Journal of Information, Law and Technology
How Do Online Investors Seek Information, And
What Does This Mean for Regulation?
Professor Dimity Kingford-Smith
Director of the Centre for Law in the Digital Economy, Monash
University
Dimity.KingfordSmith@law.monash.edu.au
and
Kirsty Williamson
Research Fellow, Faculty of Information Technology, Monash
University, and School of Information Studies, Charles Sturt University
Kirsty.Williamson@sims.monash.edu.au
The authors are grateful for the comments of Professor David Nelken and Dr. Julia
Black on prior version of this piece, and the helpful contribution of the referees.
This is a refereed article published on: 30 November 2004.
Citation: Kingsford-Smith and Williamson, 'How Do Online Investors Seek
Information, And What Does This Mean for Regulation?', 2004 (2) The Journal of
Information, Law and Technology (JILT).
<http://www2.warwick.ac.uk/fac/soc/law2/elj/jilt/2004_2/kingsfordsmithandwilliamson/>.
Abstract
This article will first explore the role that information (and its principal sources) plays
in investors’ decisions to invest online. It will then compare the findings that are
discussed in the introductory sections of the paper to both generic theory and
empirical research in the field of information-seeking behaviour. It concludes with an
analysis of the implications of these findings for the regulation of online investing.
Keywords: Online investment, regulation, capital markets, personal information
sources.
1. Introduction
In recent years, the online revolution has brought global investment markets to the
investor’s sitting room. Although there was a drop in numbers of online investors
after the ‘tech-stocks bubble’ burst in early 2000, the economies of online investing
mean that investors are being drawn back to the medium. Despite the encouragement
for individual investors to go online, there has been little research into the regulatory
implications of the non-advisory context of their decision making and, outside the
United States, no significant treatments of the regulation of online investing generally.
Mostly, financial regulators have taken an accommodating posture towards online
developments in markets. However, independent research is required to ensure that
regulatory decisions are made after careful empirical research and policy analysis
rather than because of this accommodating stance.[1]
This is especially important as, not only is online investing much cheaper than brokeradvised transactions, but it is presented, through investment advertising and online
broker websites, as empowering investors by giving them control over investment
decisions. In fact there are reasons to suspect that online investors are as vulnerable as
they are empowered[2]. Research shows that investors who switch from traditional
telephone advisory to Internet investing do worse. Recent insights from investor
psychology show that, ‘after going online, investors trade more actively, more
speculatively, and less profitably than before’ due to over confidence. [3] There are
several other cognitive biases that cause investors to lose money and seem to be
amplified by online investing.[4] This raises the second reason for caution.
While online investing is a powerful, cost effective investment mode, it is
characterised by incentives to trade frequently. For example, aggressive online
advertising which ‘conveys a message of convenience, speed, easy wealth, and the
risk of “being left behind” in the online era.’[5] This is intensified by the ease and
immediacy of clicking the mouse to trade, rather than talking to a broker on the
telephone. Further incentives to trade frequently come from online trading fees that
decrease as the number of trades increases. The same is true of the ready availability
of margin loans. These are funds borrowed from an online broker to increase the
amount but also the risk of invested funds. A third reason for caution is that research
also shows that many investors have little understanding of how an online transaction
occurs. They do not know whether their trade goes straight through to the market
when they click on the mouse. They do not know about time lags affecting the price at
which they ultimately buy or sell.[6]
A fourth reason for caution about online investing is the combination of discounted
fees or commissions, and vast amounts of investment information delivered without
personal advice. Low fees further increase the attractiveness of frequent trading. Huge
amounts of information without advice, raises questions about the quality of
investment decisions. Sites also make available a variety of charting and portfolio
management programs. These assume that online investors will do financial analysis
for themselves. A decade ago analysts and brokers did this for them. Is it safe to
assume that all online investors do not need investment advice? Will they analyse
information to make informed investment decisions? Our pilot research and other
evidence discussed below suggests that often the answer is, no.
This article reports the results of a small pilot study of the information-seeking
practices of Australian online investors. Included are the ways in which online
investors seek financial information, as well as information about the online investing
process itself. The study is significant because, despite a great deal having been
written on the nature of information efficiency in financial markets, and recent
controversy over the value of investment advice and the conduct of advisors, little is
known about how investors seek information in non-advisory environments. While
once it was possible to infer that most investors would act on the advice of their
advisors, how investors make investment decisions in the non-advisory, direct
execution circumstances which apply to online investing is much more opaque.
The findings of the research are positioned in relation to theory and empirical research
from the generic field of community information-seeking behaviour, including
reference to the practices of those seeking information through the Internet as
frequently occurs with online investors. They are also set in the context of some
important bodies of legal and economic thinking about information, price formation
and investment decision making in financial markets: the efficient markets
hypothesis, the role of investment advisors and mandatory disclosure law and policy.
These bodies of thought have been influential in the way financial regulation has been
crafted. Until the advent of online investing it has generally been assumed that
ordinary or retail investors act on professional financial advice, a rational distillation
of financial information made available under mandatory disclosure rules. Very little
attention has been given to the information-seeking habits of investors who do not use
an advisor. Financial regulators have generally dealt with the question by requiring
the issue of warnings to investors to seek professional advice. But in a context such as
online investing where all the incentives are likely to cause investors to ignore such
warnings, we think it is important that the information-seeking practices of investors
are considered more closely.
In summary, this article will explore:
1. The role of information, and its principal sources, in investors’ decisions to
invest online.
2. The relationship of these findings to generic theory and empirical research in the
field of information-seeking behaviour.
3.
Implications of these findings for regulation of online investing.
2. The Online Investing Context
The 1990s have seen the extension of investment technology, especially through the
Internet, to the retail investor markets. In 2002, in Australia, half of the Australian
adult population owned shares.[7] In 2001 nearly thirty percent of households enjoyed
Internet access[8] and up to 20% of Australian Stock Exchange daily volume was
traded online.[9] The rise of the individual investor, often trading online, has been one
of the most powerful developments in the capital markets of the last decade. There are
a number of reasons for this quick take-up of online investing.
Changes in Trading Patterns in Investing Markets
When an investor wishes to make an online trade, at one end of the spectrum there are
traditional full-service firms that offer securities analysis and investment advice, as
well as order entry and trade execution services. At the other end there are executiononly brokers that offer trades at a large discount to investors who do not want analysis
and advice.[10] It is assumed that the investor herself has analysed the market
information and placed an informed order to trade. Investor use of execution-only
services offered by discount brokers is therefore driven by the desire to increase
returns on trading by reducing transactions costs.
