How the Internet Has Transformed Investing
In the course of the years, the Internet has continually proved to be the most disruptive and revolutionary advancement in the world. It has completely revolutionized the way people operate, interact and conduct business today. It has greatly transformed areas such as the entertainment world, the shopping and communication centers, and even in the sphere of investment. In particular, the Internet has been a great leveler for retail investors, providing information and cutting costs in ways that would have been impossible not long ago.
Changes in the Ways of Information Accessing
The internet has definitely made the life of retail investors easy and the most prominent factor in easing there life has to be the availability of information. Before the Internet existed, retail users lacked resources for obtaining financial information. To start with, there was no Internet; except for physically traveling to a local library where clients could read materials on several companies or industries or studying some books related to the stock, bond, and mutual fund markets.
As an additional option, investors could ask companies to send them the latest data, namely, the annual report. Yet, this also had its pitfalls – large reports incurred postage cost and great time waiting for materials because the company had to wait until the investor relations unit of the firm was ready and sent a printed report.
Thanks to the Internet, this entire process has been made simpler. Investors can now wait for publications of the SEC’s financial statements because they are readily accessible through its official website. Large financial documents can be retrieved in a matter of seconds and can also be formulated through word or keyword searches, making the process of look ups quicker and more effective. Additionally, businesses have a dedicated space for their investor relations where all annual reports, SEC filings, and presentations for investors can be found without any trouble.
In addition, many websites offer a large amount of financial data for investors, suspecting its value and possible application. In the past, brokers and professional investment managers had an upper edge over retail investors, because such resources were very costly and were used for intensive security analysis. This, however, has changed as a lot of information is available in countless websites at no extra cost, and even some of services which are for free are reasonably inexpensive.
Diminished Transaction Costs
Reduction of transaction costs is the third benefit that networks or the Internet brings to investing. In particular, the cost of commission to buy and sell stocks has decreased significantly over the past several decades. Nowadays, it is quite common for retail brokerage firms to offer trades in stock for about ten dollars per share! In fact, this is an enormous shift from the era prior to the development of discount brokerage models when the market was dominated by full-service brokers who charged much higher commission rates.
As an illustration, the article within “Money Magazine” in 1992 clearly illustrated the level of the ‘costs’ faced by ‘traders’ prior to the rapid growth of investment internet services. A full-service broker at that time would have charged at least 2.5% commission in every sale of stocks. The article provided evidence of an example of a $250 commission to sell 100 shares of a price of $100 per share stock. These rates today are very dear.
With the advent of electronic communication networks that allow the exchange of trade related data across the internet, the act of trading itself has also changed. High frequency trading (HFT) has certainly been a subject of great debate as being one of the prime reasons among others for increase of volatility in the stock markets but it is also noted that the HFT has contributed to narrowing down bid-ask spreads. Bid ask spreads is the difference between the rate buyers want to pay for an asset and the rate at which sellers want to sell that particular asset, and such spreads have reduced tremendously. Nowadays, spreads are only a few cents wide, while in the past when they were considerably larger, they enabled brokers to earn much more from each trading deal.
Other Important Additional Benefits
A research report issued by the Wharton School in 2000 brought out three fundamental changes in relation to the Internet which have impacted the practice of investing.
The first is a central tenet of the study – i.e. more transparency of the processes. The Internet made it possible for a much larger number of investors to seek and process information leading to a better understanding of how the securities in a company should be valued.
The other change that the authors included is price discrimination. With the coming in of the Internet, the fairly steep commission costs that were prevalent due to the presence of traditional full service brokers started to vanish. This has consequently lowered the margins involved in carrying out any financial transaction.
The last change in focus for the authors was the notion of disintermediation. This concept relates to the inability of market participants to reach providers of full brokerage services or advisers. Investors are now however able to do their own research and execute their own trades eliminating the need for the expensive intermediaries who shaped the market in the past.
Conclusion
In conclusion, it can be viewed that with the advancement of the Internet, average investors are empowered with capability to obtain information and resources, thus altering the investment behavior of individuals. It has not only enhanced the availability of the research information but it has also decreased the costs incurred by market players. All these improvements have, however, transformed the opportunities available to investors, changing the manner in which investments are made forever.
