Investing online

Seeing all these commercials for companies like Ameritrade which permit people to buy and sell stock over the internet for low fees makes me wonder whether this is good.
According to my mom’s chief investing principle, The Lottery Principle, one should only invest money one can afford to lose.
According to my dad’s chief investing principle, The Hands-off Principle, one should invest a sum of money in a “good stock” and sit back, reinvest dividends, and let it grow. (This worked really well for his kids when he bought stock in Ma Bell. Now we have lots of money invested in stock in some of the Baby Bells).
According to what I’ve gathered from the news media, and applying a little common sense, it is very difficult to pick a "good"stock and to predict what will happen to the stock market. Dad’s Hands-off Principle worked better than either of his brothers’ approaches to handling similar amounts of money, but much of that is more luck than anything else. It seems to me that the more often one changes the stocks which one owns, the more likely one is to lose money. Therefore companies which allow you to invest immediately online may not be doing you a service. But, if you use them wisely, you might be able to earn more from your investments than you would using a broker. So, I’m not sure that discouraging online investing benefits anyone other than the traditional brokers.
Does anyone else have any thoughts, suggestiongs, arguments for/against investing online?

Depends on what you mean by “investing online”, Eureka.

If you mean “using a discount broker instead of a really expensive brokerage house, and executing trades on the Internet, but following a ‘buy-and-hold’ philosophy”, then it’s better, imo. Trades cost less, and I personally prefer to use a discount brokerage (on-line or otherwise) and do my own research.

If, however, you mean “executing a dozen trades a day in an ill-conceived attempt to ‘time the market’ while frittering away Junior’s college fund”, then I think it’s a bad idea. Of course, you can do this with a human broker, too, but the Internet makes it easier to lose money (so that’s what it’s good for!)

Never attribute to malice anything that can be attributed to stupidity.
– Unknown

For me, the main difference between investing online through a discount service and investing through a full-service broker has been that the commissions are a lot less when investing online. That makes online investing a Good Thing :slight_smile:

FWIW, I tend to use the same investment strategy as your Dad (often referred to by my friends as the “buy it and die” approach - I almost never sell anything).

I use your mother’s strategy when investing in specific stocks - never investing money that I can’t afford to lose - but whenever our checking/savings accounts get above my pre-determined limit I tend to dump any excess into one of several mutual funds. For the past few years that’s been Index funds.
I’m a firm believer that stocks are the best long-term investment, and I’m in it for the long term.

I fully agtee with CatInHat - day-trading is not a good idea. I’ve read (but can’t cite a reference, unfortunately) that 80% of day-traders lose money, and 70% of them eventually lose essentially all of the money they’d set aside to invest.

IMHO the best strategy for investing is mutual funds. Especially index funds. They are usually no load and cost very little to buy/sell.

You must hold these for the long run. The market index almost always increase over time but you have to learn to ignore the short term fluctuations in the market.

I have an e*trade account and have been very happy with it. They recently added six index funds with no transaction costs and only a .2% expense ratio. What a deal!

I almost always dollar cost average my investments (usually buying a certain $ amount on a certain day of the month). This strategy works well for long term investing and it helps smooth the ups and downs of the market.

“It’s like banging your head against a wall because it feels so good when you stop.”

Unless you are very sophisticated, an excellent broker is a good thing and well worth the added costs. A bad one is worse than none at all.

Most online firms execute their transactions through a third party. All who do so are paid to direct their order flow. While the online party you trade with is recquired to act as agent and give you the best possible price, they are currrently allowed to sell your order to a third party.

This third party has no such restriction and can act as principle and markup your otc purchase by as much as 5%. You are unlikely to get good execution of trades this way, so your savings will be marginal to nonexistent on most transactions over 100 shares. NYSE trades are less likely to be guilty of this kind of shenanigan, but your trade will be queued.

Undisclosed in most no-load funds are the trading fees. Many execute their own trades for undisclosed costs or are paid to direct order flow. There is no way of knowing how much they are actually making off a given fund in this manner. It is likely that it commensurate with or surpasses most load funds, especially in a high turnover portfolio. Load funds on the other hand typically execute with the vendor with the best price. If you are buying a million shares, an 1/8 of a point is quite significant.

I prefer being slapped in the face with a known fee than being stabbed in the back with an unknown one.

Buy and hold is good, and where you execute probably has little difference in the outcome. I would not let any single position become more than 10% of my portfolio for diversification reasons though.

Because of the proliferation of index funds, they are no longer as attractive. Witness when Yahoo and Conexant were recently added to the S&P. They both went up dramatically. This is because the index funds are recqired to purchase at this time, and yes, they pay that inflated price.

Hope that helps.

Scylla said:

Too true. The biggest disadvantage to on-line and discount brokerage firms is the lack of expert advice. If you follow the market and know what you’re doing, it might be advantageous to go with an on-line or discount firm to save on fees and commissions. But there is often no substitute for a well-informed broker and the firm’s market analysts.

Sum Ergo Cogito