How Has the Introduction of the Computers And IT to Markets Changed the Way Stocks And Bonds Trade - Research Paper Example

Information technology has brought many changes in the business world all over the world. Computers and internet have changed many things and investment activity has also affected. This study will aim at identifying changes that information technology and computers have caused to stock and bond trading. Literature review will be conducted using existing research articles and data will be collected from secondary sources. Increase in volume and volatility, more efficient markets, complex products, and global financial integration were identified as changes that information technology has brought to bond and stock trading. Customer Inserts His/her Name Customer Inserts Tutor’s Name Customer Inserts Grade Course (24, 09, 2011) Introduction of IT and Stock Trading Introduction Evolution of computer technology in the last decade of 20th century has changed the whole world forever. It was not previously thought that wide scale availability and use of computers and internet is possible or even feasible. The introduction of information technology on a large scale has changed the dynamics of businesses as well. Globalization became the norm of the day and firms started to capture global markets. Internet alone facilitated change in the business world by giving everyone the opportunity to excel in any field. The impact of information technology on the financial sector was also tremendous. Previously the financial sector was limited and stock markets were too complex for normal investors. Volumes were low because people who had the knowhow of finance only were working in this area. An average person did not care to take part in the buying and selling of stocks on a regular basis, and more traditional investments like bank deposits and real estate were preferred. The advent of computer technology and internet has made financial products within the reach of common investors all over the globe. Stock trading, bond trading, and trading of other financial instruments has grown tremendously after the introduction of computer technology and internet. The aim of the research is to find the effects of information technology and computers on stock and bond trading. The study will help us better understand the factors that have changed due to information technology. Computer technology and internet has changed the dynamics of global financial markets and this will be explained in great detail. Information technology has increased the dissemination of information and this has contributed to the growth of financial sector all over the world. Information technology has also made financial markets of the world integrated. The study will help identify possible effects of development of information technology and computer on the financial markets, specifically on bond trading and stock trading. Research Question Information technology has brought many changes in our daily life. The financial markets all over the world are now in the reach of normal investors which was previously not possible. But this is just one effect of information technology and computers on financial markets. In order to better understand how computers and internet have revolutionized stock and bond trading the more aftereffects of information technology should be identified. Research question we would want to answer through this study is given below: Question: How has the introduction of the computers and IT to markets changed the way stocks and bonds trade? Literature Review Financial markets started to grow rapidly in the 1980s when financial liberalization became the norm. Countries like United States started to liberate their financial sectors and deregulation started in the financial markets. Private firms and investment houses were given freedom to come up with newer products and offer investment option to normal investors. Financial liberalization focused on deregulation of financial markets where central bank’s role was just to control inflation. This was the time of significant growth in the financial markets and investment firms started to grow larger. The advents of computers in 1990s revolutionized the dynamics of investment activity all over the world. The main factors that play an essential role in stock market activity are information dissemination and reach of investors. Without proper information dissemination no investor can take a good investment decision. Also investors should know about the current products and stocks that are being traded on the floor in order to invest in them. Information dissemination is therefore extremely important, from an investor’s point of view, in financial markets. Reach of investors to stock exchanges is also a factor in stock market activity. When investors would not be able to reach the stock exchange then they will not be able to place their bets on different securities. Internet and computers have played a major role in enhancing both information dissemination and reach of investors. The household participation in the stock market activity has increased significantly after the advent of computer technology and internet. Household with computer and internet participate in stock markets more often than households without computers and internet (Bogan, 208). This may be because of a variety of factors like education or income but this shows that information technology has played a great role in bringing the investors close to stock markets all over the world. The increase in household participation also indicates that people are getting more familiar to stock markets and trading. Internet and computers allow users to get a knowhow about the realm of finance. Previously trading activity was done by people who were experts in the field and common investors were only partly involved in stock and bond trading. There was also less speculation about stock prices than today. Internet changes all that in a flash. Computer technology and internet brought people from different countries closer to each other and this gave rise to speculation and increased market participation. When people started to know how much money can be made from stock and bond trading, they wanted to invest in markets and this changed the trading of stocks and bonds for ever. Participation of household was also not into stock markets because they had a lot of misconceptions about investments in general. This was due to the lack of education people but internet increased the flow of information which