Guidance for Online Trading

Although the Internet and the proliferation of online stockbroking services represent a relatively new phenomenon for many Irish investors, such services have been a feature of US markets for a number of years and have become increasingly popular in the UK and Europe.

The first Internet-based trading systems were introduced in 1995 in the US. Since then, the number of US brokerages offering dealing services via the net has increased to over 200, with an estimated 7.8 million individuals trading online (2000). In the UK there are an estimated half a million online trading accounts and 3.2 million in Europe (2001). Forecasts are predicting 1 million online trading accounts in the UK and 12.5 million in Europe for the year 2004.

Given such phenomenal growth rates, the Securities Industry Association (SIA) in the US has developed a number of guidelines for active investors on the Internet, many of which may be useful to Irish investors. The following points provide a synopsis of what we consider to be pertinent online investing tips for those about to embark upon this rapidly evolving investment route.

On line brokerage accounts allow for unprecedented access to the execution of trading decisions, portfolio valuations, market commentaries, and stock specific research and investment ideas. However, it should be borne in mind that the Internet is merely a means of execution and should not change the primary reasons underlying stock selection. Although the investor may invest in a stock with the click of a button, stock decisions should be based on fundamental analysis, namely issues such as the quality of the business, a proven track record, strong management and favourable long-term prospects.
While the web allows access to an abundance of information, it is important that investors utilise valid and reliable sources. Legitimate information sources include annual accounts, analyst reports, press releases and industry standards. Greater care should be taken when looking at investor bulletin boards, online clubs and investor chat rooms. Information accepted without verification may have detrimental impacts upon investment decision making.
The Internet is not infallible. Traffic jams at peak times may lead to difficulty in accessing online accounts. In addition, technological difficulties with Internet providers or telephone lines may lead to interface problems. In such scenarios, the execution of your investment decisions should not suffer and consequently alternative solutions should be available, such as contacting your Goodbody representative directly.
When an order is placed via the net there may be a time lag between the placing and execution of transactions, due to issues such as liquidity of individual stocks. Therefore, the price at which your trade is executed may differ from the prices which are quoted on your computer screen.
The Internet allows access to a host of investment tools. Investors can now access stock specific information, follow the movement in share prices on a minute-by-minute basis and easily monitor the performance of their portfolios. The temptation may therefore arise to adopt a narrow trading view, attempting to capitalise on any short term price movements. However, this is a very precarious strategy to follow with potentially harmful consequences. It is important to remember that equities are an investment for the long term. Such analytical tools should simplify and not fundamentally alter the way funds are invested.
Online trading often removes primary interaction with your stockbroker. As such the onus can shift to the investor to take full responsibility for investment decisions. There is no one to verify your decisions, to ensure you purchase the appropriate number or indeed the correct shares or to safeguard against duplications. The Internet increases the array of investment tools at your disposal but does not remove the need for rational decision making and accurate execution.
The Internet is not a direct connection to equity markets. When you submit your order, it is sent to your broker who then sends it to the market to be executed. Although this process is usually seamless (and in some cases electronically managed), it is not, however, guaranteed.
Share prices can at times be extremely volatile, especially when important news relating to a company is released to the market. One way for investors to protect themselves from a rapid change in price is to use the 'limit' order. A limit order allows you to place a maximum or minimum on the price of the stock you are willing to buy or sell. However, they are not without risk as your order may not get executed at all if your limit restrains its execution.

Most importantly, remember that the Internet does not alter but rather complements the principal tenets of successful investing.