The Pros and Cons of Online Investing by jaj75621


									 Investor Protection

                                   The Pros and Cons of
                                   Online Investing
                                   Ken Kivenko

           ccording to J. D. Power and Associates, one third      and mutual funds, technical analysis tools and educational/
           of full-service brokerage clients also do some in-     instructional videos.
           vesting online, and twenty-six per cent of bank        • You can log in to your account via the Internet and print
           mutual fund investors are also using the online        out an analysis of your portfolio, view the balance of your
 channel.                                                         account, view activity records and make transfers to other
    Taking control of your investments has never been easier,     accounts.
 thanks to the proliferation of information on the Internet,
 the growing assortment of free research tools made avail-        Cons
 able by discount brokers and some excellent choices for
 low-cost ETFs.                                                   • There is a time and continuing education commitment
                                                                  required when using online investing.
 Investing Online                                                 • Stock prices might not be as up to date as you think
                                                                  when dealing with an online brokerage. If you’re dealing
     You can open U.S. dollar accounts, RRSPs, RESPs,             with volatile or illiquid stocks, this could be problematic.
 RRIFs, TFSAs and the like. Accounts can also be set up to        • By allowing you to react quickly, you may react without
 permit option transactions, margin buying and even short         thinking thoroughly.
 selling. You can invest in stocks, government and corporate      • Since brokerage commissions to buy and sell securities
 bonds, GICs, T-bills, ETFs and mutual funds.                     can become costly, mutual funds might be better for smaller
                                                                  investors. However, Claymore Investments has arranged
 Pros                                                             with some brokers to allow clients to make regular com-
                                                                  mission-free contributions to its ETFs. This levels the play-
 • Online brokerages never close, which allows individual         ing field between mutual funds and DIY investing for
 investors constant access to market data and their accounts.     smaller investors.
 • Online investing permits speedy execution of buy/sell          • With mutual funds, you can make cost-free switches
 transactions during the trading day.                             between funds in the same family as part of rebalancing.
 • Low sales commissions are often a fraction of those with       With a brokerage account every purchase and sale costs
 a full-service broker or mutual fund salesperson. The new        money. One solution: Barclays Global Investors Canada
 HST coming in July will benefit online investors relative        iShares Portfolio Builder Funds offer “ETFs of ETFs” that
 to mutual fund unitholders.                                      provide strategic asset allocation and rebalancing for inves-
 • With online brokers, individuals can set stop-loss orders      tors who want to take a portfolio approach to exchange-
 and other important triggers to kick in automatically, pre-      traded funds (ETFs).
 venting potentially huge losses.                                 • With an online account you won’t have access to an ad-
 • You can utilize stock options to protect your portfolio        visor. Some argue that this may be good since most advi-
 or add to income. Option writing requires dealer approval        sors are commission driven by the dealer’s incentive and
 as it is regarded as a more sophisticated investment tool.       performance management systems. This arrangement can
 • Discount firms offer research that is on par with those        lead to a conflict of interests.
 offered at the traditional brokerage firms.                         For some, being able to talk to someone is more impor-
 • A number of useful investment tools are available. These       tant than higher returns. Consulting with a professional
 include asset mix calculators, watchlist portfolios, model       could prevent one from making costly mistakes.
 portfolios, stock screeners, e-mail alerts on tagged stocks

