How On-Line Trading Can Benefit Your Portfolio

For years, investing in the stock market seemed like it was only for the rich. Terms such as portfolio management and investor policy statements were like Chinese to most of us. The Dow? What the heck is that? 401K and IRA? Ditto. Many average Americans felt as if they would never be financially independent, have to rely on Social Security, or have work until they die.

That all changed with the invention of the internet (thanks Al Gore!). As is usually the case, new inventions bring new opportunities and new markets. The finance industry is no different. In fact, it could one of the industries that have benefited the most, which is good for you and me, and the rest of middle-America.

No longer is access to the financial markets only for the select few. On-line trading platforms like E-Trade, and its competitors Ameritrade, Fidelity,and Schwab, have enabled everyone the opportunity to participate.

Here are a couple of ways these platforms can benefit you.

Lower Fees

This one is the most obvious. In the past, investors needed a financial adviser, and a broker, to place trades, usually in blocks of at least 100 shares. If you wanted to buy Coca Cola at $50, the cost would be $5,000, plus commissions. That’s just one trade. Commissions could run into the thousands. Most brokers required a minimum amount in an investor’s portfolio, usually $100,000. Raise your hand if you have $100,000 to invest. I’m guessing not many hands are in the air. That’s why you are reading this blog. If you do, you’ve probably been saving for a long, long time and are near retirement.

With on-line trading, commissions can run as low as $9.99, and you don’t have to buy 100 shares at a time. In fact, there is no minimum amount to invest. You could buy 5 shares of company XYZ for $100 if you want. Keep in mind the commission is still $9.99. That’s a commission rate of %10, which is astronomical.

Another drawback is the ease of buying and selling stocks. You can end up buying something on a whim since all it takes is the click of a button. On the other hand, you could click the button twice by mistake and end up with double the investment. Emotion, and not sound a financial basis, can end up being the driving force in making decisions. This could be a recipe for disaster, and drive up your commission costs. You could end up turning a long-term investment strategy into a short term gambling one.

Use the 24-hour rule when making purchases. Whenever I buy something on-line, I put in my cart and let it sit for a day. When I come back, I’ve had some time to think about it, and decide if I still really want it. How many times have you bought something and thought to yourself “why did I buy this piece of junk”? Same with investing. Sit on it for a day and you’ll know if it is really a worthwhile investment. Take your time and don’t rush. Warren Buffett takes his time. If it works for him, it can work for you too.

Efficiency

It’s hard to come up with a more efficient way to invest than with an on-line platform. First, trades happen in real-time. As soon as you place your trade, it’s in your account. No more images of traders waving tickets in the air on the NYSE floor. Plus, you insure the best possible price available. You can also monitor your portfolio in real-time. You’ll know the value of your investments at any moment in time. Actually if you are viewing your account, you will notice it changing every second.

Secondly, you don’t need a broker. This can be good or bad. You are making decisions on your own. If you don’t know what you are doing, it can be disastrous. On the plus side, you’re not meeting with a broker. It not only saves you fees, but you avoid the industry “speak” where they talk to you in terms you don’t understand in order to make you feel like you “need” them. You also don’t know if they are acting in your best interest or theirs (protecting their commissions).

Access to Information

I’m sure you’ve heard the knowledge and information is the key to success. And it’s true, if you can separate the good from the nonsense. As in any industry, there is A LOT of nonsense and misinformation. Full disclosure, I have accounts with E-Trade and TD Ameritrade. When I first login, a snapshot of my account appears on my home screen (balance, daily gain, and return percentage). I have plenty of securities available to trade (thousands in facts), ranging from stocks, bonds, mutual funds, options, and futures.

What I like best about the platform is the ability to conduct research on any investment I want. I can see any financial ratio (P/E, P/S, P/BV, P/CF, ROE, profit margins) or key statistics like EPS and dividend yields. I can even see the makeup of the Board of Directors and any news items. I can compare them to standards that I have set as part of my research or to other companies in their industry. If I want to evaluate a company based on its fundamentals, I can do that too. I have the ability to view several years of financial statements (balance sheet, income statement, and statement of cash flows).

Conclusion

Even if you use a financial adviser, or advice from a financial podcast you trust, you can benefit from an on-line trading platform. Most of us won’t trade individual stocks in our portfolios. We’ll invest most of our assets in mutual funds and ETF’s. For most investors, constructing a portfolio of index mutual funds and ETF’s should be sufficient in helping us reach our financial goals. There is no simpler way to do this than with an on-line trading platform.

Let me know what other finance topics you’d like to see discussed!

See you next time