paved by for investors by educating them about stock markets and trading activity. It was thought that trading is an extremely complex process and the risk is too much for average households. It was also believed that frauds are prevalent in investments. Internet changed all these ill grounded beliefs of the people. It actually shaped the perception of people by projecting a positive image of stock markets. This is a very important role internet played in increasing stock market participation of households because households were considered as risk averse. Internet made them attracted towards the realm of financial products. The way stocks, bonds, and other financial products are traded has a lot to do with the internet as well. Internet has not only played a major role in bringing investors and stock exchanges nearer but has also changed the trading practices. It was found that people who are young (between 20 and 30) are more likely to use internet for stock and bond trading than older people (Sandhu & Singh). This shows how internet facility has made young people closer to stock markets. Prior to introduction of computer and internet, trading was mostly done by experts, matured age people who placed safe bets without too much speculation. Stock trading was also considered a way through which a steady and constant income can be generated. Stock exchanges were not places where people could get rich in a short time. It was not a means to achieve great success easily with little hard work. Today stock exchanges are not viewed as investment opportunities only. They are perceived as places where people can get rich in no time and this is why young people are attracted towards stock markets today. Trading activity has now changed because internet traders do not believe to invest in one stock for a long period of time so that they can reap dividend income or long term capital gain. Rather they are interested in short term speculative betting instruments that can yield greater profits. This mentality of getting rich in a short time has made traders risk more and more in hope of winning. According to some stock market is nothing but modern casinos where everyone is betting in hope of winning big. Investors who are using internet are risk takers and they focus on short term trading mostly. This is how internet and computers have changed the way people trade stocks and bonds. Change in the perception of people about stock markets has also been translated into development of products that are catering to the needs of investors. Investment firms are now coming up with complex products that are risky but can also yield good profits. Many markets have developed like commodity markets, foreign exchange markets, derivatives markets etc. They offer investors with a variety of products that can satisfy the needs of both risk-taking and risk-averse investors. This is the impact of internet on financial markets of the world. Some studies give conflicting results about trading practices of internet traders. Teo, Tan, & Peck suggest that experience of internet traders is greater than non internet traders. This means that because internet traders have more experience than non internet traders therefore they cannot make risky, unscrupulous bets. An experience trader would only invest in stocks or bond that can give him or her better return by taking relative less risk. Experience trader cannot be rampant when it comes to trading in stocks or any other financial instruments. He or she will also not try to get rich in a short period of time. Experience allows traders to think differently, and if a trader is trading after 2 years then he or she must have not lost everything that is why they are still trading. One possible explanation of experience of internet traders may be that they are young and avid users of technology. Therefore they might have taken out more time to trade in investments by risking small amounts. Non internet traders can just call their brokers and place their bets. This is why their exposure to markets is limited than internet brokers. Internet also allows a trader to keep an eye on the investment activity at all times and this can also explain the experience of internet traders. Risk taking behavior is said to increase generally due to the introduction of information technology and computer. Financial markets have today become as a place where experiencing risk is an end in itself (Zwick, 22). This is an interesting way to look at the evolution of stock and bond trading due to information technology. The risk taking behavior has increased and it gives a certain degree of ‘high’ to a trader. The same can be said for betting and gambling in general. Information technology has presented an opportunity for everyone to take part in financial markets and this has allowed a generation to use stock market to enjoy risk taking. Young people are looking for stock or other forms of trading as a form of enjoyment and this has also changed the financial markets. The behavior of investors has become reckless and this can have disastrous consequences. Speculating can increase and crises can be attracted if this behavior becomes prevalent. Internet has also increases speculation in stock and bond trading in general. Internet provides forums for people to interact and people try to get information that can help them make money. People visit different sites and read reviews from different analysts, and then go invest accordingly. Internet stock message boards can move markets both in terms of volatility and economy (Antweiler & Frank, 1259). This shows how potent a role internet and computer technology has played in changing the financial sector as a whole. Internet traders have changed the dynamics of trading stocks and bonds. The change of trading techniques can be owed to internet because it has made trading within the reach of everyone in the world. Methodology Data collection in this study will be done through secondary sources. The already published data and trade volumes will be taken into account to observe the changes occurred in stock and bond trading due to the advent of internet and computers. Secondary data sources can also give a variety of other factors that have changed in stock and bond trading due to evolution of information technology. The data will come from diverse sources that can help us answer the research question in an objective manner. Also secondary sources can inform us about the world wide situation which can enhance the credibility of research. In this study we will