Changes in Provision of Information/Advice in Online Markets
This takeup of investment technology by retail investors relies on different sources of
information and advice and involves trading patterns more independent of traditional
intermediaries than in the past. Most important is that investment technology allows
investors to deal more directly with the markets and issuers of securities. Investors
may also obtain financial information directly from a variety of providers, some of
which may be virtually unregulated by contrast with traditional sources of investment
advice. The Attorney General of New York observed in a recent report:
The advent of the online brokerage industry is fundamentally changing the
relationship between broker-dealers and their customers by allowing individuals to
manage their own investments in a manner never before possible. Members of the
public can now readily access a range of sophisticated research materials and financial
data – once available only to market analysts – directly from the websites of most
online trading firms. Equipped with this information, investors can, if they choose,
make an independent evaluation of stock performance. Investors can also place their
trades without the assistance of a registered securities representative by entering an
order and submitting it to an online firm for execution by traditional mechanisms.[11]
The most obvious source of information for online investors, is the website of the
broker through which the investor obtains execution services. Even a cursory visit to
one of these sites discloses a great wealth of financial information, often very up to
date. Commonly this information includes market news, company and economic
research across many different types of financial products.
The range in Australia would include company shares and fixed income securities,
managed funds and superannuation products and also derivatives. Especially for
company shares there will be comprehensive information about the depth and volume
of the market, sometimes streamed in real time to the investor – an information
service which a decade ago would have been available only to professional investors.
The websites provide investors with bid and offer prices for shares, the price of the
last transaction, the change in the price since opening, the high and low prices since
opening, and any breaking news (eg stock exchange trading halts).
As brokers’ sites become more advanced, they are adding portfolio management tools
and charting services, which again would have been available only to professional
investors a decade ago. They allow individual investors to analyse their own stocks
against their choice of financial indicators to decide whether the stock they hold might
(or might not), be substituted by another. Some brokers go as far as to include
independent recommendations and broker consensus estimates on companies whose
stocks are able to be transacted through the broker’s site. They may refresh these
analysts’ recommendations daily, posting changes to upgrades and downgrades of
stocks. They may also carry daily postings of market commentary from expert
analysts. In short, brokers’ websites provide a very great deal of the kind of
information which investors traditionally obtained from their broker.
Brokers’ sites do not nearly exhaust the digital sources of financial information that
investors may rely on. New providers of this information are relatively unregulated,
such as Internet “portals” operated by an Internet Service Provider (ISP). Financial
portals allow online investors to obtain financial information, securities analysis
programs and general financial advice from them, rather than from an advisor.
Another source of unregulated financial information (or perhaps financial rumour) on
which investments may be traded is Internet discussion sites (IDSs), more colloquially
known as bulletin boards or chat rooms. For the most part used to discuss securities
too small to receive attention from analysts, statements posted on Internet discussion
sites range from opinions to extravagant predictions, rumours and deliberately false
information.[12] Investments traded on the basis of discussion site information do not
have the benefit of analysis, and like financial portals, unless operated by a financial
professional, discussion sites do not have to be licensed. Up to date investment
information is also provided by companies on their own websites[13]. Further, in
circumstances that are still quite limited, online investors in the primary market may
take advantage of direct marketing by issuers to investors.[14] In Australia, the first
electronic distribution of a prospectus occurred in July 1996, though it was
accompanied by a paper offer.[15] Following ASIC Policy Statements,[16] website
hosts may now publish third parties’ prospectuses, and the application process can be
performed completely online.
The Regulatory Response to Date
As already mentioned the regulatory response to the development of online investing
has been cautious. The starting point has been the regulatory approach adopted in
relation to traditional investing – that where advice is given or certain classes of
dealing or trading is done for clients, the provider of these services must hold a
regulatory licence. That brings on a cascade of regulatory requirements which are
motivated by investor protection, market integrity and prudential soundness
objectives. This introduces a bi-polar approach – either a broker is providing advice or
other services, or they are not. They either need a licence, or they do not.
The trouble with regulating online investing in this way is that, while large brokers
(with whom the bulk of online investing is done) can sustain the licensing
requirements, new business forms such as portals, ISPs and companies providing
investment information on their websites can not. They do not want to engage with
the compliance requirements of being licenced. They do not have the established
traditional investment business to cross-subsidise the online version, and the new
ways of doing investment business are expensive and risky to develop. These new
business forms have therefore, striven to structure their activities to put themselves
outside the licensing requirements. Generally, financial services regulators have also
striven to assist them in this, trying at the same time to finding ways to protect online
investors. To some extent this facilitative stance has also been adopted in relation to
the online services of licensed brokers as well. So, for example two of Australia’s
largest and most successful licensed online brokers, Commsec and E-Trade, provide
on their websites most of the information services described above for online
investors. As both are licensed under the Australian Corporations Act 2001 they
would, if they were making recommendations to investors to buy, sell or hold
particular securities or financial products, have to observe the requirements of the Act
in relation to only making recommendations that are suitable to investors.[17] They
would, if making recommendations, also have disclosure obligations to the customer,
designed to ensure the independence of their recommendations.[18]
The wealth of financial information, the portfolio management and charting tools and
the posting of independent analyst recommendations on brokers’ sites are intended to
provide a context functionally similar to that of a traditional advisory situation.
However, in formal terms the brokers’ sites are designed to stop short of a straight
recommendation to an investor. The sponsoring brokers argue that they provide only
general financial information and advice, and underline this with warnings such as
that from the Commsec website: ‘Disclaimer: This commentary is a general account
of the day’s trading and is not intended to be taken as a recommendation to buy, hold
or sell any particular stock.’ In other words, from the mass of information on the site
the investor must formulate her own recommendation, and if she has the competence,
use the portfolio tools and independent recommendations provided to make her own
decision…or pay a lot more commission for a traditional investment recommendation.
Current ASIC policy accepts that where online information services are delivered in
this way, they do not amount to a recommendation that brings on the suitability or
independence requirements which are considered central to investor protection in the
traditional investing context.
As we have noted, brokers’ sites do not nearly exhaust the digital sources of financial
information that investors may rely on. As already mentioned, financial portals allow
online investors to obtain financial information, securities analysis programs and
general financial advice from them, rather than from an advisor. Portals charge online
firms to link (or refer) customers to the firm’s order entry and execution services.[19]
Portals cannot provide execution services unless they are licensed to deal in securities.
But as they argue that they provide financial information, not advice, regulators do
not usually require them to be licensed. They are not required to observe the
requirements (such as suitability obligations) to which a licenced investment advisor
may be subject.[20] Internet discussion sites (IDSs), more colloquially known as
bulletin boards or chat rooms have also received a light regulatory touch. [21] Instead
of licencing, in Australia an ASIC policy provides for a ‘soft law’ regime of
regulatory practices – a tangible example of the facilitative approach of financial
regulator s to online developments. ASIC Interim Policy Statement 162 provides a
regime of voluntary disclosures and warnings which allows IDSs to operate without a
licence, provided that “the postings do not involve the offer of any securities product
or advice, and otherwise comply with the guidelines”. [22]
In addition to voluntary disclosure and warnings by IDSs, in Interim Policy Statement
162 ASIC has set out a series of voluntary standards of conduct for the IDS operator.
The IDS operator is expected to regulate itself in these areas, and by supervision and
exclusion, to also regulate the conduct and speech of those making postings.
