August 20, 2008

Online Brokerage Networks Gaining Popularity

Zecco and Tradeking are among the first brokerages to add online social networking to their services, and are using the new sites to add functions that exceed those found on typical subject-based discussion boards.

For Erin O'Brien and other do-it-yourself investors, using Zecco's site has paid off in more ways that one.  In the year she's been trading, the 27-year-old teacher from San Francisco has realized a 16.6 percent return on investment, and is now ranked in the 20th percentile of Zecco traders.

As part of Zecco's online community, O'Brien and her friends consult each other on everything from investment terminology and philosophy to tax law.   Once tagged as "friends", they can view each other's trades and learn from watching and interacting with each other.

"This adds a competitive aspect, which can be motivating," O'Brien told the Associated Press.

While investing about $200 monthly, she limits herself to the 10 free trades allowed by Zecco each month, using the account as a learning tool and investing only as much as she can afford to lose.

O'Brien can conduct research on various company's shares by identifying which of her friends own the stock.  This also divulges the other stocks in their portfolios, providing additional investment possibilities to investigate.

TradeKing allows users to add remarks explaining why they made a particular trade.
While TradeKing and Zecco may have blazed the trail for online social networking, other brokerages, such as Scottrade Inc. and TD Ameritrade Holding Corp., are quickly following suit and introducing their own social networking functions.

By allowing clients to interact online, brokerages are providing encouragement to newcomers that might otherwise be hesitant to start trading.   For such newcomers, these sites provide a forum where no question is considered too basic.   Indeed, groups such as "Afraid to Trade", "Newbies" and "Beginning Investors" are among the most frequented on Zecco and TradeKing.   In fact, the most popular discussion thread at Zecco is for "New Investors", while on TradeKing, one popular recent forum was titled "Need A Mentor."

And unlike message boards and chat rooms, the brokerage's social networking sites verify users' identities, reducing the possibility for spam or other scams that aim to artificially drive up stocks.

While investment clubs, in which small group of people meet periodically to talk about stocks, have been around for decades, their popularity has declined in recent years.  There are only 13,000 such clubs in the U.S. today, a dramatic drop from the 20,000 in 2002, according to data from the National Association of Investors Corp.

Online groups, on the other hand, give access to larger numbers of people, and allow users to participate on their own time.

"(The chat rooms) let me know what to look up, where to go," Kim Seiniger, a music industry executive, told the AP.   The 52-year-old Woodland Hills, Calif. resident is tagged as one of O'Brien's friends.

Seiniger has more than $15,000 of her disposable income invested in stocks, but says she's still learning the ropes about trading.  She uses the online groups to find answers about investing, but also conducts her own research.

The most common question among new investors is how to determine when to buy and sell.   Seiniger's answer: Don't follow emotions, instead stay with a trading philosophy.  

As might be expected, the number of users of online brokerage communities is on the rise. Zecco reports that a third of its 85,000 users are now active in community groups, while TradeKing says about 10 percent of its 100,000 users are active in groups.

Kristin McDougall, a spokeswoman for Scottrade, says the brokerage's online community, officially launched last week, is a response to customer demand for more education and information.  TD Ameritrade plans to launch its social networking features by the end of the year.

"In real life, traders typically congregate and become better traders by sharing knowledge. If you put them online, they'll chat as well," Jay Pestrichelli, managing director for TD Ameritrade's trading group, told the AP.

However, these online communities are not just a toll for new traders, some groups focus on women, retirees and penny stock lovers.  At TradeKing there's even a group called "I Keep Investing in Stocks I Know I Shouldn't."