Inside Online Investing: A Stockbroker Tells You What You Really Need to Know

From the Introduction

Why I Wrote This Book

– And that’s just American households.

The irony is that online trading was intended originally for a rather narrow segment of the investing public. At least at its inception, Internet investing was designed for people who were both computer literate, knew how to manage their own accounts and knew how the market works. Because these investors were largely self-sufficient, they were offered very deep discounts for managing their own accounts electronically, paying only for the execution and information.

Those deep discounts started to look very attractive to more and more people, and online brokerage firms advertised aggressively. From that point forward, online investing grew exponentially. However, not all of the people newly attracted to online investing were really computer literate, didn’t know how to manage their accounts, and didn’t know how the stock market works. Eventually, my job was to pick up the pieces after something went wrong.

Of course any number of things could, and did, go wrong – anything from computer problems, problems with the Internet, or problems with the account or trade execution. Sometimes people just needed help understanding their account balance screens. At its worst, accounts got tied into knots and it took me hours to unravel them.

Many new investors didn’t really understand how the stock market operates, and made financial decisions based on inaccurate assumptions. That can be a very expensive way to learn the ropes. For example, if, when the market is closed, you instruct your brokerage to buy a stock at the opening price, the price you pay may not be the same price it closed the day prior. A stock’s price can move dramatically, especially if there’s a big news story. Based on my experience, some of you read that and said, “yeah I knew that”, or “sure that makes sense”, and some of you will say “Oh really! I had no idea!”

One morning I had to explain this to a gentleman who fit into the “I had no idea” category, that when he placed an order to buy at the opening, he agreed to take whatever the opening price was. In this case, the stock opened $9 higher than the previous day’s close. That’s what he agreed to, and it’s too late to back out once the transaction takes place.

I’m a big fan and proponent of online investing and I believe that its benefits far outweigh its drawbacks. It’s as close to sitting at your broker’s desk as you can come.

At the same time, Internet trading gives you much more responsibility than ever before. When you invest online, you are doing everything yourself. That’s why you get the deepest discounts. That means there is no broker to ask questions of or to guide you. You place your orders and you get what you ask for – whether or not you understand what it is you’re asking. Saying “I didn’t know” or “I assumed” or “Nobody told me” is not going to cut it. Those are the most expensive words I hear, because by the time I hear it, the damage is done.

Online investing takes two distinct skill sets. You must know enough about computers and the Internet, and you must know enough about the marketplace to operate successfully. It’s like the self-serve pump at the gas station. If you want the self-serve discount, you have to pump your own gas, check your own oil and tires and wash your own bugs off the windshield. If you don’t know how to do those things, you risk excess wear and tear on your car. Likewise, if you lack the skills needed for online investing, you risk excess wear and tear on your net worth.

Then I Had an Idea

Of course that was unrealistic, but I still wished that I could somehow tell people what they needed to know before they needed to know it. I didn’t like giving people bad news, especially if it cost them money...and people who lost money generally are not very pleasant to talk to. They’re upset and frustrated, ready to tear someone’s head off and, well, mine was the first head they came across. I wanted to make my life easier too!

What if I could gather people in one room, sit them down and tell them what they need to know? The next day I called the adult education department of Scottsdale Community College with an idea to teach a workshop about how to invest on the Internet. They said computer classes are usually popular, and investing classes are usually popular, so the two together might go very well. So they took a chance on a topic that has never been taught before, and on someone who’s never taught a class before. They gave me a slot in the next catalog, and about five months to prepare.

In those five months, I sat down with a notebook and wrote down everything I could think of, and spent agonizing hours trying to organize a jumble of random thoughts and notes into a coherent classroom lecture. It was a lot of work, but once I got it done, I could keep doing it.

I’m happy to say that people at the college were right. My class has been very successful, filling to capacity nearly every time. Thanks to feedback from those who attended, it’s continues to improve.

This book is the final result of my efforts with Scottsdale Community College. It’s the culmination of eight years as a broker and four years as an instructor. I’m very pleased to offer it to you.

How to Use This Book

I’ve published this book in both standard physical “paper-and-glue” form (the p-book) and electronic form (the e-book). If you’ve bought the p-book, you also automatically get the e-book and all future updates.

An electronic book has certain advantages, including:

• By eliminating printing, binding and shipping charges I’m able to provide a full-sized book at a fraction of what it would cost in a bookstore.
• The information in this book can be updated continually, so you will never work with outdated or stale information. That’s useful for any industry, but it’s especially useful for a rapidly moving industry like Internet brokerage. Things change fast in this business, faster than I’ve seen for any other. A standard p-book would be obsolete before it hit the shelves.

I’ve tried to make this book accessible for everybody. Everything in it comes from conversations I’ve had (sometimes over and over) with all kinds of investors. Some people are more computer literate than others are; some people understand the markets better than others do. Certainly some parts of this book are going to seem simplistic to more advanced readers. Please feel free to skip right over parts you already know. I’ve included the basics because I’ve worked with many first-timers, some of whom bought their first computer just so they can invest online.

Goals for This Book

Even if you’ve barely touched a computer, even if you don’t know a stock from a bond from a hole in the ground, you are going to walk away from this book with more knowledge and ability than 99% of people using the ‘Net for trading now. Sounds like a lofty goal? I think it is possible.

Web trading, online investing, call it what you will, really is easy. It just takes a little bit of know-how. Wherever you stand right now, you are not that far having the same skills as the computer literate/market-savvy individuals who pioneered Web trading. It may very well seem too complicated if you find yourself thrown in the middle of it with little or no prior experience, or if no one’s really taken the time to explain things to you. I find that the online help that brokerages put on their Web sites isn’t really that helpful. That’s why this book was written.