Trading equities, or stocks, is often dismissed as gambling. Every middle-class family wants to profit from "the market." Unfortunately, the results can be poorly executed trades, poor decision-making skills and an overvalued market. Equity trading in the 21st century is, and will continue to be, faster, larger and more unstable than ever.
The rise and spread of computerization has been the largest and most significant change in equity trading over the last 15 years. Computers and high-speed communications -- coupled with almost instant access to vital information -- have drastically lowered transaction costs. In addition, high-speed communications and computerization have eliminated the "human error" factor in the stock market equation, at least insofar as brokers are concerned. As a result, investing is cheaper and easier than ever. On the other hand, the increased speed of communications forces traders to act more quickly than ever before. The quick and easy access to information can promote unchecked spread of rumors and outright distortions about firms or sectors, which can do serious damage to the market.
The computerization of equity trading means that the broker has, to a limited extent, been replaced. Computers can handle stock transactions at rapid speeds that reduce transaction costs. This decreases human error in that the former errors and problems of human brokers are now minimized. However, computerized equity trading can also overload computers, cause crashes, introduce viruses into the system and crash markets in situations of computer error or power outages. The computerization of stock trading has eliminated many older errors but introduced many new ones.
The popularity of equity investing has led to a significant increase in volume and overall liquidity in the markets. Stocks are more volatile than ever. While trading has increased, the average trade has fallen, since so many smaller investors are in the market and can trade over the Internet. Transaction costs have fallen drastically, which means that exchanges and larger brokerage houses are competing ferociously for this newer business. Online "brokers" can be run by one or two people, putting pressure on the more established firms and "experts."
Pros and Cons
A case can be made for the older, pre-Depression concept of investing, where only the wealthy and "aristocratic" played the market. Now, middle-class investors with lower incomes can be found everywhere, making decisions derived from the fashionable press rather than years of experience. Investing fads and fashions come and go, leaving many impoverished with a handful of new millionaires. An old-fashioned broker can make many minor errors, but a totally computerized system, if infected, can destroy a market for days. Massive and sudden increases in volume create more volatility and instability, which in turn, drive up option prices.
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