The internet and rapidly advancing technological discoveries have played a crucial role in the rise of online trading. It has also changed how we interact with music and movies, and how we play games. This has been especially significant for retail investors. We take a look at what has changed and why.
How Things Were
Prior to the internet, retail investors had to rely on their local libraries to get information on trading, select the best companies to trade with, and obtain financial guides. The library also answered the need for knowledge of mutual funds, bonds, and stocks. If they wanted to invest in stock in a company, the investor had to approach the company directly to have access to their financial reports. The report would be printed out and posted via mail, slowing down the flow of information.
Since the Internet
Although the U.S. Securities and Exchange Commission (SEC) was created in 1934, it plays a major role in online retail investments. With the advent of the internet, any investor can go online to the SEC and obtain the financial reports of any company listed on the stock exchange. The moment a report is uploaded, it is accessible to be downloaded by any trader. And the reader need not go through every page to get to the essential information with the search tools available online. Any presentations carried out to investors to attract them to purchase shares can be accessed. The trader can check the financial performance of the company over the previous fiscal year.
The internet has resulted in lower commission fees for investors and the chance to shop around. Fees are as low as $10 for small, single transactions. In 1992, you could expect to pay $250 commission for the same transaction. Nowadays, traders can utilize apps like the Pocket Option broker.
With the use of internet for trading, high-frequency traders have come in for some criticism as being responsible for volatility in the stock market. In reality, they reduce the ranges of bid-ask spreads, or the difference between the buying and selling prices.
Changes Elicited by Academic Study
One 2000 academic study researched the advantages of online trading and determined that three key factors played a role in using the internet. These were transparency, differential pricing, and disintermediation.
Transparency refers to the possibility for multiple investors to source the same information without going through a third party. This allows investors to make up their own minds and enables them to price securities individually.
Differential pricing put an end to brokers providing a full service to all their traders. The internet brought about a reduction in the once high prices being levied by these brokers. Instead, this was capped by the freedom of online trading.
Disintermediation enabled traders to ignore brokers completely if so desired. They no longer had to turn to financial advisors to make their trading decisions, thus saving these fees.
Online trading, facilitated by technological advancements on the internet, has changed the old face of traditional trading for the better.