The growth of the Internet in the last twenty years has spurred the growth of on-line financial services as well. These days on-line banking and e-commerce have become ubiquitous, as financial transactions are carried out at users’ convenient place and time. An offshoot of this broader phenomenon is on-line investment services offered by various banks. This means that the erstwhile specialized activity of stock-trading and stock-investing have now been made accessible to common people as well. There are both advantages and disadvantages in using on-line investment services. Foremost of the advantages are the convenience and ease of use associated with investment websites. A number of research and analytic tools are offered to users to aid their decision making process. Lay investors can also save up money on the brokerage charges, as on-line brokerages offer cheaper transaction prices when compared to human-agent brokerages. But the biggest threat to investments comes from systemic flaws of free-market capitalism itself. Over the course of the last century stock markets across the world have seen cycles of boom and bust. While things can look hunky-dory during the boom phase, the inevitable crash can wipe out majority of investments. Beyond this major threat, there is the vulnerability associated with all electronic transactions carried out in the Internet, as fraudsters and hackers are constantly looking to breach security systems in place. The rest of this essay will look closely at some of the pros and cons of investment through on-line banking services.
As the Internet grew into a viable global communication system, the nature and scope of online financial transactions was also transfigured. This brought with it several advantages to investors, as they can now access valuable information and analytic tools at the click of a mouse button. For example, a plethora of websites that give specialized advice to retail investors have cropped up as well. These include Daily Stocks, The Financial Center (http://www.tfc.com), Fund Alarm (http://www.fundalarm.com), Ibbotson Associates (http://www.ibbotson.com/research/iafp96.htm), InfoBeat (http://www.infobeat.com), Researchmag.com, etc. Each of these websites offer tools and features for performing in-depth analysis of various listed companies. In the United States, the Securities and Exchange Commission, which is the regulatory arm of the Federal government, has its own website too (http:/www.sec.gov), which gives authoritative information on various stocks for the perusal of all stakeholders. Here in the UK, the Financial Services Authority plays the equivalent role of regulating the stock exchanges and ensuring their smooth functioning. (Garmhausen, 2008)
So common people, who are willing to spend time carefully studying various stocks on the market and who are willing to adopt a disciplined approach are likely to fetch impressive returns on their investment. These on-line information sites that offer a range of analytic tools are an integral aspect of investing through on-line banking services. But it is equally important to remember that each of these websites have a disclaimer notice, which roughly translates to this: “Nobody guarantees a Web site as a true path to financial success. A slick Web site is no more a guarantee of useful, accurate information than a slick newsletter. Although the sites given were recommended by users or listed on major search engines, the rule on the Web, like elsewhere, is caveat emptor.” (Koreto, 2004)
While it is true that on-line investment sites charge lesser brokerage compared to human-agent broking systems, there are some other risks that the customer should be wary of. Although there has been a consolidation of prices in the on-line stock-brokering industry, prices still vary “depending on whether the brokerage offers independent research and other features, such as access to business news-wires and other investor education resources. Still, paying $10 or so to buy stocks, mutual funds, or exchange-traded funds (ETFs), and another $10 to cash out, can dramatically cut into gains or compound losses on small investments.” (Holter, 2001) Further, with the convenience and ease of access to the stock markets comes the attendant risk of indulging in gambling. Beginners to the stock market might be tempted to try intra-day stock trading, which is a highly risky game. Moreover, the on-line investment firms lure their customers to try intra-day trading by offering attractive brokerage charges, leverage facility and convenient pay cycles. Hence new investors should abstain from seeing on-line broking firms as online casinos. While “online brokerages make it all too easy to jump from one enticing stock to another with a few keystrokes, but losing your head could mean losing your precious capital. Brokers try to give you all kinds of tools to encourage fast trading, that’s the way they make their commissions”. (Garmhausen, 2008) So the individual investor should exercise caution and discretion in using online investment services.
Users should also remember that there is a trade-off involved in all the services offered by their online investment websites. Surely, the processes of analysing different stocks, placing orders to buy/sell them, electronically transferring money to the relevant investment account, etc become faster, cheaper and more easy to use, are all advantageous to the user. But they all have their flip-sides, and online trading and investing spawns an array of issues that have not yet been solved. The following passage lists some of these issues.
