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By The Internet has been one of the most game-changing and transformative technologies in the annals of human history, leading to a significant shift in paradigm. It has had a significant influence on the way consumers consume media like music and movies, as well as how they connect with one another and purchase and sell goods. It has also had a significant positive impact on investing, particularly for individuals who invest their own money.
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KEY TAKEAWAYS
- Trading on markets in the United States extends back more than a century, but we take the internet for granted in this day and age.
- Trading was completely disrupted when the internet was first introduced since it allowed for the creation of electronic marketplaces and the automatic execution of orders.
- As a consequence, transaction costs decreased, market efficiency improved, and investors had access to more information and enjoyed greater transparency.
Evolution of Communication
Perhaps the most significant advantage that the Internet has brought to the world of investing is the increased accessibility of information. Before the advent of the Internet, the greatest option for the ordinary investor was to go to the local library to study financial literature and conduct research on businesses and investments like as stocks, bonds, and mutual funds. This was the finest way to play the odds.
The second choice was to make direct contact with a business in order to obtain the most recent financial report. This course of action, however, could be time-consuming and expensive in terms of postage for large financial reports. Additionally, the investor would have to wait for the report to be printed and delivered by the investor relations department of the company.
An investor can discover an online company report from the Securities and Exchange Commission (SEC) website shortly after it has been posted thanks to the widespread availability of the Internet. Large financial documents can be downloaded in a matter of seconds, and once they are opened, a search can be conducted on them for certain keywords, subjects, or financial statements. Annual reports and other presentations delivered to investors at industry conferences can also be accessed on the online investor relations website that businesses maintain and make available to the public. These online platforms are also where similar filings can be located.
Also, hundreds of websites are always updating and putting together new financial information for investors to look at and understand. In the past, financial intermediaries like brokers and investment managers were much better at making money than individual investors. This includes putting aside more money to get detailed financial reports or to pay for pricey services so that security investigations can be done. In today’s day and age, there are a lot of websites that provide financial information for free, while some demand small annual fees for more specialized data.
Lower Fees
One of the most significant advantages that the Internet has brought to the world of investing is the reduction in transaction costs that it has made possible for investors. The commission rates that individual investors in particular are required to pay in order to trade securities have experienced a significant decrease as of late. It is not unusual to locate an internet broker these days that will facilitate a standard stock trade for a fee of approximately ten dollars. Before bargain brokers were widely available, full-service brokers were able to impose their authority over the market and charge commission rates that now appear to be excessively high. This allowed them to make significant profits.
A full-service broker might charge a commission of 2.5% for a stock trade, according to a report that appeared in the 1992 issue of “Money Magazine.” This report was published at a time when the Internet was just beginning to penetrate the consumer market. The illustration that it presented was a commission of $250 to trade 100 shares of a stock that was trading at $100 per share.
Electronic networks that are able to communicate information about trades through the plumbing of the internet have been beneficial to trading in and of itself. High-frequency traders, often known as HFT, are frequently the focus of considerable controversy and are suspected of playing a role in stock market volatility that is greater than typical. However, these traders are also credited with lowering bid-ask spreads. A bid-ask spread is simply the difference in cost that exists between buying (the price at which the security is offered) and selling (the price at which the security is offered).
The spread used to be considerably larger in the past, but it has now shrunk down to just a few pennies. When it was larger, it gave brokerage firms another opportunity to take money out of the pockets of investors and put it in their own.
Other Key Benefits
An academic study that was conducted at the Wharton Business School back in the year 2000 summed up the primary advantages that the Internet has brought to the world of investing in three primary factors.
The first of these was transparency, which may be seen as the capacity for a substantially larger number of investors to examine the information and arrive at their own views regarding how to accurately price stocks.
It also described differential pricing, which alluded to the death of full-service brokers who demanded exorbitant fees to perform financial transactions before the advent of the Internet, which drastically cut the rates that the sector could charge to conduct those transactions.
In the end, it discussed disintermediation, which once again referred to the opportunity for investors to avoid the use of traditional, full-service brokers and advisors for both the acquisition of information and the transaction of stocks.
Bottom Line
As a whole, the Internet has put a significant amount of power into the hands of individuals, which has had a significant impact on the manner in which investors get information regarding financial matters. Costs have been greatly reduced for the majority of participants in the financial sector, which is of equal importance.
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