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INTERNET REVOLUTION: Nick Williams, assistant director at Brewin Dolphin

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First published in Business: Shares
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SITTING at his kitchen table, an investor downloads information about an exciting technology firm.

Using this data, he places an online trade in the company’s shares.

The trade is executed via one online communication network or another.

The stock is shown in his online account but he can’t physically touch it.

Money he has never actually seen goes the other way.

The process has taken less than five minutes.

This scenario is a far cry from the maelstrom of telephony a child of the 1980’s like me imagines buying shares to have been when most brokers might well have worn red braces.

The internet has revolutionised our world and the investment industry with it.

Theoretically, a perfect stock market would match perfectly informed buyers and sellers so the market price of an investment was fair.

One of the key characteristics of the web is that it facilitates a cheap and instantaneous flow of information to the masses.

Previously, our investor may have had to eschew the kitchen for his local library to find (probably out-dated) company results and draw his own conclusions. Now he can access all sorts of digest and boil the kettle at the same time.

So, the barriers to communication have come down with a bang.

Information flows to where it is needed most.

Of course, people still aren’t fully informed and markets aren’t perfect but things are better.

Trading costs are lower and can be compared very quickly.

Our private investor is now better informed, and is making the trade of his own volition, but does this automatically bring better decision making?

On average, I’d venture not.

Human nature says many will search for something that reflects their specific view.

With billions of tit-bits of information a click away the chances are that something will back their view up, potentially leading to overconfidence.

This is before we’ve got on to how information overload can overwhelm the decision-maker.

There is the mere fact that the free ‘advice’ out there, by which I mean gossip, some on-line journals, advice engines and the like can vary hugely in quality.

There is still no free substitute for advice on long term financial planning and asset allocation, and the dubious quality of unregulated internet based financial ‘guidance’ has been a real boon for the more strictly regulated financial advice market.

What prompted this piece was a negatively slanted article I read in a leading journal last week, bemoaning the advent of the web that had created dominant, overlord-esque firms in online retail, film downloads and the like.

Such dominant players have always existed, and I would flip this and say that what the net has really done is to create the opportunity for these dominant players to exist in entirely new industries, bringing me on to a key benefit for investors: innovation, and what it has done for investor returns.

Technology is one sector that has been at the vanguard of web-induced stock market excitement.

Yes, the big guns rule, but low barriers to entry mean that really anyone anywhere can get some form of enterprise off the ground cheaply.

Myriad companies have sprung up, young, excellent in concept but ultimately not in performance.

The tech firm which so excited our investor after his five minute Google incursion could have been one such firm, or it could have been the next, well, Google.

Because of the difficulty in valuing such conceptual firms in a relatively nascent sector then the potential for loss is high.

You yourself may well have got into the shares of Amazon or Arm in the early days, and thus would have a warmer view of what the Web has done for your returns than those who chased the Dotcom bubble.

Nowadays capital moves more rapidly to exciting projects, but moves on faster than ever.

Capitalism used and misused.

It is fact that the web has been disastrous for some industries, but undoubtedly it has offered many companies the opportunity to keep costs low, while reaching a wider market than ever, exporting its message in new and interesting ways.

Whether or not it has been good for investors would depend on who you asked, but the benefits are certainly clear.

Nick Williams is an assistant director at Brewin Dolphin and offers advice on a wide range of financial services. The value of any investment and any income can fall and you may get back less than you invested. No investment is suitable for all people and should you have any doubts, you should consult an authorised financial advisor. The information contained in this article has been taken from public sources and is believed to be reliable and accurate.

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