Operators are also expected to keep information about the identity of people who
make postings on the site, and about the postings. They should make the information
available to ASIC if it is requested. Clearly these expectations are given motivating
force by the latent threat of having to acquire an advisor’s licence. Nevertheless, in
contrast to more traditional forms of regulation, they place much of the burden of
accomplishing regulatory outcomes on the IDS operator itself. ASIC even goes as far
as to acknowledge that IDSs may be taking on the role of “de facto regulators”.
Another source of up to date invesment information is provided by companies on their
own websites[23]. Like financial portals and IDSs, issuers do not have advisory
obligations to investors, in contrast to licensed brokers. A discussion of the regulatory
repsonse to online investing cannot conclude without a mention of investor education
which is becoming an important tool in the regulator’s kit in the online age. This is
provided both by the regulator and by site sponsors, often at the urging of regulators.
Financial information, especially of the ‘tips and hints to avoid losses’ variety, is now
a common place on the websites of major financial regulators.[24] These regulators
report increasing numbers of financial consumers visiting their sites, and they are an
authoritative source of financial consumer education as well as financial information.
The New York Attorney General and the US Securities and Exchange Commission
have recommended that online brokers devote a substantial portion of their
advertising budgets to investor education.[25] Some sites do provide online tutorials
and educational content for investors, but this is fragmented and variable in quality.
Further there is always the danger that site spponsors will undermine their own
education campaigns, with advertising that distracts the consumer from the more
sober messages of investor education links and online tutorials.
In summary, the regulatory response to the advent of online investing sites, has been
to consider online techniques as being outside the regulatory net, to regulate with a
‘light touch’ or to concentrate resources into educating online investors. The
regulatory reticence about imposing suitability and independence requirements on
providers of online investment services is an example of the first response. The IDS
regime in ASIC Interim Policy Statement 162 is an example of the second approach.
Regulators themselves have been particularly resourceful about the third strategy, but
less successful at enrolling site sponsors as investor educators. These strategies might
be commended while online investing is under commercial development. However,
the question remains as to what the final form of online investing regulation should
be, given that one day we’ll all invest this way. A central purpose of this pilot study is
to study the practices and beliefs of online investors especially in relation to
information seeking, so as to make informed recommendations as to the future form
and content of online investing regulation, once the developmental phase is past.
3. (In)efficient Markets and Information-Seeking Behaviour
The Efficient Capital Markets Hypothesis
A plausible explanation for the lack of research on investor information seeking
mentioned in the Introduction may be the influence of the efficient capital markets
hypothesis (ECMH) on thinking about the role of information in financial markets. As
Jennings et al put it:[26]
The central and least disputed claim of the ECMH is that available information about
securities traded in the principal securities markets is impounded into stock prices
with sufficient speed that even sophisticated investors cannot systematically profit by
trading on newly available information…a market is efficient with respect to specific
information if prices act as if everyone knows the information.
The market rapidly digests all information as soon as it becomes available, and
impounds this into the price of the investment.In other words, the price of an
investment quickly (in ECMH jargon, efficiently), reflects all the information that is
known about an investment.
Thus, from the ECMH perspective there is very little to be gained by an individual (or
indeed, an institutional investor) spending time and energy on securities research and
analysis, that is, on financial information seeking. This is because the mechanisms of
the market disperse new information so quickly, and the price adjusts accordingly.
This leaves no mispricing lags from which investors can develop strategies which
allow them to make consistent profits which are abnormal compared to the
performance of the market as a whole. Some adherents even go so far as to assert that
mandatory disclosure rules are unnecessary because there are sufficient market
incentives on issuers to make accurate, complete and timely disclosure without legal
compulsion.[27]
Relatively few regulatory concessions have been accorded this deregulatory thinking
on the basis of the ECMH, as securities regulators have been cautious about wholesale
changes to disclosure laws.[28] But such has been the influence of ECMH that, with a
few conspicuous exceptions,[29] little thought has been given to the mechanisms of
information dispersion and price formation, at the individual level.[30] It has been
assumed that investors will be price takers not price makers, and as such there is not
much interest in the means by which they do (or perhaps do not) undertake
information seeking. To the extent that individuals do exercise independent decisionmaking capacity, they are assumed rather than shown to be objectively rational
assessors of risk who act to maximise their own utility or pleasure.
Reservations About the Efficient Capital Markets Hypothesis
This rather deus ex machina view of information dispersal and price formation has
been under challenge in the finance literature for a decade or more, though the ECMH
has proved very resilient.[31] From the mid-1980’s evidence has been mounting
through a series of ‘event studies’ which have shown persistent anomalies in price
formation, such as the now well known ‘January Effect’ and ‘small firm effect’. In
these it has been shown that following new information, there is a lag in stocks
reaching their new long-term or equilibrium price level. It has also been argued that
stock prices are much more volatile, over reacting or under reacting to new news[32]
or even reacting to no new news at all as was the case with the 1987 market crash.[33]
These developments have reignited earlier interest in the actual information seeking
and decision-making practices of investors.[34]
Of particular interest for us, it has kindled a growing literature in the implications for
securities regulation of the cognitive and behavioural patterns becoming evident in
investor decision-making – of both institutional and individual investors.[35]
Most of what has become known as behavioural finance literature, and its legal
counterpart in securities regulation, is concerned with how investors, especially
individual investors, make trading decisions and the cognitive biases that might
influence that decision-making.[36] There has been very much less research on the
practices of investors in actually seeking information, though this clearly has potential
to influence trading decisions.
Inter-Personal Communication in Investment Information Seeking
In the late 1980s Shiller and Pound[37] studied groups of both individual and
institutional investors, to learn about their patterns of communications in the process
of making securities trading decisions. For both investor types Shiller and Pound
surveyed a group whose members had purchased securities which experienced normal
positive returns, and one where securities were undergoing a rapid price increase in
the acquisition period. The inclusion of the institutional investors was to examine the
contention of ECMH adherents that, although cognitive biases in individual investing
decisions might cause price anomalies, these should be attenuated or ‘washed out’ by
the decisions of institutional investors or ‘smart money’. Hence, the markets should
on the whole remain informationally efficient.
Shiller and Pound found that in both individual and institutional investor groups,
initial interest in individual stocks was stimulated at least in part by inter-personal
communications. Of the institutional investors in both the normal price and rapid
increase groups, most reported that their interest in a stock was motivated by contact
with another investment professional, while some said contact with a person not an
investment professional was influential. Of the individual investors, about a third of
both groups were interested in a stock by a broker, while a third of normal price
investors and a half of rapid increase price investors were prompted by a non-broker
personal contact. A substantial group of individual investors claimed to be influenced
by the knowledge that someone they knew or knew of purchased the stock in
question. Although a portion of investors did not nominate inter-personal
communications as influential a substantial group claim to have interested others in
the stock they were considering, suggesting the importance of word of mouth
contacts.
