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| Computing Winners & Losers | |
| March 2000• Vol.6 Issue 3 | |
Investment Sites The Government Steps Up To Protect Traders |
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[INVESTMENT]
[SITES]
[RICH]
[GRAY]
 It’s one of the fastest growing
segments of the Internet, and it has nothing to do with people taking
their clothes off; although, many find wearing a bathrobe while doing it
enhances the experience. It is investing, and the phenomenal growth in the
U.S. financial markets and the Internet over the past couple of years has
inspired many people to use the Internet to obtain investment information. It’s a
convenient and cost-effective way to research, track, buy, and sell
stocks, as well as keep abreast of changes in other investment
fields.At the close of 1999, experts estimated that one out of six investors were doing their business online, and that number is expected to swell to one in four this year. With that much interest, it’s no wonder that so many people and businesses, including online brokerages, media outlets, con artists, and analysts, are vying for your eyes and dollars. Knowing the market is important, but the first step is knowing the good, the bad, and the just-around-the-corner when it comes to Internet investment Web sites.  What’s Hot.
The biggest trend right now in investment sites is user-friendliness. Every site is trying to cater to specific users. Some are specializing in certain areas; others are focusing their attention on new users. Investing on the Internet. You really have to give the biggest nod to the phenomenon itself. The Internet is rapidly revolutionizing investing, and five years from now, the relationship between consumers and markets will look nothing like the relationship today. Where before investors were more likely to go through stockbrokers, now they are more likely to go online and execute trades themselves. The advantages of online trading are many: •Trades are generally less expensive. •You can access your account any time from anywhere •Research is not only easy to find, but it is also usually free and of high quality • Keeping up with the markets is much easier to do on a computer than trying to track down stock quotes via phone. A recent survey by J.D. Powers and Associates showed the Internet is the fourth most popular source of financial information (behind newspapers, television, and investment magazines), and sites dedicated to financial pursuits abound. General, all-in-one sites, such as The Motley Fool (http://www.fool.com/), Bloomberg.com (http://www.bloomberg.com/), and SmartMoney.com (http://www.smartmoney.com/), now offer a stunning selection of features, news, and other information. If you’re just looking for news, every major media outlet and Internet portal hosts its own financial channels. For example, you can peruse Excite News (http://news.excite.com/) and Yahoo! Finance (http://finance.yahoo.com/?u). Business search engines, such as justquotes.com (http://www.justquotes.com/) and TradingDay.com (http://www.tradingday.com/), let you look up stock quotes, news, and analysis recommendations; sites such as Hoovers Online (http://www.hoovers.com/) and Kompass International (for foreign companies; http://www.kompass.com/ let you pry deeply into the workings of companies to get ownership, executive, and other company information. Investment clubs. Even though they’ve been around for many years, investment clubs have risen in popularity during the past few years. This is due in part to the popularity of groups such as the Beardstown Ladies Investment Club. Clubs are run in different ways, but they all have the same general theme: A group of investors who pool their money to make joint investments. These clubs offer several advantages over individually investing, including shared knowledge, diversification, and reduced transaction costs.
Sites for new users. The stock market goes through the roof, IPOs climb 600% in a day, online brokers such as Ameritrade (http://www.ameritrade.com/) and E*TRADE (http://www.etrade.com/) litter the media with ads . . . you’re starting to feel a little like Cinderella, left at home while everyone else is partying down. The push is on by online brokers to get your business, and even though it might be tempting to leap in and worry about swimming later, a little doggie paddling goes a long way in the investment pool. Many sites gear themselves primarily toward new users, and some of the best include: •MoneyCentral Investor (http://moneycentral.msn.com/investor/home.asp): This wing of the Microsoft Network offers great reference materials and step-by-step guides. Just click the Insight link to start. •Investing Online Resource Center (http://www.investingonline.org/): Created by the securities division of the Washington State Department of Financial Institutions, this non-profit site exposes myths and helps you get to the real costs and rules involved in online investing. It also features a quiz to see if you’re ready to trade, as well as other resources. •Investor Education and Assistance (http://www.sec.gov/oiea1.htm): From the U.S. Securities and Exchange Commission, this site is dedicated to education, assistance, and complaints by and about investors. •National Association of Securities Dealers (http://www.nasdr.com/): A great site to get information on brokers, as well as complain about them. •Gomez Advisors (http://www.gomez.com/channels/index.cfm?topcat_id=3 ): Its Internet Broker Scorecard compares many of the top online brokers according to various categories. (NOTE: If you find yourself stuck on a term or two along the way, try the Washingtonpost.com online business glossary at http://cgi.washingtonpost.com/wp-srv/business/longterm/glossary/glossary.htm) Stock market games. One of the best things a new investor can do is to play one of the many fantasy stock market games found on the Internet. Games such as Virtual Stock Exchange and the E*TRADE Game let users buy and sell stocks and options with play money. This is a perfect no-risk way to acquaint yourself with the world of investing. Most games run for a specific length of time (usually monthly), and many offer cash prizes for those who’ve made the biggest killing. You can find a list of games at G6 Perspective (http://www.g6perspective.com/lbgames.htm). Specialization. Another hot trend, according to Eli Neusner, senior analyst and community manager for MetaMarkets.com (http://www.metamarkets.com/), is in sites that focus on specific industries or areas such as IPOs, earnings, or charting. “With money at stake, investors trust the specialist over the generalist,” Neusner says. IPO.com at http://www.ipo.com/, for example, is devoted to IPOs. What’s Not.
