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Investing and the Internet

The Internet is a powerful and rapidly growing resource. Recent estimates put the number of users at 159 million worldwide. With the increasing availability of information and its ease of use, the Internet is fast becoming an invaluable investing tool. In fact, 25 percent of retail stock trades today are made by online investors, and the number of online brokerage accounts will soon top 10 million.

When it comes to investing, there are many ways to use the Internet. You can research companies and other potential investments, place your trades using online brokerage firms, or even join the growing number of investors in the Internet companies themselves. Whether you're a new investor or just a new user of this powerful technology, keep reading to learn how you can get the most out of investing and the Internet.

The Internet As A Resource

It is easier than ever to research a company before you invest. Financial Web sites abound on the Internet, displaying price quotes (often delayed by only 15 minutes) and financial reports, giving you the capability to track one stock or your whole portfolio. You can link to individual company Web sites and read their news, investor information, and annual reports. Many companies are required by law to file forms with the Securities and Exchange Commission (SEC).

You can now find these forms (such as the companies' annual financial reports, called 10Ks) online in the SEC-maintained EDGAR database. In addition, chat rooms and bulletin boards provide instant and open forums for discussion. All this allows you the opportunity to be well informed about financial decisions like never before. Using the Internet wisely can help you become a more knowledgeable and confident participant in your own investment plan.

 

Investing On The Internet

Once you have done your homework, you can utilize the Internet to trade in the stocks you have chosen. The number of online brokerage firms keeps growing and they are continually striving to improve their services. Although trading online generally means much lower per-trade costs, access to near real-time quotes, and an easy to use interface, there are other factors you must consider.

Internet technology is still evolving, so you must be prepared for occasional performance glitches. When there is a high volume of trading, it is possible for Web sites to go down, or "crash," which means you won't be able to access them to do any trading. Also, in a volatile, or "fast," market, your brokerage firm may institute controls (such as suspending order executions) to restore order and protect you from price fluctuations.

It is important to find out what alternative means of trading exist for you with your firm. For example, can you call to place a trade? Do you need to go to a branch office? What has the firm agreed to provide? The answers to these questions could be crucial.

One of the differences between an online and a full-service brokerage firm is the level of involvement you have with an investment advisor. Online services are inexpensive, but they also leave the trading entirely to you. You must educate yourself, not only about the stock you want to trade, but how to trade.

A very basic example of understanding how trading works--and one especially relevant to online trading--is knowing the difference between a "market" order and a "limit" order. When you place a market order, you will pay or receive whatever the quote is at the time your order is actually executed. When you place a limit order, you will pay or receive whatever you set as the price you want, but your order will not be executed if the price you set is not available.

In a volatile market, the market may be moving so rapidly that the quotes you see on your screen do not reflect what the actual quotes are. Say you decide to get in on a hot new initial public offering (IPO), which has been priced at $9 a share before the market opens, and you place your market order to buy 1,000 shares at the open. But there could be so many orders ahead of yours--and the price has kept rising in response to the orders--that by the time your order actually gets executed, the price is $90, and you have spent $81,000 more than you intended. This price jump may have happened in a relatively short period of time, but because the quotes you see on your computer screen are not real-time quotes, you cannot see the rapid rise in price until it is too late. If you had placed a limit order, you may not have been able to buy the stock, but you would not have spent the extra money either. Understanding how the market works and what trading alternatives exist is equally as important as knowing what you want to trade.

The trading scenario described could happen with almost any kind of stock, depending on a host of other market conditions. However, it is particularly relevant to the growing number of "dot com" stocks--the companies involved with the technology or the use of the Internet itself. The wild success of many of the IPOs of these companies has fueled an unprecedented interest--especially by individual investors--in jumping into trading at the very beginning. So much so, in fact, that the SEC recently approved a request by The Nasdaq Stock Market® for a trial expansion of the pre-trading initial quotation window from five minutes to 15 minutes. By expanding this window, Nasdaq® hopes to give all market participants sufficient time to gauge more accurately what the IPO market price will be--before they place their orders.

 

Internet Fraud

While most individuals have honest intentions and use the Internet as a legitimate investment tool, others may seek to distribute information and advice in order to manipulate prices or take advantage of unsuspecting investors. These people have found that the Web provides an easier, cheaper, and more far-reaching medium for perpetrating fraud than existed before. Old scams are getting a renewed life through the Internet because it can be more difficult to weed the good from the bad in this kind of environment.

