The Internet has been one of the most revolutionary and disruptive technologies in history, creating a major paradigm shift. It has had a profound impact on the way that consumers listen to music, watch movies, buy and sell products, and communicate. It has also had a hugely beneficial impact on investing, especially for retail investors.
- While we take the internet for granted today, trading in U.S. markets dates back over a century.
- When the internet arrived, it 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.
Evolution of Communication
The wide availability of information is perhaps the biggest benefit that the Internet has had on investing. Prior to the Internet, the retail investor's best bet was to head to the local library to read financial literature, and research companies and securities such as stocks, bonds, and mutual funds.
The other option was to contact a company directly for the latest financial report, which could prove costly in terms of postage for large financial reports and could take some time, as the investor would have to wait until the report was printed and sent by the firm's investor relation department.
With the Internet, an investor can find an online company report from the Securities and Exchange Commission (SEC) website immediately after it is posted. Large financial documents can be downloaded within seconds and can be searched for keywords, topics, or specific financial statements. Companies also maintain online investor relations pages, where these same filings can be found, as can 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. Previously, financial intermediaries, such as brokers and investment managers, had an advantage over individual investors. This included more resources to obtain large financial reports or pay for expensive services to perform security analysis. These days, many free websites provide financial information while others charge nominal annual fees for more specialized data.
The other primary benefit that the Internet has had on investing is the effect it has on lowering fees for investors. In particular, retail investors have seen a dramatic decline in the commission rates they pay to trade securities. These days, it is very common to find an online broker offering around $10 to make a common stock trade. Prior to the wide availability of discount brokers, full-service brokers were able to exert their control over the market and charge what now seem like exorbitant commission rates.
A "Money Magazine" article from 1992, right as the Internet was just beginning to enter the consumer market, detailed that a full-service broker could charge a 2.5% commission for a stock trade. The example it 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 and accused of contributing to above-average stock market volatility. However, these traders have also been credited with reducing bid-ask spreads, which is simply the different cost that exists when buying (the bid price) and selling (the ask price) a security.
These days, the spread is down to pennies but used to be much wider and allowed brokerage firms another opportunity to take money from investor pockets and place it in their own.
Other Key Benefits
An academic study from the Wharton Business School back in 2000 summed up the key benefits that 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, which speaks to the demise of full-service brokers that charged high prices until the Internet significantly lowered the costs that the industry could charge to make financial transactions.
Finally, it spoke of disintermediation, which again referred to the ability for investors to bypass old school, full-service brokers and advisors for both information and the trading of securities.
Overall, the Internet has placed considerable power in the hands of individuals, and this has had a profound effect on how the investor obtains financial information. Equally importantly, it has lowered costs significantly for most financial market participants.