The investment world has been turned on it's head by the internet. The emergence of internet stock broker companies has transformed the services, charges and profits of the stockbroking industry.
Essentially, stockbrokers used to have a position of privilege with regards to the flow of information. In truth, they still do have this, but the information gap between amateur and professional has been narrowed significantly. This information advantage enabled stockbrokers to make substantial incomes for many decades. Indeed, in England a stockbroker was one of 'the professions' with a similar status to solicitors and accountants.
At the turn of the century, investment information firms used to enable investors to track their portfolios online, for free. The availability of this technology meant that many of the high priced tracking and monitoring software systems started to become obsolete.
Why pay twenty or thirty dollars each month to track your
holdings when a website will let you do it for free? Even worse, the
free website might use technology that does a better job!
As time passed, these sites started offering what they called 'Level 2' information. This, they charged for. However, the difference in information quality is astounding.
The private investor now can have real time access to the market and watch trades, including their own be actioned. Not only do they have this access, but costs are so low that it is available to the private investor for almost every major world stock exchange for one monthly payment. There is even price competition in this area now.
The advances of both computer memory and internet capabilities
means that this information can be distributed at very low cost. There is also a very real business advantage for funds and individuals (usually day traders) for having the fastest possible connection and the best hardware and software available. The shorter the proposed holding period of a security, the more important powerful technology becomes.
It also means that huge quantities of information can be stored and therefore available to all. Simply, the emergence of the internet stock broker has turned what was once a profitable and elite trade into a low cost commodity.
This trend will almost certainly continue.
This process is also making it far easier for an investor to buy
and sell in different world markets and assets. This, by very definition,
is lowering the costs of international trades and forcing local
stockbrokers to compete with internet stock broker firms that span the
globe virtually. Almost anything that was once considered to be an
'exotic' investment is now purchasable at very low cost online.
Watch These Free Videos And Learn How To Trade The Stock Market
Once upon a time, being a stockbroker was one of the most highly paid professions available. The emergence of the internet stock broker means that this will never be the same again. Who knows, in twenty or thirty years time, stockbrokers may not even exist!
It is possibly a little ironic that one of the leaders in the world of fast, low cost stock trades for the masses was Bernie Madoff - he of ponzi hedge fund infamy. It was he that saw the potential of faster and lower cost stock trades by using computers long before others.
An 'Execution Only' Service
A feature of online share dealing is that a customer selects the investment to be made himself or herself. No advice is offered or given by the company. This means that the individual is fully responsible for the outcome of the trade, good or bad. The massive rise in the numbers of investors and selecting 'no advice' suggests that this is a popular move.
It is easy to see why. In the past, a client would pay for advice in the form of a fixed percentage fee of the sum under management and then pay an additional fee per deal (buying and selling). But incidents of fraud get enough publicity to make most investors frightened of handing over complete control of their portfolio - whether this fear is justified rationally or not.
Under such circumstances, the client takes the risk for any problems - deliberate or not - with a large portion of their net worth. Many are now simply unwilling to provide such a level of trust.
With such a backdrop, carrying out a stock purchase online with no requirement to deal with - or abdicate responsibility to - a stockbroker is the preference of many millions of investors.
There are three levels of service, execution only being the lowest level. However, these changes mean that less and less people pay for the higher levels that moved towards private wealth management.
The flip side for the brokerages is that the internet has opened up a vast new portion of the population to stock market investment that probably would not have otherwise had access. These are people that individually did not have the level of wealth that would have enabled them to use advanced brokerage services, but the aggregate commissions of these extra millions of people has been very good for the sector.
In a similar way, the mass access to pension schemes has been very good for the financial services sector because all that extra money pouring into funds needs to be managed and ever larger trades will be made, both generating more fees.
As mentioned above, the emergence of online brokerages has enabled internet stock broker commission to be much lower than was previously the case (details here), but this has further helped to make the stock market accessible to the masses.
Other pages related to this topic are: