Investing in Stock Markets - Literature review Example

Investing In The Stock Market Is Much Easier, Faster And Cheaper Than In The Past

Introduction

Stock trading has become easier and more efficient since technology has facilitated a better approach to route orders. Through technological advances, many companies have good liquidity, and investing in such firms is easier and more secure. On the other hand, many stock markets are utilizing automated electronic trading platforms, and this has made the investment process simpler and cheaper. Traders have easier access to information on the stock exchange due to technological advances. Coupled with the use of technology, investors can engage in high-frequency trading, even if they trade in a limited number of stock shares. Even though investing in the stock market is much easier, faster and cheaper than in the past, technology has made the investment process more secure.

Investing in the stock market is faster and cheaper than it was in the past. Investors have easier access to information on the stock market as a result of technological advances (Thomsett 2008, p. 132). For instance, a trader can quickly obtain information such as company earnings reports and current stock prices from the internet, and this is something that was not available before the advances in technology. From this information, an investor can make the right decision regarding their investment in time, and reduce the adverse effects of a market risk. In the long run, easier access to information on stock prices can lessen the cost of investing in the stock market.

Liberalization of equity markets is the other aspect that has facilitated easier and cheaper investments in the equity markets. Through liberation, foreigners are allowed to participate in the trade of another nation’s stock market by buying shares. As a result, markets become more efficient since stock markets do not have an auto-correlation to future market openings. Many global markets have liberated their stock markets over the years as a result of globalization, and they have allocated money in a better way. In the light of this, capital has become more productive as compared to the past.

Although diversification in the stock market is not a new concept, the productivity of the capital allocated more resourcefully has enabled many investors to diversify their investments. Currently, many people are comfortable with owning stock shares in a variety of companies. Coupled with the use of technology, investors can engage in high-frequency trading, even if they trade in a limited number of stock shares. Moroever, individuals can easily venture into different market sectors when capital is freed up.

The ease and efficiency of stock trading have increased since technology has facilitated a better approach to route orders (Kim 2010, p. 26). Liquidity can easily be accessed since the relocation of order by firms aims at increasing investment performance. Considering that the stock price cannot be significantly affected by the sale of shares when the market is liquid, investors can quickly conduct trade. Consequently, investors have the opportunity of earning more interest considering that part of the float is used in daily trading.

Investors can determine the liquidity of the stock in a company by reviewing the bid spread, which can easily be obtained without even contacting the firm. Investors can secure the price of their choice in stock when they place limit orders in an exchange with relative ease. Through technological advances, more companies have good liquidity, and individuals can be willing to invest in such firms since it is cheaper and more secure. Fewer order flows are routed through phones (Kim 2010, p. 26). Investors are, therefore, finding it easier to trade in stocks in companies that have good liquidity without significant risks.

Stock market investments have been made easier and cheaper considering that many equity markets are utilizing automated electronic trading platforms. A significantly high number of trades can be executed through the use of these models (Kim 2010, p. 20). This indication, therefore, implies that the speed of trading shares is currently faster compared to that in the previous years (Kim 2010, p. 20). Investors are drawn to stock exchanges that take a short time between the initiation of a trade and its completion. Considering that firms would like to attract more investors, this could be the reason why most stock markets have adapted to the use of this technology.

Many companies have improved their data infrastructure since investors prefer obtaining market information through real-time analysis (Kim 2010, p. 20). As a result, such firms have achieved better services, which are faster, and this has benefited the investors as well as the companies. While the enterprises minimize operational friction and manage costs more efficiently, traders achieve efficient and cheaper trading. Ideally, the electronic trade platforms have enabled traders to buy stock without meeting with the brokers, and this makes the execution of trades faster and more efficient.

Trade transparency has increased as a result of technological upgrades. Investors can easily find out the price of shares, and this enables them to make better trade decisions. It would, therefore, be harder to place the portfolio at risk when trading since one would less likely apply the personal bias in their investments. In the past, there was no trade transparency since people could not easily access information regarding the price of stocks in the market. Consequently, personal bias, especially on particular brand names, could have adversely affected judgment in the stock market trading.

It is currently easier to invest in the equities market compared to the past when investors could be skeptical of trading in individual stocks. This situation is similar to an instance where personal bias would affect investment decisions. For example, a trader could have had fears about purchasing shares in a particular stock with the perception that they were risky since another person lost money through their purchase. The risks, however, are subject to variations, and an investor’s judgment should not be affected by one experience (Thomsett 2008, p. 143). Through trade transparency, investors can make their trading decisions by relying on facts rather than personal bias.

Volume-Weighted Average Price (VWAP) is an algorithmic strategy that may be used to determine the trading cost (Kim 2010, p. 58). This trading benchmark was not widely used in the past, and its current use is practical and efficient when employed in short-term intervals. An investor’s decision can be affected when a performance benchmark is available, and this further affects the realized trading costs. Traders would be encouraged by the VWAP benchmarks to spread trades for a long time (Kim 2010, p. 58). As a result, investors can avoid taking risks such as trading at extreme prices on a particular day.

The integration of stock markets is the other aspect that has enabled easier and cheaper trading. In Europe, the Paris, Amsterdam, and Brussels stock exchanges merged to form the Euronext Stock Exchange (Dorodnykh 2013, p. 86). It is evident that traders from any of the three exchanges could access the securities in this market following the merger with ease. A virtual integration solution would be introduced when infrastructure providers cooperate by agreeing on standard methods, protocols, and communication practices (Dorodnykh 2013, p. 51). The integration solution that results from such a network, therefore, formalizes membership in an integrated stock market.

Traders have the opportunity to invest in more diversified portfolios while trading through an integrated market (Dorodnykh 2013, p. 26). Integrated markets have made investors aware of the existence of stocks in the other exchanges through the merger. It is, however, imperative for traders to establish the right form of diversification, and this is the only way they would benefit from a diversified portfolio. Sometimes, traders may have the perception that their portfolio is diversified when it is not (Thomsett 2008, p. 143).

It is easier for investors to trade through stock markets that have merged since they have the assurance of the good performance of such a market. Even though all equity markets are supposed to abide by strict rules regarding the sale of shares, there could be manipulations in the market. Developed markets have strong regulations, and this is an aspect that makes them unique from the rest (Dorodnykh 2013, p. 26).

Other investors may prefer using alternative trading systems, and this is another change that occurred in the stock market recently, making it easier to invest (Dorodnykh 2013, p. 32). This trading system is in the form of a trading venue which operates in an official market. The subscribers of such markets have the opportunity of trading after the official hours, and this offers them flexibility. It is, therefore, apparent that the alternative trading systems would be appropriate for investors who trade in large volumes.

In 2001, trading costs were lowered through the introduction of decimalization in the stock market (Kim 2010, p. 6). Additionally, investors could easily understand stock prices following the implementation of decimalization since the decimal format was the new standard of quoting security prices. Currently, the majority of stock markets utilize this trading form, and it has made it easier for traders to invest (Kim 2010, p. 6). This standard has promoted tighter spreads in the stock market hence facilitating a wider range of price levels.

Even though changes such as technological advances have facilitated easier, cheaper, and faster trading in the stock market, there still exists challenges in the share markets. Investors have to anticipate the reactions of stocks to market-wide changes correctly (Thomsett 2008, p. 139). For instance, when the average value of shares in an exchange drops by many points, it is likely that other stocks would follow the same route. Such a phenomenon would probably be the result of the markets’ overreaction to the drop in the average value of shares. Without the help of financial advisors, some investors may still make the wrong investment decisions.

Although it has become easier to invest in the stock market, the unexpected outcomes of market crazes make it difficult to make wise investments. For instance, many traders purchased stock shares from what was described as the internet sector from 1995 up to 2000 (Thomsett 2008, p. 123). Even though the value of the companies involved in this bubble soared during this period, no particular service or product was provided (Thomsett 2008, p. 123). Traders would, therefore, be skeptical of investing in such a stock after the craze suddenly disappears.

A trading system that utilizes the algorithmic trading technology is evidently more secure compared to one which is manual. When a trade agreement is entered into an automated system, the transaction data can easily be verified (Kim 2010, p. 17). A confirmation process that is effectively controlled would be difficult to support fraudulent trades. Technology and automation are utilized in a market’s front office, and investors are not the only ones who benefit from their use. These changes have evidently helped ease the pressure in the stock markets brought about by increased competition.

Today’s technology has made the investment process more secure. Computing technology, as well as back-office automation, have advanced, enabling better recording of trade history (Kim 2010, p. 19). As a result, traders can efficiently retrieve market information, and this facilitates secure trading. On the other hand, scalable straight-through processing (STP) is a form of technology used in the stock markets whereby market transactions have expanded automation (Kim 2010, p. 19).

Technology has promoted effectiveness in the order management systems. Investors can determine the approximate cost of trade, as well as the most appropriate algorithm for a particular trading situation through pre-trade analytics (Kim 2010, p. 24). This process clearly enhances the security of a trader’s investment. Investors would use trade blotters to improve the security of their investments since they facilitate the application of various benchmarks and the management of orders.

Conclusion

The current speed of trading shares is faster compared to that in the past considering that many stock markets are utilizing automated electronic trading platforms. Many companies have improved their data infrastructure since the traders prefer obtaining market information through a system that supports real-time analysis. The integration of stock markets has enabled easier and cheaper trading. On the other hand, a trading system that utilizes the algorithmic trading technology is highly secure, and this extends to the investment process too.