Investing and the Internet

Investing and the Internet

The pervasive influence of the Internet has had far-reaching implications for both markets and investors around the world. The Internet has allowed individual investors to flood into the marketplace armed with an unprecedented and almost unlimited amount of information. This phenomenon has led to serious changes in how markets operate and respond to new information. Some of these changes have been negative and some have been positive, but this paper will attempt to demonstrate that the overall impact for investors has been for the better. Along with nearly every other aspect of life, the Internet has forced the world of investing to undergo a democratization process that ultimately has proved and will continue to prove beneficial for the individual investor. The Internet has benefited the individual investor with near-instantaneous access to information, a change in the nature of shareholder influence and power, and lowered costs and barriers to entry. With the mindfulness of the some of the negative aspects of the Internet’s influence and the wherewithal to exploit the benefits, individuals can work towards financial independence on their own terms.

The first and most obvious benefit of the Internet is the vast amount of information available to investors. What was once an arduous and time-consuming process of requesting financial documents from investor relations departments, now only requires a brief search to reveal not only official financial documents, but also mountains of blog posts, analyses, and minute-by-minute news for a particular company. According to the 2014 Brunswick Investor Use of Digital and Social Media Survey[MD1], investors are increasingly relying on blogs (up 7% year-on-year to 59%) and social media (up 2% year-on-year to 26%) to research the market or individual investments. More importantly, online engagement is having a greater influence on individuals’ investing decisions (up to 27% investment decisions influenced by blog posts). (2014 Brunswick) This has allowed individual investors to quickly increase their knowledge on companies and the market as a whole.

However, investors should be mindful of the potential downfalls of having so much information available. The issue about investors having so much information available “depends on the relevance of the information to the decision and on how well-equipped the decisionmaker[sic] is to use the information.” (Barber, Odean 46). In fact, an overabundance of information can actually lead inexperienced investors to feel overwhelmed and unable to separate useful analysis from irrelevant or misleading information. In the investing industry, this is widely known as ‘analysis paralysis.’ Though these points do have merit, the act of being mindful of these biases will help investors overcome them and, over time, investors will become more aware of what useful, relevant information is and what is not. In fact, what is most important and beneficial for individual investors “is long-term financial planning and asset allocation—as opposed to speci.. stock or asset selection.” (Barber, Odean 45) According to Dick Davis, individuals should tune out the overabundance of information. “One of the worst things that can happen to a long-term investor is to be instantly and totally informed about his stock.” (para 2) Especially for a well-planned portfolio, “the media’s daily ineptness is of less concern to someone who is truly a long-term investor—and maintains that long-term focus even when listening to the daily news.” (Davis, para 33)

The increased access of information is leading to a paradigm shift in corporate governance of publically traded companies. Scholars have noted that many companies are suffering from “falling attendance rates at annual general meetings of shareholders.” (Grzybkowski, Wojcik 2) With multinational corporations stretching to every corner of the globe, it is virtually impossible to get every shareholder from various countries together in one place. So, while it is unlikely that the Internet will completely supplant face-to-face meetings for corporate governance, the Internet is supporting “the development of a global marketplace for corporate governance.” (Grzybkowski, Wojcik 14) Tools must be developed for shareholders to vote in important board decisions, lobby company’s investor relations department, and get in touch with other shareholders through electronic means. This new dynamic is changing how executives operate in the boardroom. While it is unlikely that a small, individual investor would have a massive impact on the overall course of a company, a cohesive group of investors, brought together through the Internet, could have enough clout to influence corporate policy. (Barber, Odean 53) Just as websites like Kickstarter or Indiegogo are able to rally investors behind a product or a new company, it is feasible that individual shareholders would be able to form groups or coalitions to help influence policy in huge, traditionally structured companies as well.

The most beneficial aspect the Internet has had on individual investing by far is the reduction of costs and barriers to entry associated with the buying and selling of securities. The proliferation of online brokerage firms like Scottrade, Fidelity, TD Ameritrade, and others have drastically reduced frictional costs of investing, or to be more exact, “retail investors have seen a dramatic decline in the commission rates they pay to trade securities.” (Fuhrman) As the rapid expansion of start-up, online brokerage firms suggest, “the marginal costs of services such as enabling a customer to review a portfolio or the status of trades are essentially zero, and such services can be provided 24 hours a day, every day.” (Barber, Odean 43) The fact that these brokerage firms are available at all hours of the day, no matter what part of the world the investor is in, is hugely attractive to those investors who are stifled by the office hours and regulations of larger, traditional firms. Also, the overhead for these companies is far less than that of huge banks and brokerage firms, so those large companies may not be able to adapt and adjust to woo customers away from online brokerage firms. Subsequently, this forces traditional brokerage firms to lower their prices and scramble to add additional services. For example, as the prices for traditional financial service advice goes down, financial advisors [must] provide more services—for example, tax planning, tax preparation, estate planning, and insurance planning—to differentiate themselves from the on-line providers.” (Barber, Odean 45) These services will prove to be an advantage for consumers as financial advisors become more specialized and better able to convey more complicated information that, for an individual investor by themselves, would be difficult to comprehend and implement correctly. So, the Internet still has a major influence on services provided in the ‘real’ world by traditional financial service companies.

The Internet has fundamentally challenged the status quo in the investment world. Access to greater amounts of information, critical changes in corporate governance and individual shareholder influence, and the dramatic decrease in the cost of trading securities are all intertwined and have both positives and negatives. Though the negatives do have various degrees of merit, the overall impact of the Internet ultimately tips the scale in the individual investors’ favor.

Works Cited

1. Barber, Brad M., and Terrance Odean. The Internet and the Investor. The Journal of Economic Perspectives (2001): 41-54. PDF. 16 Oct. 2014.
2. Brunswick Group. Investor Use of Digital and Social Media Survey. New York, NY: Brunswick Group, New York Office, PPT. 16 Oct. 2014.
3. Davis, Dick. The Stock Market and the Media: Turn It On, But Tune It Out. The American Association of Individual Investors Journal May (2008): 14-16. Web. 16 Oct. 2014.
4. Fuhrmann, Ryan C. How The Internet Has Changed Investing. Investopedia. Investopedia, 6 Feb. 2012. Web. 16 Oct. 2014.
5. Grzybkowski, Michal, and Wojcik, Dariusz. Internet and Corporate Governance. 6th Global Conference on Business and Economics (2006): 1-21. Web. 16 Oct 2014.

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