Investing online, or self-directed investing, also known as online trading or trading online, has become the norm for individual investors and traders over the past decade with many brokers now offering online services with unique trading platforms.
Prior to the advent of the Internet, investors had to call up their stockbroker and place an order on the telephone. The brokerage firm would then enter the order in their system which was linked to trading floors and exchanges.
In August 1994, K. Aufhauser & Company, Inc. (later acquired by TD Ameritrade) became the first brokerage firm to offer online trading via its "WealthWEB". Online investing has experienced significant growth since that time. Investors can now enter orders directly online, or even trade with other investors via electronic communication networks (ECN). Some orders entered online are still routed through the broker, allowing agents to approve or monitor the trades. This step assists in the protection of both the client and brokerage firm from unlawful or incorrect trades which could affect the client’s portfolio or the stockbroker’s license.
Online brokers are most often referred to as discount brokers. Their popularity is attributable to the speed and ease of their online order entry, and to fees and commissions significantly lower than those of full service brokerage firms.
Two types of online brokerages have emerged. One type of brokerage offering Direct-access trading to exchanges, such as Interactive Brokers. While the other type of brokerage, such as TD Ameritrade route orders to Market maker firms to have their orders filled. An example of a Market Maker firm was Knight Capital Group, now known as KCG Holdings.
Tools and trading platform
Investors who trade through an online brokerage firm are provided with a trading platform. This platform acts as the hub, allowing investors to purchase and sell such securities as fixed income, equities/stock, options, and mutual funds. Included with the platform are tools to track and monitor securities, portfolios and indices, as well as research tools, real-time streaming quotes and up-to-date news releases; all of which are necessary to trade profitably. Often, more robust research tools are available such as full, in-depth analyst reports and analysis, and customized backtesting and screeners to see how particular investment strategies would have been realized during different historical periods.
Some of the popular online brokers based in Europe and USA include: E*Trade, IDealing, Interactive Brokers, Scottrade, TD Ameritrade, and Fidelity. Schwab is an example of a hybrid broker combining a traditional, brick-and-mortar brokerage house with discounted trading online, with the usual benefits of both available to customers. Online investing and trading has seen a rise in India too. Besides independent online portals, fund houses in the country too are promoting their online transaction portals. Some popular online investment portals in India are FundsIndia and Fundsupermart. Commissions vary from broker to broker, depending on the services included with the account.
Before investing or trading online, investors are advised to research the online brokers they plan to employ, assuring that those firms are licensed within their state or provincial jurisdiction. Informed investors are less likely to fall victim to unlawful securities schemes, such as the so-called "boiler room" scam. The US Federal Government provides practical tips to avoid investment scams via their OnGuard Online website. The website cautions investors to be wary of internet newsletters, investing blogs, or bulletin boards. Stock manipulators often float false information and "hot tips" on these sites, as part of an effort to affect the price of shares in a particular security. Investors are also advised to turn to unbiased sources when researching investments. The U.S. Securities and Exchange Commission (via their EDGAR database) is one example.
Investors must fully understand the potential risks of investing without the help of a trained stockbroker or investment advisor. These professionals are experienced both in trade and education, and forgoing their advice could be costly. Inexperienced investors are easy prey for stock manipulators and pump and dump schemes often associated with penny stocks. For this reason, many online brokers offer a number of investment tools to educate and inform new investors.
Many online brokers provide tools to help investors research and select potential investments. There are also numerous third party providers of information, such as Yahoo! Finance. Other reputable sites provide information on business sectors, news and financial statements of individual companies, and basic tutorials on subjects such as diversification, basic portfolio theory, and the mitigation of risk associated with volatility in the stock market.
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