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The Impact of the Internet on Investment Strategies: The Online Trading Revolution

Chris Doss

Paulo Ribeiro

“Born of a marriage between the Internet and the long-running bull market, online stock trading has put investing within the reach of nearly everyone”

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Outline

Introduction and Objectives Historical Background Hypothesis Research Findings Conclusions and Recommendations

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Introduction

It is early morning, and you just had breakfast, skimmed the local paper, and checked your e-mail. One of the e-mails from a financial news alert service mentions a company whose stock tumbled dramatically after a disappointing earnings announcement. This may sound like an opportunity to buy their stock. You go to the WEB and check the company’s profile and find out that this is a very solid firm who has performed well over the last several years. You check their 5-year summary of financial figures, stock prices and dividends: they are excellent. The return on equity is better than the average company of the same SIC code. Value Line and S&P also indicate that the company’s growth in profits and operating income has consistently improved. The recent reduction in the stock price is supposed to be temporary and it should go back to its original value early next year. You make the move to buy. You go to your online investment provider and purchase 200 shares. This whole process is completed in less than 15 minutes. You grab a second cup of coffee and go to work. Your money is safely invested (hopefully) … you are on the way to become a another millionaire (may be). And that is the magic or revolution of the Internet: No complicated transactions or intermediate fees. That is how the Internet has transformed the investment and financial worlds: a revolution whose true consequences can be hardly predicted. It sounds like science-fiction. But there is no fiction, it is all science: it is virtual reality.

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Introduction and Objectives

Technological Revolution Objectives:

– Market Transformation– New Opportunities for Investors – Information / Technology Accessibility– Investigate the Impact and

Dynamics of this Revolution Volatility Online Trading

– Trends and Projected Future

A June 1999 survey found that 4.6 million online investors had traded at least once in the prior six months. And despite the fear of a slowdown in online-trading activity, the survey found that 16.3 million people were poised to begin trading on line.

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First Half of 1999

State Number of Deals Amount Invested

AK/HI/PR 2 1,400,000

COLORADO 15 120,523,090

DC/METROPLEX 23 240,890,000

LA/ORANGECO 48 508,674,462

MIDW EST 22 131,998,260

NEW ENGLA ND 94 861,262,000

NORTH CENTRA L 12 56,650,000

NORTHW EST 42 283,500,000

NY METRO 45 451,419,000

PHILA DELPHIA METRO 10 74,606,000

SACRAMENTO/N.CA L 2 16,500,000

SAN DIEGO 16 81,803,000

SILICON VA LLEY 233 2,241,852,916

SOUTH CENTRAL 4 19,750,000

SOUTH W EST 11 54,725,000

SOUTHEA ST 40 275,175,000

TEXAS 27 182,950,581

UPSTATE NY 2 7,690,000Grand Total 648 5,611,369,309

Source: PriceWaterhouseCoopers

Internet-Related Investments by Region

Introduction and Objectives

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Historical Background

History of the Internet Investing Prior to the Internet Post-Internet Investment Strategies

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Hypothesis

The Internet has enabled any investor the information necessary for an intelligent decision regarding investment strategies.

This fast dissemination of information has impacted the speed in which the market reacts, created further speculation, and produced more market fluctuations on short-term basis.

This environment allows for more stability on the long term basis since the market is continuously adjusting to reflect actual conditions.

When advertising brokers make a point to stress their low fees and user-friendly research tools. Basic online commission has dropped to low as $8, with limit and stop orders for an additional $5. Accounts can be opened with a minimum for $ 200

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Research Findings

Online Trading– E*Trade, Ameritrade, Schwab

Day Trading Cultural Change (age doesn’t matter) After-hours Trading Diversification Strategies Impact on Inflation Investment Information Availability Regulatory Issues Competition New Trends: Online Banking

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Conclusions and Recommendations

The Internet has revolutionized and redefined the way financial investment strategies. The Internet resources can provide the knowledge one needs for becoming a proficient online investor. The potential is phenomenal and the future hard to predict.

From reducing inflation to impacting the reaction time of the market the Internet is here to stay and redefine the way financial investment is done.

However, the Internet is a not a panacea. Technical and regulatory issues will have to be addressed in order to make this revolution a greater success.