As Shiller and Pound point out, the most striking piece of evidence from the research
is that most of both institutional and individual investors denied that they were
systematic in their decision to buy stock[38], though the majority of institutional
investors in the normal price group said their decision-making was systematic. The
evidence suggests that investors deciding about rapid price increase stocks are more
likely to rely in part on inter-personal communications, perhaps due to the additional
difficulties of obtaining verifiable information in the context of securities undergoing
quick price change. In short, Shiller and Pound found that direct inter-personal
communication between peers is of importance in the information seeking and
decision-making that precedes securities trading. More recently Shiller has argued
that people also try to infer information from observing the actions of others (eg stock
purchases), and that prominent opinion entrepreneurs in particular groups or habits of
revealing sources of information may influence the subsequent acts of
individuals.[39]
In the absence of a sustained interest in information-seeking behaviour by investors in
the financial economics literature, we have turned to the more generic theory of
information seeking which has developed in other areas – notably at the sociological
end of information technology and information systems management. In what follows
we build on the empirical and theoretical literature in community information seeking,
online investing being one form of such information seeking. In doing so we engage
with research on the plurality and variable authority of information sources, and
confirm Shiller and Pound’s insights about the importance of inter-personal
information seeking, with research from the information seeking area.
4. Community Information-Seeking Behaviour: Generic Theory and Empirical
Findings
Considerable theory and empirical research findings, relevant to the present study,
have been generated in the field of ‘community information-seeking behaviour’. The
information seeking of citizens for investing online is encompassed in this field,
which is sometimes labelled ‘information seeking for everyday life’. Prominent in the
study of community information-seeking behaviour have been the attempts to
discover preferences for information sources, with research findings often leading to
further theory generation. Although the studies cited here were foundational, and
undertaken in pre-Internet days, we believe they are still relevant.
Bearing out the findings of Shiller and Pound,[40] many of the earlier studies in the
community information field showed that people prefer personal sources of
information, particularly family, friends and neighbours.[41] Chen and Hernon,[42]
who included 'personal experience' with family, friends, neighbours and co-workers to
make up an 'interpersonal' category, found a heavy emphasis on personal information
providers. The mass media have been shown to be widely used, but not always to
supply useful information.[43] The same studies have indicated that institutional
sources, e.g., professionals, government departments and libraries, are used less
frequently. Now we have the Internet, a readily accessible source of information, but
with its own advantages and disadvantages.
Personal Information Sources
There has been a range of explanations offered for the preference for personal
information sources. Firstly, the importance of psychological accessibility of sources
has been indicated by research on diffusion of innovations. Rogers[44] showed that
the most effective communication takes place between two individuals who are alike
in such characteristics as beliefs, education and social status. Secondly, personal
sources of information are preferred because they are supple and adaptive to people's
needs.[45]
The role of 'information gatekeepers' or 'opinion leaders' is also pertinent. The
literature concerned with the dissemination of innovations[46] illustrates the
importance such people have in the communication of information.[47] Information
gatekeepers have more exposure to mass media than their followers, are more
gregarious, have more contact with officials of various kinds, are more active in
professional associations outside their immediate environment and serve as links
between the groups and the outside world.[48]
The Mass Media
Studies of information and the mass media have typically shown that users of print
media of all kinds (including books, newspapers, booklets and pamphlets) compared
with users of electronic media, especially television) were the only respondents who
possessed accurate knowledge for decision making.[49] Print sources of information
have been found to be very useful and highly regarded by information seekers in other
studies.[50] Wade and Schramm[51] found that the more education people had, the
more likely they were to use print as their major source of news and information. The
implication is that reliance on television for information is unlikely to be helpful.
Institutional Information Sources
Because institutional sources, including professionals, require greater effort by users,
they appear to be used less frequently than personal sources. Mooers' Law explains:
An information retrieval system will tend not to be used whenever it is more painful
and troublesome for a customer to have information than for him not to have it.[52]
Cooper's[53] theory of information usage is related. This theory states, firstly, that an
information seeker has, in any given information-seeking situation, a certain level of
effort beyond which he will not go in his attempt to obtain information. Secondly, ‘...
the acceptable level of effort is usually, approximately, zero’,[54] for the reason that
the eventual reward is uncertain. Included in 'effort' are such factors as money spent,
time wasted, risk of delay, frustration and physical strain. Cooper said that: ‘It is the
sum total of all these penalties and potential penalties which tempt the would-be user
to say to himself “Why bother?”’.[55]
Nevertheless there are some information topics for which it has been shown that
citizens are more likely to use professionals than others. Income and finance is
included in the topics where professionals are more likely to be used.[56] This is
likely because the risk of financial loss is likely to prevail to ensure that investors will
make an ‘effort’.
The Advent of the Internet
The research cited above was all undertaken prior to the advent of the Internet. Apart
from questions about the level of use of the Internet for everyday life information –
and the perceived value of the information available – an interesting question is how
the balance of sources used for everyday life information may have changed by the
now easy access to information on the Internet. Although there have now been a large
number of studies of information searching on the World Wide Web, Kari and
Savolainen[57] point out that:
Unfortunately, such endeavours … have often examined the use of the World Wide
Web (WWW or Web) as a phenomenon in itself, without explicitly relating it to other
sources of information … or its wider frames of reference.[58]
One study that did investigate information seeking on the Internet in relation to other
information sources was by Hektor.[59] For this study, there was an extensive
literature review and case studies of ten individual citizens, with data collected
through interviews and diaries. A key finding was that:
To the respondents, the Internet is a resource to information that is used when a more
convenient information system does not resolve the problem at hand, and when it is
considered to be the most convenient information system … Occasionally it is a
unique source that cannot be substituted, but more often it is a complement or
substitute for other sources.[60]
Interestingly, Hektor goes on to say that participants saw the World Wide Web as the
most convenient source for ‘market information’, which is a broad term which could
include investment information, at least in its online form. Nevertheless, Hektor
concluded that ‘it is not considered as a sufficient source as they often return to the
search and use other sources before a decision is made and the problem solved’.[61]
Given that our topic involves online investors, it is a reasonable assumption that the
Internet will be a significant source of information. The easy access to the Internet
means that Mooers’ Law and Cooper’s ‘Why bother’ question are not applicable to
Internet use to find information for online investment. To date, no specific study
about the role and perceived value of online information in this context could be
found in the literature, including through a search of the World Wide Web. This is a
key indication of the need for the present study.
The Need for Multiple Sources
Foundational studies have shown that different sources of information are favoured by
different community groups. In addition, Williamson[62] concluded from an
extensive study: people have different information source preferences and abilities to
use specific information sources. This means that there is a need for multiple sources
of information to be widely available. Although her study focussed on older people,
aged 60 and over, her conclusion is nevertheless applicable to all types of community
information and age groups.
5.Conceptual Framework and Method
Interpretivism is the theoretical lens through which this study is conducted.[63]Rather
than attempting to ascertain general laws by which humans are said to exist,
interpretivist researchers are more concerned with focussing on the ‘processes by
which meanings are created, negotiated, sustained, and modified within a specific
human context.’[64]
We have also used related ideas of social constructionist theory[65] to justify our
investigation of the meanings developed through the interactions of social processes
involving people, language and religion. As Schwandt[66] states: 'We do not
construct our interpretations in isolation but against a backdrop of shared
understandings, practices, language, and so forth.' We believe that there is usually a
range of cultural influences, both macro and micro, on each individual and that, when
people experience similar cultural impacts, they are likely to have at least some needs
and understandings in common. The activity of all our participants, viz online
investing, means that they are likely to have at least some shared perceptions of needs
for information and elements of information-seeking behaviour in common. We have
taken the approach that the patterns that emerge from shared meanings can be used to
improve services such as information provision for online investing. We therefore set
out, through our qualitative research, to discover the meanings that were shared by
participants, as well as those that were not (consensus and dissonance).
From Theory to Method
Modern ethnography is a qualitative method well suited to the aim of understanding
and describing the ways in which online investors seek financial information, a
method which is also consistent with the theoretical underpinnings of the study –
emphasizing, as they do, both individual and shared meanings. Modern ethnography
allows the use of a range of techniques, one of which is interviewing, with
trustworthiness being enhanced by triangulation of techniques and findings.[67] In
the case of this small pilot study, interviewing was the only technique possible. The
researchers considered that rich data would emerge from individual, hour-long
interviews, and this turned out to be correct.
The Sample
The sample is a purposive one, selected to suit the needs of the small pilot study.
Purposive samples, which are common in qualitative research, are premised on the
concept of ‘theoretical sampling’, as discussed by Glaser and Strauss.[68] Theoretical
sampling means selecting subjects which represent the major categories of people
relevant to the research, e.g., mix of ages, genders, socio-economic/education levels,
types of investing. With this approach, there is no compunction to sample multiple
cases which do not ‘ … extend or modify emerging theory’.[69]
Although the pilot study included interviews with representatives of two organizations
that provide online investment services, E-Trade and COMMSEC, as well as the
regulator, Australian Securities and Investments Commission, it is the ten individual
investors, who are the focus of this article. All of them were either experienced in the
online environment (five participants), or had an acquaintance with the issues
involved, in some cases having tried out online investing (five participants). They
were selected to reflect a range of demographic characteristics – gender, age,
employment, education and income. They included five males and five females. Age
groups were fairly evenly split between younger and older investors, with four
participants being under 50 years of age, and six over 50. Half were in full-time paid
employment; four were retired and one was a younger full-time day trade online
investor. There was a range of education levels: although one had a post-graduate
university degree, two participants had only high school education and two a nonuniversity tertiary qualification, with the remaining two having undergraduate
university degrees. Incomes tended to be at the high end of the scale, with only one
participant having an income under $50,000.
In terms of computer and Internet use, all participants had a computer at home and all
but one had the Internet at home – which was where they mostly did their online
investing. The participant without the Internet at home had access at work. All
participants described themselves as frequent or very frequent computer users – with
nine out of ten opting for the latter category. Only two participants had less than two
years’ Internet experience; with six having had four years plus.
Data Collection
Semi-structured interviews, lasting 1 to1.5 hours were undertaken with each
individual interviewee, as well as with representatives of the two organizations that
provide online investment services and the regulator.[70] Interviews were conducted
by two interviewers in each case and took place between July and November, 2002.
As each of our individual interviews began, we asked the investor to complete a table.
Against one axis, they were asked to indicate what types of transactions for which
they used the Internet.
They could choose as many categories as appropriate, with the choices including:
information seeking; trading in domestic Australian shares; trading in international
shares; trading interests in a managed investment scheme; trading interests in a
superannuation fund; payment transfer related to any trading; and ‘other’ (please
explain). They were asked to choose the degree of frequency for all of these
activities, choosing between: very frequently (VF) – once or twice per week;
frequently (F) – at least once per month; occasional (O) – about once in 3 months; and
rarely (R) - not more than 1 or 2 times per year. The other part of the table asked
investors what sources they used for financial information, again rating their
frequency on the above scale.
The sources of information and advice listed were: information from broker’s
site/Internet discussion site; Internet execution with broker advice (Internet advisory);
telephone execution with broker advice (telephone advisory); face- to-face advisory;
newspapers /journals; printed literature from share brokers/financial; and information
or advice from friends and acquaintances’. The filling in of the table was assisted by
the interviewers, who discussed each option with the interviewee, thus gleaning extra
details and insights during the process. Then the interview followed. This explored
reasons for investing online, or for continuing with traditional forms of investment, as
well as in-depth discussion of information sources and their advantages and
disadvantages.
Analysis of Data
Interviews were audio-taped, with the permission of the interviewees, and then
transcribed for analysis. The gathering, coding and analysis of the qualitative data
followed the grounded theory method, originally conceived by Glaser and
Strauss,[71] but as outlined by Pidgeon and Henwood.[72] Analysis of data was a
continuous process with the initial themes and categories, determined after the first
few interviews, being continually reassessed and expanded as more data were
collected. The full set of transcripts was read by both researchers. In relying on
interpretations from more than one researcher, we were seeking to acknowledge the
role of constructivist researchers as the primary instruments in the research
process,[73] and to reflect on the effect of our own roles as they influenced the
research process.[74]
A small amount of quantitative data was collected, as presented in the information
about the sample, above. These data were analysed by the Statistical Package for the
Social Sciences (SPSS), with the analysis involving only frequency counts, e.g., the
number of participants in each age group or the number who engaged in information
seeking (together with the frequency of that activity). In presenting the findings, we
have attempted, as far as possible, to allow participants to speak for themselves by
using quotations to illustrate the views expressed.
6. Information Seeking by Online Investors in Australia
This section presents the findings of the pilot study. As outlined above, they focus
on: the role of information, if any, in investors’ decisions to invest – or not to invest online; the principal sources of information used by investors, whether investing
online, or in traditional mode; the reasons for use of these sources of information; the
relationship of these findings to generic theory and empirical research in the field of
information-seeking behaviour; and the implications of the findings for regulation. To
set the scene, the first section outlines the types of investments in which participants
were trading, as elicited in the first part of the table, followed by a discussion about
how some of our participants began investing online.
Types of Investments and Investment Modes
While all our investors traded in Australian domestic shares, we found no one who
used the Internet to invest in any of the other financial products in our list, although a
couple of participants used a broker for these other products. Two of the investors
traded very frequently using the Internet, the other online investors traded only
frequently. One of the non-Internet investors traded very frequently using a broker,
the others frequently. Five of the respondents also used the Internet to transfer funds
(e.g., from bank to broker) to support their trading orders, and one of these was a nononline investor. Only one of our investors traded in international investments, and that
was in government of New Zealand fixed interest securities and shares of New
Zealand companies, the investor in question being originally from New Zealand.
Three of the group of online investors also used telephone execution through a broker,
either advisory or execution only. This tended to be less frequent than their use of
Internet trading, although two of the group used these channels frequently – ie as
often as they used Internet trading. Most saw telephone execution only trading as a
back-up when the Internet mode was not available. Non-Internet investors used these
channels much more heavily, all but one using them frequently or very frequently.
Getting Started with Online Investing
All but one of our online investors began investing with a broker, and then moved to
online mode, when they felt able to perform for themselves the advisory services they
obtained with broker executed transactions. Very commonly, their first online trading
account was with Commonwealth Securities, the online arm of which is known as
Commsec. This broker’s site was praised as being easy to use, and reliable. Some
investors used what was the Commsec Learning Centre, which provided general
securities information and information about the online investing process. Some
investors, having cut their teeth with Commsec, then moved on to E-Trade and
Sanford Securities when they felt more confident, or needed services such as a live
feed of market information. Some, however, including the day trader, remained with
Commsec, although he used other brokers as well. Online investors who were middle
aged or more, tended to have a career background involving information technology,
or had a family member who had helped them gain the early competencies necessary
to trade online. The one younger investor, who had not gone through the broker
execution transitional stage, had been educated with computers, had an early interest
in investing itself, and a parent who encouraged him. All online investors spoke of
learning about the process of online investing through using a broker’s site, through
doing transactions, and through seeking guidance from telephone support services
provided by online sites. One of the onliners actually described the process as one of
‘osmosis’, while others implied that this was what happened. While several investors
reported attending courses on the nature of investing and the securities themselves,
none reported any formal training on the actual process of online investing. They all
more or less learnt by doing, and none reported this as causing great difficulty.
The Role of Information in Investing Behaviour
All of the online investors spoke of spending quite large amounts of time on
information seeking. One Internet investor who was a day trader spent the equivalent
of each working day doing this. Another of the Internet investors spent up to half a
day most working days gathering and considering information. Others reported
spending a number of hours a day on this. Except for the day trader whose technical
approach to trading was by its nature more opportunistic (but not impulsive), all
investors reported following a company for relatively long periods (weeks or months)
before investing, though not invariably. Although the non-Internet investors were all
open to the idea of using the Internet, some of them cited the expenditure of time
involved in making their own investment decisions, as an important reason why they
used a broker. In two cases, information played a crucial role in the decision not to
invest online, at least at the time the interviews took place. In one case, the
participant had invested online in the past. In response to the question of why she did
not invest online at the moment, she replied:
It's time really and research.Because I've been very busy doing some otherwork, I've
really not had that consistent time to analyse the data.
The other investor had tried out online investing some time ago – and found it fraught
with frustrations. She was reluctant to try again as she saw the research provided by
her broker as valuable: ‘Well it saves me reading all the bits and pieces’.
Nevertheless, both of these participants did quite a lot of their own information
seeking, including from brokers’ sites. All the interviewees, regardless of whether
they invested online or in traditional mode, used a range of sources for information.
These sources are discussed below, using quotes from participants, wherever possible.
Brokers’ Sites and Other Online Information
All participants used online information, even investors who did not execute trades on
the Internet. The exception was our investor who was not as yet literate in the online
world, who was nevertheless motivated to learn. This confirms the theory, mentioned
above: that this is an easily accessible source for those with a home computer, who
are also competent users. Mooers’ Law[75] and the ‘Why bother?’ theory[76] clearly
do not apply when there is little effort involved in this kind of information seeking.
Participants clearly viewed online information very favourably, as indicated by this
online investor:
More convenient. Probably more impartial in terms of the information/advice that
comes in. You don't have the broker's information sales pitch going on
concurrently.The few dogs that we've had from brokers in recent years have sort of
been a 'we've got something good for you' sort of thing and take it at face value. You
don't have that sort of interruption or sort of misinformation going on when you're
online and looking at everything before you have to make up your mind.
All our investors, with one exception, even those who did not invest using the
Internet, used brokers’ sites very frequently for information seeking. This source of
information was very important to them. As one online investor said about the
brokers’ sites he used:
ETrade,CommSec… I just look at a couple of the announcements and things like that
and read advisory sort of stuff and so on.
The one investor who was the exception mentioned above, used brokers’ sites
occasionally when her children could help her, and was keen to become more
proficient. She called a broker for advice very frequently. Some of the investors
mentioned obtaining information from broker emails as well as logging onto broker
sites. Only two investors obtained advice from a broker and then executed using the
Internet, one doing this frequently. The other mentioned the implicit obligation to
execute through the broker after having sought advice – and this was what he mostly
did.
The other frequently used online source was company web sites, especially for annual
reports. Additionally there were particular web sites which participants had found,
and about which they were sometimes enthusiastic. For example our day trader
informed us:
I've got another site for graphs which is not a broker's site at all, just a general
information site. It's called incrediblecharts.com. It's just something I found from a
Google search.It's brilliant.It's free.
Newspapers, Journals and Printed Information
All the investors used newspapers and journals very frequently to seek information.
In fact, most described reading newspapers carefully each day, as this comment from
a traditional investor exemplifies:
I read the reports in the Age and the financial Review daily. I read those. Yes, I
suppose I spend more time reading.
The Financial Review was the most frequently mentioned newspaper, with even the
day trader, who wanted only factual information, rather than analysis, saying when
asked about information from newspapers:
That's huge.In the morning I read the Fin Review from cover to cover.In trading they
suggest it is not important to read the news because the markets should be efficient
and all the information should already be in there. It's good to know what's happened
overnight.
One non-Internet investor had even used newspapers to keep a manual weekly log of
movements of the share price of the companies she followed which went back nearly
two decades.
All but one participant used printed literature, such as reports from companies,
brokers or analysts, very frequently or, in one case, frequently. The findings show that
most of the online investors used channels other than the Internet, including printed
information, although usually less frequently. This multiple channels approach is even
more emphatic in pure information seeking (when a trade was not involved at the
time). In some cases, Internet investors used newspapers and broker printed literature,
etc., just as frequently as broker sites.
Personal Sources of Information
As discussed, above, personal sources of information, such as family, friends and
acquaintances, have been found to be widely used for community information in a
range of studies. Our findings provide further confirmation: all our participants talked
with others who were also investors - ranging from family members, through flat
mates to friends and work colleagues. A few investors described how they trusted
and respected the investment prowess of members of their family. A couple of older
investors particularly said they discussed investing with children, and specifically the
actual process of using the Internet for investing where they relied on their children’s
greater familiarity with computers. On the other hand, one of the online investors
said:
For a start I have no family members in Australia so most of my information comes
from friends, acquaintances or old colleagues.
Several other participants reported discussing investing with work colleagues whom
they had discovered shared the interest, and even using down time at work to carry
out online transactions while chatting with colleagues. Nevertheless, some
participants were quite clear that their trust was limited to one or two people whom
they respected as knowledgeable:
It's probably my son would be the only one I trust because he has got pretty advanced
skills as to how to access things. He is a pretty quick thinker. I don't think I would
trust some of the other relatives who have not got quite the same background.
And
I speak to Paul about it because quite often we'll do it together.But he's got different
ideas and he's more into the charts and I'm less into that.He's got different ideas on
what some stocks will do and sometimes we talk about it but we don't really listen to
each other that much.He's the only other one I'd speak to.
