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Many investors, particularly individual investors and newcomers to the financial markets, appreciate the convenience and accessibility of electronic investing with online investment companies. Online investment companies are growing in popularity even among those who used to keep their business strictly with full service investment brokerages based on Wall Street.
Many online investment companies are pitching much of their business towards the do it yourself investor. However, before undertaking any financial transactions with an online investment company, it is extremely important to acquire a thorough knowledge of personal finance. It's equally important to possess good critical thinking skills and an abundance of caution about protecting both your money and your identity on the internet.
Can an online investment company ever be legit?
When you consider using an online investment company, you first need enough finance industry knowledge and internet sophistication to be able to distinguish the many legitimate online investment companies from identity thieves, fraudulent schemes and other online scam artists masquerading as legitimate online investors.
Some questions you should ask before doing business with an online investment company include:
- Is this company registered with my state securities agency and the SEC?
- What are the fees involved, how much do they total and how much do they subtract from an eventual return on this investment?
- How profitable is this online investment company?
- Has this company ever been disciplined by a regulatory agency?
- How will this investment make money (capital gains, interest rates, dividends)?
- How can this online investment company be independently investigated?
Another way of making sure your online investment company is legitimate is to stick with established, reputable "brick and mortar" investment companies that maintain a presence online and also run an online investment company. ("Brick and mortar" means the company also has a physical address where customers can interact in person with their investment adviser or broker.) Established brick and mortar investment companies that run legitimate and popular online investment services include Charles Schwab and Vanguard.
You can also stick with an online investment company such as E-Trade Financial Corporation, which is licensed and regulated by FINRA. E-Trade has been in business since 1996. A company like E Trade might be a particularly good option for the beginning investor to get their bearings in the world of online investments, as they have relatively low fees and also feature an "online advisor". An online advisor is an interactive information resource that analyzes a potential investor's financial goals and recommends where the investor might best position their assets.
As with almost all online investing, it is still the investor's responsibility to know their own income and expense circumstances - a critical component of traditional financial and investment planning that is generally not part of online investment services.
Working with a conventional investment company, a client develops a relationship with and works closely with a personal advisor who understands the level of financial risk the client can tolerate, advises on investment decisions and closely monitors their investment portfolio. With an online investment company, the client must understand that they are 100% responsible for all investment decisions and portfolio management, and of necessity needs to become a far more educated investment services consumer. Otherwise they can quickly lose as much money as they would falling victim to a fraudulent investment scheme.
