How the Internet Has Changed Investing

The internet has been one of the most revolutionary and disruptive technologies in history, creating a major paradigm shift. It’s had a profound impact on how consumers listen to music, watch movies, buy and sell products, and communicate. It’s also had a hugely beneficial impact on investing, especially for retail investors.

Key Takeaways

• The internet is a relatively new phenomenon but trading in U.S. markets dates back over two centuries.
• The internet revolutionized trading by introducing electronic markets and automatic order execution.
• This resulted in lower fees, more efficient markets, and greater information and transparency for investors.
• Hundreds of websites maintain and compile financial information for analysis by investors.

The Evolution of Communication

The wide availability of information is perhaps the biggest benefit that the internet has had on investing. A retail investor’s best bet used to be to head to the local library to read financial literature and research companies and securities such as stocks, bonds, and mutual funds.

Their other option was to contact a company directly for its latest financial report. This could prove costly in terms of postage for large financial reports and it could take some time. The investor would have to wait until the report was printed and sent by the firm’s investor relations department.

An investor can find an online company report from the Securities and Exchange Commission (SEC) website immediately on the internet after it’s posted. Large financial documents can be downloaded within seconds and can be searched for keywords, topics, or specific financial statements.

Important

Companies also maintain online investor relations pages where these same filings can be found along with annual reports and other presentations made to investors at industry conferences.

Hundreds of websites also maintain and compile financial information for investors to analyze and understand. Financial intermediaries such as brokers and investment managers once had an advantage over individual investors. They had more resources to obtain large financial reports or pay for expensive services to perform security analysis. Many websites provide free financial information while others charge nominal annual fees for more specialized data.

Lower Fees

The effect it’s had on lowering fees for investors is another primary benefit that the internet has had on investing. Retail investors have seen a dramatic decline in the commission rates they pay to trade securities. It’s not uncommon to find an online broker accepting $0 to make a common stock trade. Full-service brokers were able to exert their control over the market before the wide availability of discount brokers. They could charge what seems like exorbitant commission rates.

A Money Magazine article detailed that a full-service broker could charge a 2.5% commission for a stock trade in 1992 right as the internet was beginning to enter the consumer market. The example provided was a $250 commission to trade 100 shares of a stock trading at $100 per share.

Trading itself has benefited from electronic networks that can send trade information through internet piping. High-frequency traders (HFT) are often the subject of much controversy. They’re accused of contributing to above-average stock market volatility but they’ve also been credited with reducing bid-ask spreads. This is the cost difference that exists when you’re buying (the bid price) and selling (the ask price) a security.

The spread is down to pennies but it used to be much wider. It allowed brokerage firms another opportunity to take money from investor pockets.

Other Key Benefits

A 2000 academic study from the Wharton Business School summed up the key benefits the internet has had on investing in three principal factors.

The first was transparency or the ability for a much wider base of investors to analyze information and come to their own conclusions on how to properly price securities.

It also defined differential pricing that speaks to the demise of full-service brokers charging high prices until the internet significantly lowered the costs the industry could charge to make financial transactions.

Finally, it spoke of disintermediation. This again referred to the ability for investors to bypass old-school, full-service brokers and advisors for both information and the trading of securities.

What Is a Retail Investor?

A retail investor is someone who isn’t affiliated with an institution. They’re individuals who buy and sell securities for their personal accounts.

What Is a Paradigm Shift?

Merriam-Webster defines a paradigm shift as “an important change that happens when the usual way of thinking about or doing something is replaced by a new and different way.” Enter the internet, allowing individual investors to place their orders for securities directly online, bypassing that phone call or visit to their broker.

What Are Some Internet Sites Where I Can Find Stock Information?

Seeking Alpha provides research and analysis. It charges for premium accounts but you do have the option of setting up a free account that might serve you depending on what you need. Yahoo! Finance and Stock Analysis are free and they’re both highly rated.

The Bottom Line

The internet has placed considerable power in the hands of individuals. This has had a profound effect on how an investor obtains financial information. It’s lowered costs significantly for most financial market participants.