Finally, several investors we interviewed acknowledged that information gained from
friends and acquaintances was likely to be lacking in a significant respect. Investors
are sensitive about talking about losses, and investor friends are also sensitive in
probing them about losses. This means that information gained from these informal
sources may be skewed in favour of good news and omit bad news. Asked what the
reactions of friends were to the losses of the 2000 market crash, one investor echoed
the comments of several others:
I think a lot of them just were silent. They really didn’t say much and I didn’t ask
them. …If they had won a whole heap they would probably tell you.
The findings about the significance of personal sources are reinforced in the next
section which examines an interesting way in which personal sources were involved
in individuals’ investing activities.
Social Inter-Communication and Investment Information Seeking
While we knew of the Shiller and Pound[77] study discussed above, we were not
prepared to find the level of social inter-communication in investment information
seeking that we encountered from our first interview. As mentioned above, all our
investors reported speaking to others about their investing activities. Very few
reported using chat rooms or bulletin boards, though some had used them in the run
up to the 2000 market crash in tech stocks.
There was quite a variety in how structured the social inter-communication was. It
ranged from casual conversations to regular semi-formal meetings in pubs and coffee
shops, to more formal discussion groups with a common interest in investing, and on
to investor clubs in which members contributed to a common fund to learn from
making actual investments. At the most structured, there are associations such as the
Australian Shareholders Association which conducts regular meetings with a formal
agenda but has an opportunity for socialising afterwards, and the Securities Institute
of Australia which has a formal program of securities industry education and training.
The Australian Stock Exchange also conducts seminars on issues of current interest to
investors, which some of our investors reported attending.
One thing we observed very strongly, is the extent to which many investors see
investing as a leisure activity. Online investing allows them much more freedom in
the degree to which they can do this at leisure, if they have Internet connection at
home. The investor, who did not invest online himself but knew a lot about a range of
people who did, commented:
[Investing] It's like their television. They could be there for two, three or four hours.
The same investor told us:
The people that do it [online invest] every day, a lot of them will basically
communicate with their friends. They will be on the phone. It's like playing a video
game where everyone's connected. So they ring each other; What are you doing?
They're networks. They go to seminars. They do all that sort of stuff.
The degree to which online investing is seen as a leisure activity is again captured by
another of our investors who regularly spoke to his flatmate about investing. This
flatmate had no spare cash and was ‘trading without cash, practice trading’ as if it
were a computer game. That same investor saw online investing as something he
enjoyed saying:
I see it as a bit of a hobby to fill in time.
This sense of investing as a hobby or leisure activity segued into the activity of
attending informally organised social occasions in which investment trends are
discussed and there is commonly a speaker who makes an informal presentation on a
topic of current interest. Three of our group of investors had recently, or still did,
attend such occasions regularly, and several others reported having heard about them.
But there's quite a lot of seminars where you can go and the room is full. I've been to
seminars and there's 40 or 50 people; the last time we met was at a pub; they have a
few drinks ...they have slides and they were talking about options trading; it's just a
private group and they network with each other and if they meet someone new who's
interested they say: Come along.
Another investor, who is female, reported that the shareholders’ group she belonged
to had been going about six years and was mainly male. She said:
People are very open and free about information I find. There is no covetousness very
much. One probably accumulates information by osmosis as much as anything. And
so I think you always pick up some little thing.
Another investor who had actually convened one of these investors’ social groups for
a while, described a family group which operated an investment club. She told us how
the family:
talk about shares, and they put in so much and actually invest it. But that’s purely for
their family only.
Again, an investor reported a similar formation in an informal all male investor club:
We put up $500 each and invest it and play with it in the investment club. …It’s
attitude is to trade in all the shares you normally wouldn’t trade in and its idea is to
discuss things that people might know about.It's mainly there for that purpose,
learning.
The investor described this activity as fun, even though the investment club was
making a loss and had recently called on all members for a top-up in funds!
Despite this widespread social activity focussing on investment, there was also a
variety of views about how influential (in the investor’s own perception), the social
inter-communication was on the investor’s own investment decisions. One reaction
from the day trader to the idea of investors’ groups was:
No, definitely not. I want to make it purely the charts [that] generate what I buy, not
people at all.
Another, from the female member of the mostly male investment group, warned us:
I find it really interesting to listen and to take some ideas, just to weigh them up, but I
wouldn't take it straight from there, no. I have done it once and I had my fingers
burnt.
The Analogy with Gambling
In relation to the idea of investment as fun or a leisure activity, a number of our
investors spoke about investing using the analogy of betting on the horses. It was in
this regard that they recognised the context in which it was most likely that one
investor would rely on information given by someone else. One investor told us:
Some of them who aren't very experienced, it is almost like horse tipping;it is just like
a gambling game. If for instance they work full time, if it's [investing] not something
they do all the time, it's just like a horse tip.
When talking about the info tech boom, the day trader captured succinctly a
perception that a number of other investors seemed to hold:
I think there were people who were treating it more as an alternative to the horses
rather than a job.
The perception was that investors divide into those who take it very seriously [like
himself] and those for whom it is really a leisure activity. The first group may spend
many, many hours a week on information seeking and analysis (retired investors we
interviewed fit this group as well), others in the second group may act more
impulsively. One of our investors even had this perception about himself. Describing
what he does when warming up for a trade he said:
I just follow the company announcements or go by what people say in the paper or the
guides in the newsletters or on the Internet. Hear what other people have said and
think there seems to be a few people backing this one.
Later on he elaborated:
I don't have the discipline to do it properly because I don't get out and find more
things out, find out more information and processes and so on.
Another investor summed up:
It is so easy to see the share price move and click and buy. It's like gambling, it's very
risky. That's why I think online investing is very dangerous. Because it requires a very
high degree of discipline.
7. Analysis and Regulatory Implications
In this section we draw together the insights from our findings and connect them to
the theoretical issues raised earlier in the piece. Mostly, however, we are intent on
drawing out the regulatory implications of our findings for online investing as it
passes out of the developmental phase. We do this somewhat cautiously because of
the pilot nature of this study.
Regulating in a Technologically Neutral Fashion
We think that the degree to which the investors we interviewed moved between the
actual and virtual modes, is significant. Due to the novelty of the online mode, much
attention has been devoted to it as if it were quite distinct from traditional investing.
Certainly the case for a lighter regulatory touch has rested heavily on this view. It is
true that the interactivity, immediacy and inter-jurisdictionality of the virtual
world[78] intensifies some aspects of investing (eg the attractiveness and ease of
taking up investment offers), in a fashion not feasible in the actual world. While we
think that it is important to be alert to these differences, we suspect that they are
differences of degree rather than quality, and this seems to be the current view of
financial regulators as well.[79] We think our findings show that it is important that
regulation be neutral as between information seeking and execution modes. It is
striking how both online and traditional investors, move between actual and online
modes. A number of those who identified themselves as online investors, and did in
fact complete numerous transactions online, also reported using traditional investing
means. Sometimes they used the online mode for those shares in which they traded
frequently, using the traditional advisory mode for parcels they intended to hold.
Others reported using the online mode for Australian equities and a broker for
international equities or other interests such as in managed funds or superannuation,
although all these may be purchased online.
