It's been my opinion for a while that online trading and the increase in information available to stock traders has contributed to an increasingly volatile stock market.
Think about it for a second, before the rise in online trading, selling off your stocks required a call to your broker. Theoretically, your broker was someone who you trusted to know what he/she was doing when it came to buying and selling your stocks. More importantly, your broker (other than a brokerage fee) wasn't financially involved in the sale or purchase of your stocks.
There's a good chance that if you'd called your broker to sell your stocks during a downturn in the market, he'd tell you that now was not the time to sell off the stocks and lock in your losses, now was the time to buy more for the inevitable upswing in the market that follows any sell-off.
Unfortunately, for a large number of Americans, the broker is a thing of the past. There's very little standing in your way when you log into your E-Trade or ScottTrade account to sell off that stock that's tanking... meaning there's no one there to talk some sense into you before you commit one of the biggest rookie mistakes of stock trading (selling near the bottom).
In addition, we're bombarded (especially lately) with information about how bad the economy is doing right now. The economy is really a trust-based system that thrives when consumers have confidence in it and doesn't when they don't. Sure, there are some issues with the fundamentals of our credit markets, but they pale in comparison to the mental specter of recession and how we react to it.
Just like shark attacks, SARS, the Asian Bird Flu, and other over-hyped crises, the mass media is doing a bang up job of making sure everyone in the U.S. is scared. After all, if people are scared they'll buy more newspapers and watch more TV to monitor the situation. In the current media environment, sensationalism sells.
Combine these two things and you have a perfect storm for market volatility. When you log into your online brokerage account, you're probably presented with the performance of the shares you own as well as news items relating to them. As you read about how badly IBM is doing, it's all too easy to click a few buttons and sell off your IBM stock. While it's a boon to usability and it makes the online trading companies money (they make money on every trade whether you do or not), is it the best thing for our stock market?
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1 comment:
This makes a really good point. Today, technology can help make a lot of things easier, such as throwing your money away... While it is convenient, selling off stocks is a hazard if someone does that while not understanding the consequences of their actions. Experts get paid for that reason, they help to make sure that no one goes on an uneducated selling spree.
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