Online Trading Lures Investors

Today, there are 11 million online accounts, and that number continues to grow.

Would-be investors can choose from a variety of online services.

If you're interested in investing online, but don't know where to go first, CBS Early Show Financial Expert Ray Martin has some pointers.

Since the first trade on the Internet in 1994, online trading has exploded to become a popular financial service among individual investors.

According to Gomez Advisors, a company that advises e-commerce companies, today there are 11 million online trading accounts in the United States. This number has grown from 7 million at the beginning of 1999.

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At first, large established brokerage firms dismissed online trading as a fad, and a Merrill Lynch spokesperson even stated that Internet trading posed a serious threat to Americans financial lives.

But after realizing that online investing would detract from its business, Merrill Lynch did an about face and announced its online brokerage service.

Merrill Lynch joined Fidelity, Charles Schwab and many others in online investing, fast becoming a large component of their businesses.

Discount brokerage houses realized that if they didn't get on board this fast-moving train, they would lose a lot of business, old and new, to newer companies like E-Trade and Ameritrade.

Demographics of online traders

According to a national survey of online traders, more than 91 percent are male and over 60 percent are 21 to 45. And more than 50 percent have three years or less experience managing their own investments.

The next category of investors that online companies want to market to are online households with existing brokerage relationships.

These people demographically resemble the current online traders, but trade less frequently and through traditional channels.

Setting up an account involves evaluating and selecting an online brokerage service from the many online firms, such as Ameritrade, Charles Schwab, E-Trade, Fidelity, Discover and DLJ Direct.

The following are the top four reasons why people flock to the Internet:

1. Low feesTrading costs range from $8 to $30 per trade, as compared to the several hundred dollars charged by full-service brokers.
2. ConvenienceYou don't have to leave your desk or make any phone calls.
3. EfficiencyIf you do it yourself and are confident, you don't have to worry about other people's mistakes.
4. Account informationAs soon as you make the trade, it is reflected online.
Source: Ray Martin

Getting started

First, to trade online you will need a computer with Internet access.

Second, establish an investment account with a company that offers online trading.

Next, you will need money to invest in the account. And most importantly, you'll need to have more than a layperson's knowledge of computers, the Internet and trading techniques.

If you are not familiar with the computer and a mouse, don't even think about investing online - one wrong click of the mouse and you could lose a lot of money!

Setting up an account

Account forms can be accessed, completed and printed from your computer online.

They usually must be signed and sent through the mail with a check to deposit money in the account.

Many firms require a minimum deposit of $1,000 to $2,500 to open an account. Some firms have no such minimums.

Doing the necessary research

First, you must remember not to believe everything online that you read. Online access may shorten the time to access and trade your money, but it doesn't lessen the importance of doing research and basing investment decisions on sound reasons.

The widespread use of the Internet has created an explosion in the number of investment information services – ranging from ones providing verified annual reports to investment chat rooms run by investors who may know less than you know.

It's really important to figure out where the information is coming from.

Information can be intentionally or unintentionally misleading and you should always verify the fact before investing.

Buying stock online

Some might say it is almost too easy. With a few clicks of the mouse, you can see your accounts online and buy or sell stocks.

A password protects entrance to your account and correspondence between you and your trader usually travels in an encrypted format.

Along with the ability to invest online comes a new set of responsibilities. You become responsible for your money and cannot rely on a financial adviser to guide you through every step. In other words, you must do you own homework.

Impact on traditional brokers

Some financial service pundits claim online trading spells the end of the line for stockbrokers.

Online trading certainly democratizes the process and lowers the cost of trading. It also neutralizes the nagging concern about a broker's intention when large commissions are paid for transactions.

Brokers will need to upgrade their advisory services to add value to an investor's situation.

Online trading makes it easier to be fickle about an investment and lets investors change their minds on a whim and dump a stock.

Perhaps having another perspective or a little handholding from an experienced investment professional can be helpful to nervous investors during uncertain times in the markets.

Limits for beginners

Think about opening a trial account with a minimum deposit and make a few small trades. Just think of this as an investment of your time and money before making a more serious commitment.

Know that you have the option of placing what is known as a "limit order" when trading online.

When placing a limit order (a type of order you specify on the trading site), you need to specify the number and price of the shares you are willing to buy.

Once your order is entered, you will not buy the shares unless they are at or below the price you specified.

This protects you from investing more than anticipated due to big price moves before your order goes through. The downside is that you may never purchase the shares if the price rises beyond your limit price.

Advertising's role

Aside from the people who are buying and selling with the click of a mouse, the online investing craze has affected another industry: advertising.

Combined, online-brokerage advertisers spent more than $100 million last year and the number is expected to grow to $1 billion in the next year.

The new target audience is the 14 million wired households with income above $70,000 that currently donÂ't do any online trading.