When signing up with an online investment site, you need to make sure you aren’t taken. For example, sometimes sites will take questionable actions or charge you a subscription fee when you can get the same information for free on another site. You also need to be aware of the problems that growing pains, security, and fraud can cause investment sites.
Fraud and security problems. If you’ve spent any time on the Internet, no one has to tell you that surfing with the caution flag out is part of standard operating procedures. Security on reputable sites (particularly brokers) is effective and usually relies on three methods to protect your information and money: PIN/account numbers, encryption, and authorization (no one can access your money but you). As long as you’re on a reputable site, you should have no problems in this area. But there are always con artists operating at the fringe, and one recent con, called the micro-cap fraud, serves as an example of how some of these scams work. Micro-caps are small company stocks, ones that sell for little money and aren’t listed on the major markets. Con artists buy a sizeable amount of a given stock and then start hitting chat rooms and bulletin boards to spread disinformation about the stock. Everyone sees it as the next Microsoft and buys into the stock, which sends its price soaring, briefly. The bad guys sell out, the stock crashes, and everyone else loses their shirts. Beware of deals (and stocks) that sound too good, especially if you’re not sure if the source (person or site) is legitimate. The Federal Trade Commission (FTC) Consumer Protection Site (http://www.ftc.gov/ftc/consumer.htm) offers information on investment and Internet frauds. Questionable tactics. Late last year, two reports were released that called into question many of the practices, tactics, and even the underlying philosophies of some online brokerages. Citing what he called an “expectation gap” between what users expect and what they get, New York State Attorney General Eliot Spitzer launched an investigation into brokerage practices following a series of technical problems that crippled E*TRADE for several days in February 1999. Spitzer and his team raised questions about misleading advertising, the brokerage’s degree of willingness to disclose information regarding system failures, and more. The second report came from U.S. Securities and Exchange Commission’s (SEC’s) Commissioner Laura Unger, and it too looked at numerous issues, including whether brokerages should be sponsoring stock discussions in chat rooms and even whether online trading was suitable for all traders. At issue is whether online brokers, because they provide targeted information to users based on their account balances, trading activity, etc., have an obligation not to recommend investments they know are not suitable for given clients. The SEC is also planning to examine issues such as fees for instant stock quotes, privacy policies, and again, the issue of how brokerages should disclose contingency plans. Even though this will mean better functionality for future users, the investigation of some of these issues may raise red flags for some investors. Subscriptions. There are so many sites offering great research and other free information that you should make sure anyone who is looking to charge you subscription rates is offering something unique and worth your money. As the trend is toward increased quality of free information on sites, this becomes even more of an issue. What’s Next.
In the future, the customer will win big. Sites are trying to gain and retain customers with new features and easier navigation. The government is trying to protect traders from themselves and from companies with increased regulation. The customer comes first. Competition generally favors the customer, and there is enough in the area of online investing (despite the fact that the field is consolidating at a fast pace) to ensure that private investors will have a lot to look forward to in the future. “Investment Web sites will have to provide more advanced tools as users gain in sophistication, but the winners will be those sites that provide easy navigation and quality content (news, chat, research),” says David Wachtel, publisher of Bloomberg Media. “Of equal importance will be the ability to provide content of all types in an on-demand format.” Users can also expect service to evolve well beyond the point it’s at now. The 1999 Dow Jones Newswires Investor Satisfaction Study by J.D. Powers and Associates decried the absence of the human touch in online trading, stating without equivocation that satisfaction and the ability to communicate with an actual person went hand in hand. This, and the presence of usable research/educational information, is going to serve brokerages much more effectively than having the lowest trading cost on the block. Extended trading and ECNs. Even though major exchanges have been holding back on this, expect movement in the direction of extended trading this year as Amex, NASDAQ, and the New York Stock Exchange face increasing competition from electronic stock exchanges and electronic communications networks (ECNs). ECNs are computerized trading networks that allow traders to buy and sell stock without a market-maker. (See the “Terms To Know” sidebar.) Two of these, Archipelago (http://www.tradearca.com/) and Island (http://www.isld.com/), have applied to become stock exchanges themselves. Increased regulation. Based on the results of reports such as the aforementioned ones from the New York State Attorney General and SEC Commissioner, expect to see an increase in consumer protections in the area of online investing. The New York Attorney General has already called for an immediate release of four sets of broker statistics that include outages, system capacity, trade execution, and customer service. The community model. Aram Fuchs, CEO of FertileMind (http://www.fertilemind.net/), sees the emergence of the “community model” as a future trend. “I think financial content sites will advance by fully developing the community model,” Fuchs says. “In general, they will do this not by any ‘gee whiz’ technology, but by integrating their in-house journalists and analysts into the community itself. There will be less of a distinction between articles and message boards. The journalists and analysts will serve as catalysts and focal points for the conversations and discussions going on at the site.” Integration with software. Late last year, E*TRADE and Microsoft entered into an agreement that would bundle E*TRADE headlines and financial links in several areas of Microsoft’s Money 2000 application. Interestingly enough, Money 2000 will also come with an E*TRADE membership application in the box. Expect more of this online/desktop software integration in the future. by Rich Gray
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