Investing Online? Be Safe, Not Sorry
By: Linda Greider Source: AARP Bulletin Today Date Posted: October 2001
Just a few years ago, it seemed the only people investing over the Internet were either professionals or risk-loving, youthful "day traders" buying and selling stocks in volatile markets with dizzying speed.
Nowadays more investors of all ages—from 25-year-olds saving money for a house to 80-something retirees tweaking their portfolios—hold more than 11 million online trading accounts.
The popularity of online investing is understandable: It's relatively cheap, convenient, fast and, most experts believe, secure. But for some, trading in cyberspace can be intimidating, and like all investing, it does have risks.
"Online investing," says AARP legislative representative Roy Green, "compounds two of the most complicated things people deal with: the complexity of the computer and the complexity of making investment decisions in a variety of markets."
Nevertheless, more people take the plunge every year, and most of them are pleased with their experience. A recent AARP survey of computer users who go online indicated that more than 40 percent of online traders are over 45. Of these, two-thirds expressed satisfaction with their experience, and only 7 percent were dissatisfied.
Online investing has become so popular that even full-service brokerages such as Merrill Lynch and Salomon Smith Barney now offer it.
They were forced to. People like Veronica Finnis, a 60-year-old housewife in Alexandria, Va., moved her account to an online broker several years ago when her long-term brokerage firm told her she shouldn't fool with online investing because "there's no future in it." Now her former firm actively recruits online investors.
One attraction for Finnis was the potential discounts. In fact, for 77 percent of online investors in AARP's survey, price was the main draw. Online trades typically cost from $6 to $30, depending on the number of trades the customer makes and the type of trade. Similar trades made by phone through a full-service broker can cost many times that.
Full-service brokers with online trading offer other services. In a typical arrangement, the client pays a flat fee of 1 or 2 percent of the portfolio value, which covers the services of an investment adviser, access to the firm's research and unlimited trades.
Cost saving isn't the only possible advantage of online investing. Proponents cite the elimination of the middleman, greater personal control over investments and the convenience of researching and trading stocks without leaving home.
But the automated ease can also be hazardous, leading to substantial losses or at least, in the case of Tony Wells, missed gains. Wells, 34, of New York City, is an experienced investor who recalls the day he "went on autopilot and made a stupid and expensive mistake."
Intending to buy 700 shares of stock, Wells instead entered 70 on the trade screen.
"I confirmed my buy," he says, "but obviously not carefully." Later that day, his stock "popped," its share price rising substantially—but Wells missed out on 90 percent of the gain he could have realized.
Even so, says Eddie Reeves, a spokesman for Merrill Lynch, trading on the Internet "can be an efficient and effective" way to manage your finances. But, he adds, "the more time and effort you put in over time, the better results you tend to see."
Online investors who want a little handholding can sign on with a brokerage that offers online trading along with the consulting services.
Increasingly, discount online brokers offer investment information (although it varies in quality and complexity). But most discounters do not make investment recommendations.
While online trading seems to go smoothly for a majority of investors, the practice still raises concerns:
Security and privacy. These issues are a big worry, but many experts say that with care, consumers can make sure their transactions are secure.
"Compared with [making a trade over the phone with a traditional broker], a trade with an online brokerage has the security of a presidential detail," say Dave Pettit and Rich Jaroslovsky of the Wall Street Journal's online edition in their book "Guide to Online Investing" (Crown Business, 2000).
Online transactions are protected by several layers of security blankets. One is encryption, the scrambling of information that's indicated by a small key or lock symbol that appears in the corner of the screen.
Scams. Most of these scams tend to be less about technology and more about the investor's vulnerability to a hot tip.
While the Internet is a vast source of useful information, it can also be "a propagator of misleading and less than accurate information," warns Alan Alper of Gómez, Inc., a research firm that tracks online financial services. "Access to information on the Web can be a double-edged sword."
According to AARP policy adviser Sharon Hermanson, old-fashioned "pumping and dumping" is one way misleading information is used on the Internet. A tout, operating only with a screen name, offers false "insider" information in Internet chat rooms and message boards about a certain "hot" stock to run up its price, then sells his position in the stock. Investors who take the bait and buy the stock are left with losses as the price falls when the stock is dumped on the market.
Market experts point out that a more sophisticated and still legal form of pumping and dumping occurs every day when stock analysts at conventional brokerage houses recommend purchase of stock in companies their firm has ties to. These conflicts of interest raise risks for all investors.
Technical glitches. Internet investment chat rooms and message boards are full of complaints about problems placing orders, delays in processing trades or in confirming them, websites that are down or slow, the lack of timely stock quotes or the inability to get the best price for a stock.
Although these problems occur less often as technology improves, mistakes still occur, sometimes costly ones. The U.S. Securities and Exchange Commission reports that delays in processing a customer order can even result in unintended purchasing or selling of stock. If a customer doesn't receive a confirmation of a buy order and assumes the order didn't go through, he may send the order again, possibly buying twice as much as he intended.
Experts caution that while most firms now have procedures to prevent these problems, customers need to double-check that their orders have been executed.
Investor overconfidence. The vast amount of investing information on the Internet leads to a greater "perceived sense of control," says AARP's Hermanson, which can lead to more, or sometimes unwise, trades. Fifteen percent of online investors in AARP's survey said they had made an unwise trade that they would not have made trading the traditional way.
Laura Goodman, 58, of southern Vermont can attest to that. "A couple of times I bought tech stocks online that everybody was talking about and lost my shirt," she says. "I was too embarrassed to call my broker and say I wanted these stocks. He would have talked me out of it anyway."
Online addiction. Gamblers beware: Those "streaming" stock quotes moving relentlessly across the computer monitor, the charts and graphs, the theoretical portfolios, the constantly changing numbers can "become kind of addictive," says Alper of Gómez, Inc. And in cyberspace there's no one to hold back an impulsive investor.
The speed of the Internet may be more of an enticement to make fast, unresearched trades, but experts say that in general online investing overall is not unlike conventional investing. Both have risks, and both require homework on financial planning as well as investments.
In the eyes of some, the Internet's biggest benefit is allowing more people to participate in a practice once limited to a privileged few.
Linda Greider is a Washington-based freelance writer.
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