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*Note: Make sure to check out the Lucky Dog Investing Tutorials*

Mutual Funds

Collective investment helps curb individual risk.

Actively managed by an investment company, mutual funds are the ideal choice for small-budget, long-term investors to get a diverse and low-maintenance portfolio. They also permit small periodic additions, which makes them a great way to save (Lichtman and Duke, 23).

Each fund has a set of stated objectives and guidelines for the manager. They can have all kinds of different strategies, and they often combine multiple strategies. They can be aggressive or conservative, they can invest in bonds or in growth stocks, they can be open to international markets or limited to regional companies (InvestorWords).

The Internet has made it possible for novice mutual fund investors to better track their money and communicate with managers. This is going to make the mutual fund market more competitive, which is of course, good for the investor.

Index Funds

Indexing is the practice of "Building a Portfolio to match an index, in an effort to mirror that index's performance."(Lichtman and Duke, 23). An index fund is a mutual fund that mimics indexes such as the Dow Jones Industrial Average or the Fortune 500 by buying the same types of stocks in the same proportions (InvestorWords). They are not as actively managed as other funds, so they usually have lower fees. These types of funds are very popular and can actually boost the index that they are tracking. Talk about positive feedback.

401(k) and I.R.A.

Many people do not know that their retirement accounts may offer a self-directed option. You probably don't want to start speculating with your nest-egg, but you may want to think about switching to a better performing fund than the one you have.

Online Brokerages

Screen Shot of Ameritrade 1998
Screen shot of Ameritrade's trading interface. Source: /td-ameritrade-service.html

The Internet has given rise to specialized online discount brokers and has forced many traditional firms to change the way they operate (Thomsett, 182). Knowing the right one to choose is tricky, but once again the Internet provides a plethora of opinions, studies and side-by side comparisons.

The Broker-Client Relationship

One of the most visible and important changes brought by the Web is the discount broker. Traditionally, brokers and investors have personal relationships, even if it is only over the phone. The broker could tell the client about a promising company and the client could ask the broker what he knew about futures. On the other hand, full-service brokers charge hefty commissions; discouraging most small-time clients from placing orders.

At least one third of all online investments are done through discount brokers (Thomsett, 181). The broker-client relationship may become a thing of the past. Many tech and business savvy individuals choose to more actively manage their money and forgo the higher service charges. Most discount brokers offer advice through applications that can be downloaded to your computer or viewed on a website. Critics say that the information provided by the services is biased and meant to direct money into stocks, so that major stockholders can make money.(Lichtman and Duke, 27)

Fee or Commission?

Most people know that they have a choice between paying a flat fee or a percentage commission to their broker for transactions. Since the Internet has made it much easier for investors to place orders, one must take into account how many transactions of what size they are planning on making before selecting a broker (Thomsett, 182-183).

Electronic Communications Networks

While ECNs are only for more skilled and adventurous traders, they deliver unprecedented control and low cost to individual investors.

Not only do ECNs bypass brokers, they bypass the exchanges too. Now it is possible for individual investors to trade directly with each other. ECNs automatically match bids with sales and carryout trades with no middlemen. People can now mange their portfolio after work thanks to the access to after-hours trading provided by ECNs. They can also be used for commodity, bond, and derivatives trading.(Millman, 49-51)

Small Order Execution System

After the 1987 stock market crash NASDAQ made applied SOES to all their major stocks and changed the order handling rules for market makers. During the crisis, money makers stopped answering their phones and buying stocks. Money makers are responsible for keeping their assigned stocks liquid, and by not buying any stocks they were cutting their losses at the expense of others.(Millman, 58)

DJIA during the 1987 crash
The Dow Jones Industrial Average during the 1987 crash. Source:

The new SOES rules force market makers to automatically execute orders of 1000 shares or less. The system is very popular with day traders, as it has advantages over exchanges and commercial ECNs. This does not mean that users have to aggressively invest like day traders. Being able to sell your stock as it's plummeting or buying before everyone else as it's skyrocketing can be both profitable and relatively safe. It presents a great opportunity for individual investors with an above average skill set (Ecommerce).