“the introducing broker needs to worry about building or customizing a clean interface and supporting it. The futures commission merchant needs to run a secure network with proper risk controls. The exchange needs to operate a scalable trade-matching engine or ensure that floor technology adequately supports executing pit brokers or both. But several new problems are the actual trader’s alone because the other parties in the trading game lack the ability, desire or business rationale to lend a helping hand. Most of these issues contribute to complicating your trading day – and never seemed to get in the way before you moved your account online.” (Holter, 2001)
Investors should also be aware of scammers and fraudsters lurking in the Internet and take necessary precautions in safeguarding their investments. The proliferation of junk mail, ponzi investment schemes and misleading advertisements are all harmful to the interests of online investors. The worrying aspect of these threats is that they are not perpetrated by proven criminals, but are carried out in collusion with accountants, lawyers and even stockbrokers. Indeed, most of the investment scams are executed by a team of white-collar criminals, as the recent expose of the Madoff Scandal illustrates. The investment scandal perpetrated by Bernard Madoff is the largest financial fraud in the history of capitalism. It is believed that Madoff’s secretive investment advice firm caused a loss of nearly $65 billions for the 4,000 odd investors who trusted his firm with their wealth. (Murray, 2000) The investors consisted of several celebrities as well as people from middle and lower classes, thereby making the loss more acute for the latter group. Although the Bernard Madoff’s investment firm was registered and operated in the United States, the lessons learnt from this episode is equally applicable to retain investors here in the UK. Typically, those initiating such ponzi schemes lure unsuspecting customer through
“well-written e-mails, online newsletters and bulletin boards, and flashy Web sites–complete with audio, video, and links to legitimate sites–to perpetuate their schemes. These guys no longer need a boiler room with 100 people phoning during the dinner hour, they can send thousands of e-mails with a single keystroke. They can also post anything on the Internet–cheaply quickly, and without disclosing their identity and location. That means it’s up to you to separate truth from fiction” (Murray, 2000).
Instances of a particular type of financial crime called “insider fraud” have also escalated during the age of the Internet. The improvement in telecommunication technology, which has helped businesses in unprecedented ways, has also incidentally facilitated fraudsters. According to industry analysts, two thirds of all losses arise due to this kind of fraudulent activity within the confines of the organization. As much as 6% of the annual revenue of a business organization can be lost in this manner. As was rightly pointed out by a report, this kind of electronic financial transaction fraud is perpetrated by technology-savvy employees, who have a thorough understanding of the financial processes, business system customizations and network technology. Recently laid-off employees, subcontractors and third-party consultants also commit such frauds. In such cases, the enemy is clearly within and not without. So who gains access to vital computer systems will have a bearing on the overall security of business operations. (Koreto, 2004)
Hence, in conclusion, there are both risks and rewards attached with the process of online stock investment. The retail investor, who is usually investing his hard-earned savings, is indeed very vulnerable. He/she should look at various information sources with a degree of skepticism, as frauds and scams are commonplace in the Internet. Even the most authoritative looking source of information, say a popular business station, can perpetrate misinformation in order to manipulate people’s decision making process. Hence, the investor should verify if a particular investment company has cleared the requirements imposed by the Financial Services Authority. Online investors should also be wary of ‘pump and dump’ operations, where “a crook hypes the thinly traded stock of a tiny company, hoping that eager investors will run up the price. When the price jumps, as can happen quickly when word of a “hot” stock circulates on the Internet, a sell-off by the perpetrators can cause it to drop back down just as fast” (Koreto, 2004). But for those investors who are willing to guard themselves against such manipulation and who are prepared to do studious research, online investment is indeed a viable method of creating wealth. Those individuals who show dedication and discipline and who abstain from get-rich-quick temptations do indeed go on to make impressive returns on their investments.
References
Ena, M. (2008). Securing Online Transactions: Crime Prevention Is the Key. Fordham Urban Law Journal, 35(1), 147+.
Garmhausen, S. (2008, February). Are You Ready to Do It Yourself? Discipline and Self-Study Can Help You Profit from Online Trading. Black Enterprise, 38, 35+.
Holter, J. T. (2001, June). Online Aspirin for Online Traders. Futures, 30, 59.
Koreto, R. J. (2004). The Best Online Investment Sites. Journal of Accountancy, 185(1), 41+.
Murray, D. (2000, April 10). Online Investment Scams: Coming to a Screen near You. Medical Economics, 77, 184+.