The Disadvantages of Online Investing

Get your investing information online faster -- but think before you act on it.
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With online investing, you can manage your portfolio wherever you go, just as long you can access the Internet. Online investing gives you greater control, lower fees and greater convenience: you can check into your account in the dead of night or during a 15-minute snack break if that's what suits you. It does have some drawbacks, however.


The Internet makes investing easier, but making good investments is as hard as ever. Sometimes harder, if you're a novice: you're working alone, without a broker or adviser to mentor you. Another risk for novices is that it's easy to get seduced by the technology and forget that when you put in a buy order, you're spending real money. To succeed, you need the same judgment and research skills with your online account that you use in making any investment.


Even if the investment websites you use have tight security, hackers have multiple ways to steal your password or trick you into handing it over. If a hacker gets access to your account, she can sell off your portfolio, then transfer the proceeds to an offshore account. For a more elaborate scam, the hacker uses the proceeds to invest in penny stocks she already owns shares of. The sudden interest in the stock drives prices up, after which she sells off her investment at a nice profit.


Internet technology is wonderful -- except when it isn't. If you need to make a trade and your Internet service is out, you may miss the window of opportunity. If online traffic is high or your Internet connection is poor, your ability to manage your portfolio may slow down to a crawl. The same is true if the problem's at your online broker's end. Sometimes you may be certain a trade didn't go through, but if you repeat the order, you discover you've actually bought twice the shares you meant to.


The Securities and Exchange Commission notes that a common problem for online investors is that they place market orders for fast-moving stocks. By the time the order goes through, the price may have risen to more than you can afford. To minimize the risk, the SEC recommends using a limit order that sets a maximum price on what you're willing to buy. Another risk is that if you enjoy gambling, the ease of online trading may encourage you to take risky investments just for the thrill.

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