There are many kinds of online fraud, both indirect, like "pump and dump" schemes, and direct, like "pyramid" schemes or various types of so-called "risk-free" investments. (There is no such thing as a risk-free investment.) Indirect frauds supply false and/or misleading information--in chat rooms, mass e-mail ("spam"), and bogus Web sites--in the attempt to get you to buy a certain stock.

Frequently these are small, little-known stocks that sell for pennies and are often difficult to research. By "pumping" up the value of the stock, and therefore creating a buying frenzy, the fraudster--who, naturally, bought the stock before the hype--can then "dump" those shares at a profit. The sell-off triggers a snowballing price decline, leaving you holding shares in a stock that nobody wants to buy anymore, with a value probably lower than before the game started, while the perpetrator has already disappeared with the profit.

The direct frauds are just that--schemes that ask for your money up-front. In this case, the pitch generally promises huge returns on a relatively small investment. For example, one type of direct fraud known as a pyramid scheme, you supposedly make money in proportion to the number of additional investors you can recruit. In reality, most people never see any return, and usually they lose their initial investment as well. Worse yet, some direct fraud schemes solicit investments that you direct to a non-existent account. Direct fraud isn't new, or confined to Internet investing--but the online medium and lack of direct human interaction often make it harder to tell what's legitimate from what's bogus, so you need to be especially careful.Remember, always consider the source of any information or offer you receive. Although most online services, bulletin boards, and chat rooms display the screen names of users, individuals can remain anonymous behind aliases and misinformation. In most instances, there is simply no way to uncover someone's true identity. Can you tell whether you are getting information from a broker, short seller, corporate insider, amateur investor, stock touter, criminal, or merely a prankster? Probably not. And why would they have a stake in what you do with your money anyway?

 

How To Protect Yourself

Never make an investment decision based solely upon information from one source. The real-time nature of the Internet, combined with its growing base of users, makes it a prime target for a variety of fraudulent schemes. Be wary of the rumors and unsubstantiated claims that can surface in e-mail or in the unstructured environment of chat rooms. A high-pressure pitch for a particular investment can mean trouble. Be suspicious of "once-in-a-lifetime" opportunities or demands to "invest quickly." Be alert for recommendations based on "confidential information," an "upcoming favorable research report," a "prospective merger or acquisition," or the announcement of a "dynamic new product." And be especially careful with advice about unfamiliar securities.Because of the marked increase in the fabrication and proliferation of computer viruses affecting the Internet, we want to warn you about infections or viral contamination on your system. It is your responsibility to scan any and all downloaded materials received from the Internet. Bishop Street Funds is not responsible or liable for any damage or loss caused by such hazards.

There is no substitute for your own detailed research via a variety of media and sources. Any information you find on the Internet should be double-checked and verified. It is always a good idea to check with a brokerage firm, an accountant, or a trusted business advisor to get a second or third opinion about an investment. Don't get discouraged--just because fraud exists on the Web, that doesn't mean there aren't many valid opportunities out there. The most important thing to remember is that this is your money, your future. If you take the time to make informed and educated choices, you will have a better chance of making online investing work for you.

 

Reliable Sources

Several reliable sources exist on the Internet for general information on investing:

• The U.S. Securities and Exchange Commission
• The Commodity Futures Trading Commission

 

Where To Turn For Help

If you think you have been the victim of wrongdoing, or that securities laws may have been violated, you should contact the appropriate regulators.

U.S. Securities and Exchange Commission Office of Investor Education and Assistance
450 5th Street, NW
Washington, DC 20549
(202) 942-7040
TTD (202) 942-7065
https://www.sec.gov/page/oieasectionlanding

 

For the telephone number of your state securities regulator contact: North American Securities Administrators Association, Inc.
One Massachusetts Avenue, NW
Suite 310
Washington, DC 20001
(202) 737-0900
http://www.nasaa.org

 

©2000. National Association of Securities Dealers, Inc. All rights reserved. NASD is a registered service mark of the National Association of Securities Dealers, Inc. NASD Regulation is a registered service mark of NASD Regulation, Inc. Nasdaq and The Nasdaq Stock Market are registered service marks of The Nasdaq Stock Market, Inc. Amex is a registered service mark of the American Stock Exchange LLC.