Canadian MoneySaver   • PO Box 370, Bath, ON K0H 1G0 •   (613) 352-7448   •   MARCH/APRIL 2010
• It’s not as easy to reinvest dividends and fund distribu-                      complete the clients transactions. Therefore, trading reviews
tions automatically with an online account compared to a                         are often done post-trade.
mutual fund. However, most brokers will reinvest dividends                          Regulators expect that any trading system that is devel-
from a wide number of common stocks as well as mutual                            oped must be reasonably designed to function correctly, be
fund distributions. Check when opening your account.                             responsive to client orders and to changes in the environ-
                                                                                 ment. Account reporting must be accurate and
Getting Started                                                                  timely. Regulators have taken action against firms for fail-
                                                                                 ures in their computer systems that deal with such issues as
• Pick a broker based on your needs. For details about the                       breach of client confidentiality, failure to detect manipula-
2009 online broker survey visit                         tive trading and failures to reflect changes in the makeup of
report-on-business/online-broker-rankings/the-11th-annual-                       a particular security.
online-broker-survey/article1348448/                                                As an example of the latter in the discount brokerage envi-
• Set up a discount broker account at a reputable dealer                         ronment, IIROC had a case where a reverse split of the shares
with a good rating for their website tools, research and re-                     of a company was not reflected on the client’s portfolio. The
porting. Take a read of IIROC’s Opening Your Retail Ac-                          result was that the client believed that share value had in-
count available for download at                         creased exponentially and sold the shares. The client had an
l i s h / Me m b e r R e s o u r c e s / B ro c h u re s / D o c u m e n t s /   unintended short when they sold what they thought they
RetailAccountBrochure_en.pdf Find the discount broker’s                          owned but in reality had been reduced significantly due to
Internet page and complete the application process. It takes                     the reverse split. This caused the client a considerable loss
approximately 2 weeks to complete all the account trans-                         when they had to repurchase a very thinly traded equity to
fers. Visit                       make good on the short. The client was ultimately compen-
to help you overcome the fear of opening a brokerage ac-                         sated for the loss and IIROC took action against the firm for
count.                                                                           having a trading system that did not meet standards.
• Decide on your original strategy, how much you want                               The Canadian Investor Protection Fund (
to invest and what are your short term/long-term invest-                         offers insurance of up to $1 million per eligible account in
ment goals and objectives.                                                       the event of dealer insolvency. IIROC member firms sup-
• Define a starting asset allocation using any number of                         port the Ombudsman for Banking Services and Investments
online asset calculators, e.g.                         ( OBSI provides a free dispute resolution serv-
java/InvestorProfile.html Many investing gurus are of the                        ice for a complaint that an investor feels hasn’t been han-
opinion that asset allocation, rather than individual secu-                      dled properly by their broker. Restitution is available up to
rity selection, is the primary determinant of portfolio re-                      $350,000.
turns for a given level of risk. You can use online risk assess-
ment tools to help get a handle on your risk tolerance and                       Some Cautions
loss capacity.
• Start investing by putting small amounts in safe invest-                           Be careful when entering stock symbols, quantities and
ments.                                                                           prices. With the wrong clicks you can make an expensive
• Keep current by reading the financial news and subscrib-                       error. Also, be sure to check when you cancel an order – it
ing to Canada’s only member-funded advisory publication,                         is subject to prior fills. In a 2003 case, an investor thought
Canadian MoneySaver.                                                             he had cancelled a sell order and re-entered it at a higher
• Monitor investments, rebalance as necessary and review                         price. It turned out the earlier order had been filled and he
periodically as your personal situation, financial objectives                    had inadvertently put himself in a short position.
and markets change.                                                                  Because of the ease in completing transactions, there is
                                                                                 an inclination to trade more often. There is no research
Investor Protection                                                              that frequent trading and market timing are effective for
                                                                                 retail investors. Indeed, the opposite is true.
   IIROC ( is the self-regulating organization                          Also, don’t be enticed into every new IPO or ETF that
(SRO) for brokerage firms – online brokers are members.                          comes along. The ETF industry is picking up some bad
Online brokerages are subject to the same rules as any other                     habits from the mutual fund industry. There’s a growing
brokerage with a couple of narrow exceptions based upon                          list of more expensive, specialized sector ETFs that are of
the fact there is no advice provided. The exceptions include                     little use to investors. More recently, 2 times leveraged ETFs
the fact that the suitability rule is relaxed in respect to dis-                 (BetaPro ETFs) have appeared that have already caused
count accounts, i.e. the online discount brokerage is not                        much investor grief. By and large, they were sold by full-
supposed to provide any advice and is merely a service to                        service brokers who didn’t understand the product.

Canadian MoneySaver       • PO Box 370, Bath, ON K0H 1G0 • (613) 352-7448 •                  MARCH/APRIL 2010
    Most mutual funds will pay trailer commissions to dis-
 count brokers even though they do not and are not allowed
 to provide advice. You may want to avoid these products.
    Since you are on the Internet, privacy and security are
 paramount. One of the best links I’ve found comes cour-
 tesy of the U.S. Securities and Exchange Commission (http:/
 / It ex-
 plains all about passwords, phishing, logging out and even
 wireless networks.
    Most firms offer a security guarantee to provide you with
 greater peace of mind. If an unauthorized transaction is
 conducted in your online investing account, you will be
 reimbursed 100% for any direct losses in your account.

    Online investing is a different experience, so take it slowly
 and maybe even try a practice account. By looking after
 your own portfolio you’ll save on commissions and fees,
 manage your taxes better and develop a better understand-
 ing of the world of finance as you build your nest egg. Buy
 for the long term and keep your eye on the horizon.

 Ken Kivenko, PEng, President , Kenmar, Etobicoke, ON
 (416) 244-5803,,

Canadian MoneySaver   • PO Box 370, Bath, ON K0H 1G0 •     (613) 352-7448   •   MARCH/APRIL 2010

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