When asked about the impact of the financial crisis many individuals mention the decrease in value of their investments and changes to retirement plans. But for many investors, the fallout includes a change in attitude. Some became so concerned about their finances that they now place a greater value than ever on professional financial advice. Others felt so disappointed in their professional advisers that they resolved to take greater control of their finances.
The popularity of online discount brokerages has exploded since the financial crisis as investors strive to take more control of their financial future.
Online brokerage trades in Canada totaled 51 million for the 12 months ended September 2011 compared to only 34 million for the 12 months ended September 2008, according to the Investor Economics Retail Brokerage report for Fall 2011.
Total accounts were at 4.4 million for the same period; up from 3.3 million three years earlier and assets held in these accounts reached $228.2 billion in September 2011, compared to $166.3 billion in September 2008.
Why has online trading become the vehicle of choice for many retail investors? Because it allows the investor to take control in a number of ways.
You make the decision to buy or sell a stock and carry out the transaction without discussing it with a broker or financial adviser. If you're interested in purchasing shares in Research in Motion while they are well down from their 52-week high of $60.30 you can decide on your purchase price and immediately punch in a buy order.
You are also in the driver's seat when it comes to choice of trading sites, but it pays to shop around. Many bank-owned operations compete fiercely for your business by lowering rates and providing special deals such as free trades for a specified period. After checking out the different packages, you can be forgiven for feeling as confused as after checking out cellular telephone packages but the principle is the same: study them all and then select one that suits your needs.
Some sites tout unique incentives. RBC Direct Investing provides a practice account that allows use of the same stock screens for actual trades, but at no cost or risk. They also offer Rep-Assist -- a service which enables an online investor to have a conversation with a representative using an on-screen pointer as a visual guide.
Be warned: DIY investing comes with disadvantages. The downside of independence is having limited or no access to financial service professionals when you have questions about risks and suitability of a volatile investment such as a gold exploration company. That leaves only one person to take the blame for a bad decision or the credit for a great decision — you.
You will also deal with emotional risks. Given the volatility of our economic and trading environment, you may face a stressful roller coaster ride with daily or hourly price swings, wondering whether to sell a holding that has appreciated handsomely or retain it in hopes of increasing your gains. Ask yourself: Can you deal with volatility?
An otherwise great stock pick can lose much of its value with a sudden development that you would never have foreseen and that can lead to a quick reappraisal and pragmatic decision making. As Kenny Rogers sang in The Gambler "You've Got To Know When to Hold 'em When to Fold 'em."
Venturing into online trading also requires a shrewd self appraisal. Although all trading sites offer tools and huge amounts of research information, you need to ask yourself if you have the self-discipline necessary to work with the tools and read the material?
Are you confident in your own type of investor profile? Research has shown the mindset of an online trader may be the type of decision-making identified with a gambler looking for gain or profit, according to Victor Ricciardi, a professor of finance at Goucher College in Baltimore, MD, who has researched behavioural finance for over a decade.
"Online stock traders tend to embrace the notion of highly volatile markets because these types of market conditions provide them the prospect to make increased short-time profits," he said in a commentary provided to Yahoo! Finance.
Online trading also means integrating trade decisions into other areas of your life. If you take a holiday, checking your holdings in a foreign hotel lobby may present security problems. Investors will need to wrestle with whether they are able to set no-regrets buy and sell prices before leaving or risk logging on to a potentially unsecured network.
Online brokerage accounts mean you can also integrate your other investments with your online portfolio. If you and your financial adviser have created an asset allocation plan designating 10 percent of your holdings as growth investments, have you agreed on which accounts contain them?
If you answered yes to most or all of these questions you may be ready to trade online.
Al Emid is an author and financial journalist covering investing, banking and insurance. The opinions expressed are his own.