are reductions to a basic price of goods or services.They...

 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
Boiler room (business)
In business, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock or committing outright stock fraud...

 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
EDGAR
EDGAR, the Electronic Data-Gathering, Analysis, and Retrieval system, performs automated collection, validation, indexing, acceptance, and forwarding of submissions by companies and others who are required by law to file forms with the U.S. Securities and Exchange Commission...

 database), your state securities regulator, and securities industry self-regulatory organizations (including the Financial Industry Regulatory Authority
Financial Industry Regulatory Authority
In the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...

 (FINRA), Amex
American Stock Exchange
NYSE Amex Equities, formerly known as the American Stock Exchange is an American stock exchange situated in New York. AMEX was a mutual organization, owned by its members. Until 1953, it was known as the New York Curb Exchange. On January 17, 2008, NYSE Euronext announced it would acquire the...

, and Nasdaq
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...

)."

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
Financial statements
A financial statement is a formal record of the financial activities of a business, person, or other entity. In British English—including United Kingdom company law—a financial statement is often referred to as an account, although the term financial statement is also used, particularly by...

 of each company whose stock they plan to purchase. This, along with diversification
Diversification (finance)
In finance, diversification means reducing risk by investing in a variety of assets. If the asset values do not move up and down in perfect synchrony, a diversified portfolio will have less risk than the weighted average risk of its constituent assets, and often less risk than the least risky of...

 and basic portfolio theory, will assist to mitigate some of the risks associated with the volatility
Volatility (finance)
In finance, volatility is a measure for variation of price of a financial instrument over time. Historic volatility is derived from time series of past market prices...

 in both the stocks and the stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

s.

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
Fixed income
Fixed income refers to any type of investment that is not equity, which obligates the borrower/issuer to make payments on a fixed schedule, even if the number of the payments may be variable....

 and equities), options
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...

, mutual fund
Mutual fund
A mutual fund is a professionally managed type of collective investment scheme that pools money from many investors to buy stocks, bonds, short-term money market instruments, and/or other securities.- Overview :...

s, and foreign exchange
Foreign exchange market
The foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...

. Included with the platform are tools to track and monitor securities, portfolios and indices
Index (economics)
In economics and finance, an index is a statistical measure of changes in a representative group of individual data points. These data may be derived from any number of sources, including company performance, prices, productivity, and employment. Economic indices track economic health from...

, 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
Backtesting
Backtesting is the process of evaluating a strategy, theory, or model by applying it to historical data. Backtesting can be used in situations like studying how a trading method would have performed in past stock markets or how a model of climate and weather patterns would have matched past...

 and screeners
Option screener
An option screener is a tool that evaluates options based on criteria and generates a list of potential trading ideas. Most people who trade options are technical traders. It essentially means they look for patterns in charts. Also they use statistical correlations and deviations and give them...

 to see how particular investment strategies would have been realized during different historical periods.

Some of the popular online brokers include: E*Trade, Scottrade
Scottrade
Scottrade is a privately owned American discount retail brokerage firm headquartered in St. Louis, Missouri. Its Founder, President and CEO is Rodger O. Riney. Scottrade has 500 branch offices around the U.S...

, TD Ameritrade
TD Ameritrade
TD Ameritrade is an American online broker with over 6 million U.S. customers, and many more internationally, that has grown rapidly through acquisition to become the 746th-largest US firm in 2008. TD Ameritrade Holding Corporation is the owner of TD Ameritrade Inc...

, and Fidelity
Fidelity Investments
FMR LLC or Fidelity Investments is an American multinational financial services corporation one of the largest mutual fund and financial services groups in the world. It was founded in 1946 and serves North American investors. Fidelity Ventures is its venture capital arm...

. Schwab
Charles Schwab Corp.
The Charles Schwab Corporation , is an American brokerage and banking company, based in San Francisco, California. It was founded in 1971 by Charles R. "Chuck" Schwab, as a traditional, brick and mortar brokerage firm and investment newsletter publisher. In 1973, the company name changed from First...

 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.
Commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...

s vary from broker to broker, depending on the services included with the account.

External links


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