not be using primary data because it is not the scope of the study. Primary data would limit the findings of the study and we want to know in general what factors are playing a role in changing the dynamics of stock and bond trading as a result of internet and computer technology. Secondary data is best suited for our research because it will give us the answer about how internet and computer has changed the trading of stocks and bonds. It will also be not geographically limited therefore it will be applicable to the world in general and not only to a specific country. The analysis of research articles and other sources will be done in a way as to give credibility to the research. People who are expert and peer reviewed journals will be included. Statistics will also be given in areas where it is necessary. The aim is to increase the objectivity and reduce the subjectivity of the research. The study will also present conclusion and future research areas and limitations of this research. Results Internet has changed the way how stocks and bonds are traded by increasing volatility and volumes of stock and bonds. Information technology has also made financial markets globally integrated. Complex financial products are also a consequence of information technology and computers. Internet has played a vital role in changing the dynamics of finance by bringing together buyers and sellers. The divide between investors and markets has shrunk greatly as a result of internet. Also the role of brokers has reduced significantly because investors can now trade their own stocks themselves. Changes in stock and bond trading as a result of information technology and computers are specifically discussed below. Volume and Volatility Trade volumes and volatility has increased significantly after the introduction of computer and information technology (Ashraf & Joarder, 265). Computers have made it easy for investors to observe the movement of stock prices and they can also get any news about a stock in no time. This is why markets have seen increased volumes and volatility. Investors have become more responsive to news and internet allows them to sell their shares or bonds at any time. This can explain the increased volatility and stock volumes after the advent of internet and computers. Increase in volume and volatility of stocks and bonds can therefore be regarded as a result of internet and computers. Global Integration of Financial Markets Global financial integration is also a product of information technology. Internet has brought people from different continents closer and physical differences are not a problem today. Investors from Australia, Africa, and Europe can all trade in different stock exchanges all over the world. This means that a European investor or firm may have invested in a Japanese stock or bond, and an American firm or investor might have invested in Australian stock or bond. This is why an event in one country will have an impact in global financial markets of the rest of the world. This is how financial markets today have integrated globally and one event like Japanese earthquake can impact global financial markets. Complex Financial Products Information technology and internet specifically has also increased the variety of investment products available to consumers. When participation of investors increased investment firms came up with new products that could attract investors. Increase in investors and change in trading methods caused investment firms to come up with products that could give satisfy the needs of internet traders. Complexity of financial products has also increased with the advent of internet and computers. Computers have given sophisticated valuation models that are used to create complex products for investors. Efficient Markets Information technology has also made markets more efficient since the dissemination of the information has improved. Now a press conference in USA can be seen live in any part of the world and investors can make decisions accordingly. Internet and computers have therefore made sure that news or event is represented in the prices of stocks. Internet has made it impossible to hide information from investors. A simple forum posting or review can disclose any information and therefore no one can earn abnormal returns. It can be safely stated that information technology and computers have made markets efficient. Conclusion The results of the study have identified changes that information technology and internet has brought to trading of stocks and bonds. Information technology has increased volumes and volatility, has increased global integration, has made markets more efficient, and has increased complexity of financial products. These changes are not disputed at all and most of the literature available on the internet supports our findings. Internet trading is a growing market and investment firms should try to capitalize them. Also youth is getting attracted towards online trading therefore this should also be kept in mind before launching newer products. More accurate data can be collected by conducting a survey based quantitative study. Impressions of youth and internet traders can be taken regarding stock and bond trading. This can more accurately predict specific changes that have come in trading patterns after advent of internet and computers. Longitudinal studies can also help explore more specific trading activity related questions. The research we have conducted has a major limitation. We have not collected any primary data and previous literature has been used to answers research question. Works Cited Page Antweiler, W. &Frank, M. Z. Is All That Talk Just Noise? The Information Content of Internet Stock Message Boards. The Journal of Finance, 59, 1259–1294, (2004) Ashraf, M. & Joarder, H. The Effect of Information Technology on Stock Market Trade Volume and Volatility: Case for Dhaka Stock Exchange in Bangladesh. Australian Journal of Technology, 12(4), 265-270, (2009) Bogan, Vicki. Stock Market Participation and the Internet. Journal of Financial and Quantitative Analysis, 43(1), 191-212, (2008) Singh, A. & Sandhu, H. Investors’ Adoption of Internet Stock Trading: A Study. Journal of Internet Banking and Commerce, 15(1), 1-21, (2010) Teo, T., Tan, M, & Peck, S. Adopters and non-adopters of internet stock trading in Singapore. Behavior & Information Technology, 23(3), 211-223, (2004) Zwick, D. Where the Action Is: Internet Stock Trading as Edgework. Journal of Computer-Mediated Communication, 11, 22–43, (2005) Read More