Are you aware that online securities trading is a relatively new idea to the financial world? Did you know that just 40 years ago, firms charged very high commissions on all trades, whether you bought one or a million shares? And finally, do you know how it came to be that there are both regulated and unregulated brokerage firms? A lot has happened since the late 1970s, both in terms of legal changes and technological advancements. To understand the evolution of how people buy and sell stocks and other securities via the comfort of their computer chairs, consider the following.
Platforms are More Sophisticated and Easier to Use
Anyone who regularly uses some of the common advanced trading platforms knows how sophisticated and simple it is to purchase and sell securities. Once you’re acquainted with a particular platform, placing orders, following price action, and deciding to hold or sell is as simple as clicking a mouse. Just a few decades ago, if you wanted to purchase a share of stock or an option, you had to pick up your telephone and speak with a licensed broker-dealer to place your order. Commissions were ridiculously high, so unless you were making a big buy, the effort was almost not worth the trouble. This is one way that individual, non-wealthy individuals were effectively locked out of the securities markets.
Everything changed when laws and federal regulations allowed for competitive commissions and non-broker order placement. Today’s platforms are highly sophisticated pieces of technology. One of their biggest selling points is their simplicity. After a few hours of training, just about anyone can learn to set stop-losses, place limit orders, and perform precise buying and selling activities with ease. Another way the platforms have evolved is in terms of analysis. Many firms offer clients powerful risk-limiting tools that work to prevent large losses on single transactions. Additionally, account holders can take advantage of expert investors and follow their trading activities step by step.
There are many different ways to limit risk, and the latest platforms use the techniques to protect the capital of users. As far as a web-based broker is concerned, it’s a smart business to help customers stay financially solvent. That way, they’ll stick around and continue to place orders and add to the size of their portfolios. It’s a win-win situation if ever there was one.
The 1970s and 1980s: The Starting Point
During a 10-year time frame from the late 1970s up to the late 1980s, the entire trading environment changed. The causes were numerous, but the most important ones were the end of paper stock certificates. That old way of doing business was replaced by digital/electronic accounts for investors. Other factors that started the ball rolling toward complete automation of the exchanges were laws that let investors place trades without having to go through a broker. Additionally, regulators did away with fixed-rate commissions, thus setting up a new system in which brokers were allowed to compete for clients by offering discounts. The world’s first online broker appeared in 1993, and during the next several years, the growth of the automated industry was so rapid that dozens of other companies entered the field.
The Growth of Unregulated Broker-Dealers
Before the deregulation phase at the end of the last century, every brokerage firm was closely scrutinized by governmental bodies. Today’s situation is quite different, with hundreds of unregulated firms, many of which operate off-shore, outside the bounds of any nation’s regulatory authority. Investors should always check a firm’s history, regulating body, and credentials before putting money into an account. Regulated firms offer financial peace of mind because they’re able to insure against the risk of loss, should the company go out of business or take part in outright fraud.
How Firms Attract Customers: Then and Now
Before the 1990s, brokerage houses did little to attract customers in terms of marketing efforts. After website-based activity becomes the norm from 1995 onward, those efforts changed completely. At first, new account holders were given gifts and cash bonuses for coming on board, much the same way traditional banks gave toasters to new customers. Later, as competition intensified, trading companies went started openly competing in major ad campaigns, vying for new signups with special educational materials, access to expert advisors, and more. Today, one of the newer question marks in that effort is an array of risk-limiting software and systems for new clients. As platforms become more technologically advanced, it’s safe to say that the balance of the decade will witness fresh approaches to attract new customers.