Online investing offers amateur investors the opportunity to take full control of their own portfolios, eliminating the traditional role of the stock broker. There are significant advantages and disadvantages to each approach that should be considered by investors when deciding how to handle finances. Weigh the pros and cons before choosing, and perhaps even use a little of both styles.
Online investing gives you the chance to take complete control of your own portfolio. Trades can be executed immediately during trading hours, as opposed to trading through a broker, who must be notified of your decision to buy or sell stock and then act on those decisions at their earliest convenience. On the other hand, brokers are professional traders, and part of their traditional role has been to act as a safety valve to preclude you from making bad investment decisions. While there is never a guarantee when purchasing stocks, brokers are an informed third party who can offer their own input and perspective if you are thinking about making a high-stakes trade or a rash decision. You still retain control, but with a tempered hand.
Online trading offers you a variety of tools for research. Some online firms even offer professional, state-of-the-art research for no additional charge. These tools allow you to make informed decisions about your own finances. On the other hand, brokers are essentially paid to do extensive market research for their clients, which can save you significant time and effort. Effective brokers function like an adviser or mentor to their clients, bringing their own trading experience to bear on investment decisions and doing the extensive research into the market.
Personal brokers perform a clear service for their clients, and they normally charge substantial fees per transaction, as well as a percentage on overall profits. Online investing companies tend to charge much lower fees. However, you must consider what you are paying for. In some cases, the broker fees might be worth paying if the broker is able to help you avoid unwise investment decisions or give you an edge to capitalize on obscure opportunities that you might have otherwise passed over. Online investing, by contrast, although it may be cheaper, also leaves you more vulnerable to scams, junk investments or misinterpretations of raw data.
A personal stock broker can be an extremely valuable resource to any investor through their experience, professional connections, access to research and understanding of the market. Brokers can offer highly personalized service to investors through an understanding of the investor's goals, philosophy and risk tolerance. This is simply not available through online trading. On the other hand, stock brokers are professionals trying to earn money for themselves. Although outright fraud is quite rare, basic economic incentives dictate that brokers will try to take actions and to encourage trades that will benefit their own financial well being in addition to yours.
Linda Ray is an award-winning journalist with more than 20 years reporting experience. She's covered business for newspapers and magazines, including the "Greenville News," "Success Magazine" and "American City Business Journals." Ray holds a journalism degree and teaches writing, career development and an FDIC course called "Money Smart."