Over the last two years, particularly in recent months, the American Securities Exchange Commission (SEC) has been hearing concerns about retail online (Internet) investing. In fact, the number of complaints concerning online investing has increased 330 percent in the last year. Some of the issues raised specifically relate to online trading, others are generic to all investing. The majority of them can be addressed through better education and investors ensuring that they have done their homework.
Every day, more and more people invest in the stock market, and many of them do so through the Internet. In the US, online brokerage accounts account for approximately 25 percent of all retail stock trades. And, the number of online brokerage accounts is expected to exceed 10 million by the end of the year. While the manner in which orders are executed may be changing, the time-honoured principles of evaluating a stock have not. An investor's consideration of the fundamentals of a company ? net earnings, P/E ratios, the products or services offered by the company ? should never lose their underlying importance.
Investing in the stock market ? however you do it and however easy it may be ? will always entail risk. I would be very concerned if investors allow the ease with which they can make trades to shortcut or bypass the three golden rules for all investors.
In recent months, we have begun to identify a number of issues every online investor should be aware of. First, investors must understand the issues and limitations of online investing. You may occasionally experience delays on these new systems. Demand has grown so quickly that many firms are racing to keep pace with it. In the meantime, you may have trouble getting online or receiving timely confirmations of trade executions.
One way to do this is to use limit orders rather than market orders when submitting a trade in a "hot" stock. The result for investors that do not limit their risk can be quite surprising. Say an investor wanted to buy a stock in an IPO that was trading earlier at R9.00 and failed to specify the maximum they were willing to pay using a limit order. That investor could end up paying whatever price the stock has moved to at the time his order reaches the market. If, on the other hand, the investor submitted a limit order to buy the stock at R11.00 or less, the order would only be executed if the market price had not moved past that level. Investors should understand the risk associated with trading in a rapidly moving market and make sure that they take all possible actions to control their risk.
Millions of new investors have taken advantage of the unprecedented access and individual control the Internet provides. But, new opportunities present all of us with new responsibilities, challenges and risks. The SEC will do everything it can to protect and inform investors during this time of great innovation and change. But, investor protection, at its most basic and effective level, begins with the investor.
I say to all investors ? whether you invest online, on the phone, or in-person ? know what you are buying, what the ground rules are, and what level of risk you are assuming.