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A Guide To Online Investing - Part 1

Stock Market and the Internet - A Marriage Made in Investment Heaven?

For experienced investors and novices alike, the flexibility that comes with online stock market investment must seem like a godsend. Data available at the tips of quick fingers; buy and sell shares with a click of the mouse; valuable guides to online investing on thousands of forums and blogs. Who need brokers and investment advisers when there's a multitude of software programs guaranteeing 400% return on your online investments? Internet + stock market is surely destined to give birth to thousands of new Warren Buffets! All that glitters is not gold (and there's still only one Warren Buffet at last check). Note to the beginner online investor: "online stock market investment" does not necessarily = to "investing wisely". A caveat before we proceed. In dealing with the issue of online investment - our discussion is purely limited to the stock market and the trading of public company shares. There are a multitude of other online investing options - in foreign exchange, bonds, commodities, derivatives and the like (many would classify online poker as an investment option!!), but the scope of our guide to online investing is limited to online stock market investment.

Online Stock Market Investment - How it Started

Electronic networks and the stock market have actually been operating side by side since 1969 with the invention of Instinet. Originally constructed to eliminate brokers within the share trading system, Instinet actually became a brokerage tool for the industry to electronically trade shares in an efficient manner. By the mid 1990s, with the burgeoning popularity of the internet, the use of electronic trading systems moved online to the www - a much bigger scale. This opened up stock market investment to anyone with online access. E-Trade and Ameritrade were two popular trail blazers in online investing. Today, hundreds of brokers, banks and non-bank financial institutions all compete for a slice of the online stock market investment pie. This intense competition to sign up on-line investors has lead to lower fees, lower commissions, better tools and efficient dissemination of investment data to the online investor.

A Computer with Modem is all you need?

A computer with modem is just the start to online stock market investment. The four key steps in investing wisely online are:

  • 1. Determine your investment plan.
    Successful online investors have a plan. They are either buying stocks for long term equity growth coupled with regular dividends or they are looking to exploit short term volatility (hour to hour/day to day movements) in the market. Long term share investors typically make less trades and hold on to shares over a longer period of time. Short term investors trade more regularly as a rule. Your investment plan is key to your online investing strategy as your trading frequency will necessitate you to pick an online trading platform that is cost effective according to the frequency and volume of your online trading.
  • 2. Chose an online broker that matches your investment plan.
    Examine the fees and commissions charged by the online broker, as well identifying backup ways to trade (if suddenly you lose internet connection). You should also read up on the online broker's reliability and record with online investors. Once you are satisfied, open an online trading account with the chosen one.
  • 3. Familiarize with software, data sources and trading techniques.
    Your online trading account often comes with trading software and access to company/economic/stock market data which will help with your online stock market investment decisions. It is important to familiarize yourself with the chosen online broker's trading tools and functions, including setting trading limits to your investing.
  • 4. Online trading psychology - don't gamble!
    Online stock market investment can provide real time buying and sell of shares. While this is a significant advantage in fast moving markets, it can make worse any bad investment decisions made through poor trading psychology. If you lose patience, fail to expect the unexpected and fail to remain detached from market cycles by not remaining firm to your online investment strategy - you can lose out as quickly as clicking on your mouse! You still need to minimize your risks by setting online trading limits and not be overcome by greed and fear.

The revolution that is online stock market investment opens up an efficient and effective channel for online investors to invest in the stock market. However, DO NOT throw normal trading strategy and investment plans out of the window. Do your research, find good trading software, other guide to online investing and an online broker and do all you can to minimize risks. Investing wisely online is about doing all the right research and setting sound risk prevention limits to your trading - before you click BUY. If you are not prepared for all this - you might as well find an online casino and go gambling.