Transiting between the actual and virtual modes is not only done between transactions
and types of investments, but also within a single transaction. Two online investors
reported occasionally seeking information and advice from a broker, and then wishing
to execute the ensuing buy decision through the online mode. One investor felt freer
to use the broker’s advice in subsequent online acquisitions, while the other, having
obtained broker advice, felt the obligation to use the broker for the execution too.
Much discussion of online investing assumes that the investor both seeks information
and executes in the same mode – wholly traditional or wholly online. In fact we
observed that all but one of our non-online investors was an active information seeker
in the online mode, though they executed trades through a broker. The effects of
immediacy and interactivity of Internet information may be somewhat attenuated by
having to change modes to contact a broker, and the advisory intervention of the
broker. Clearly, the effects of information delivered by the Internet may extend
beyond just those who execute online, for example to those who use telephone
execution only services.
Related to this crossing between the actual and virtual investing modes, is the use by
all investors of many channels of finding investment information. This finding
confirms research undertaken in the generic field of information-seeking behaviour,
which has found that multiple sources are used for community information seeking,
with different people having preferences and abilities to use specific sources.
The novelty here is really the new types of information sources involved, and the fact
that investors switch from the actual to the virtual and back. Even prior to the
availability of online sources, investors used a number of different avenues for
collecting investment information: newspapers, tip sheets, TV and radio investing
programs and of course their broker. But as we have already said, we were impressed
by the extensive use that non-online investors made of online information sources.
We were equally impressed by the fact that even very experienced users of online
information sources such as our day trader still read the daily papers with particular
care given to the financial pages, magazines and hard copy financial newsletters. This
points to the continued usefulness of print sources of information. It also bears out the
findings of Hektor’s study of the use of the World Wide Web for ‘market
information’ where the Web was not considered a sufficient source and where other
sources were used before decisions were made.
The generic literature on information seeking and also the work of Shiller and Pound
in financial information seeking[80] suggests that the more formal sources of
investment information just discussed are likely to be mingled with use of
interpersonal or social information sources. After all that has been written about the
use of Internet discussion sites such as chat rooms, bulletin boards and real time relay
chat networks, we expected to find that the interpersonal or social dimension of
information seeking would be exploited through these electronic forms of community.
As we have reported this was not in fact the case, and what we found instead is
relatively frequent use of a range of real world social sources, by both online and nononline investors.This emphasises again the ease with which investors move back and
forwards between investment information media.
In regulatory terms it is therefore dangerous to think about investment activity in
discrete online/off-line categories or to ignore the extent of inter-penetration between
on and off-line information sources. It is crucial that regulatory policy and rules
remain neutral, particularly as between sources or media of investment information.
This is particularly so as not to disadvantage those information sources that have been
shown empirically to be more accurate than others. Indeed, there are arguments for
particular regulatory support for these, in terms of encouraging investors to use them,
at least for checking information gained from other sources. We think that as
regulatory policy on online investing moves out of the development phase into
permanent form, that the lighter regulatory burden that online modes carry be
reconsidered given what we now know about investors’ reliance on a multi-media
approach to information seeking.
Promotion of Investor Education – Enrolling Private Actors
The reports of our online investors make it clear that they often start by using the
advisory broker as a means to educate themselves about investing, and then swap to
the online mode. They seem to do this when they feel sufficiently knowledgeable and
experienced to take investment decision making into their own hands. Further in
moving to online investing, they tend to begin with broker sites which are more
supportive of customers, and then either move on to, or add, other sites that have more
advanced services (eg data streaming). This should be seen against the background of
the fact that none of our investors had attended any course or other formal training in
which they actually learnt about how to do online investing, or about how it works. It
suggests that if online sites are well designed they can be useful in investor education
as well as providing the online investor function. In other words we do not see
facilitating online functionality and providing a safe and instructive environment for
investors as being objects at odds with each other. We think the possibilities of
enrolling online brokers in the investor education process should be a high regulatory
priority in developing investor education programs for the online world.
Research in the field of information-seeking behaviour has shown - over a long period
of time and in a range of fields including community information - that personal
sources of information are widely used and respected. Our findings are therefore very
much in keeping with this major body of research. Given the social constructionist
component of our conceptual framework, which encouraged us to focus on the
‘shared meanings’ of participants, it was particularly interesting to find that the
sharing of information and opinions was very much fostered by the considerable
degree of social interaction in which many participants engaged. We think this is also
significant in relation to the shared understanding (or at least capacity to recognise) of
online investing as a leisure activity, which we discuss further below.
Shiller and Pound's work tells us that personal contacts are important in triggering an
interest in a particular investment, and that was definitely the case with our investors.
Many would use a tip from a friend, work colleague or investment group acquaintance
to begin a trail of investigation. Further, as with Shiller and Pound’s results, we also
found that investors reported influencing others, even if they had not reported being
influenced themselves. By contrast with Shiller and Pound’s group of individual
investors, where about one third of respondents reported being interested in a stock by
a broker, none of our investors really made this point. Of course it is to be expected
that in a group of online investors where the medium is by nature non-advisory, that
information from brokers personally will have a much lesser role to play, but this was
also true of most of our non-online investors. They reported mostly using brokers as a
further sounding board for decisions they were in the process of making as a result of
becoming interested in a stock through other sources, albeit that these might be on the
broker’s firm’s website or financial newsletter. In analysing the role of brokers in the
online investing world, the tendency to downgrade their importance in providing
advice must be set against the fact that their websites are one of the most important
sources of information. This suggests to us a change in the way investors see and use
brokers, - from a stance of deference, to seeing brokers as a resource of variable
usefulness. Returning to the question of interpersonal communication, while Shiller
and Pound's research underlines the importance of interpersonal communication, our
results show some of the formations through which that communication occurs,
though there is much more research to be done to provide a full picture. Our investors
disclose a fairly high level of organisation though of a generally informal variety,
within groups of investors. These range from family investing clubs to associations
such as the Australian Shareholders Association, all the formations showing a
substantial social aspect as well as providing specific locations for group
communication between like minded members of the investing community. Of course
there are also more atomistic contacts between investors – one to one conversations
between individuals. We think that the presence of community groups in investment
behaviour is significant for a number of reasons.
First, we think this provides some evidence that there are locations for the formation
of group sentiments about investing, that would seem to contradict the more atomistic
picture of investment decision making presented in more traditional explanations such
as the efficient markets hypothesis. While, like Shiller and Pound, we concede that an
exploratory pilot study like ours could not possibly disprove such a well established
hypothesis, we think that it suggests questioning in a wider way how investors do
actually do seek investment information and make decisions. We think that further
investigation here could bear valuable empirical and theoretical fruit, and that policy
directions will thereby emerge. In particular we suggest research about the dynamics
of community groups where opinion about investment matters may be formed and
communicated.
Already however, we think that our findings in this area have important regulatory
implications in the area of investor education. We think that the investor groups we
have identified could be used productively, in the process of investor education. Some
of the groups already set out to improve the knowledge of investors, and there is the
possibility that they could be enrolled by the regulator in more general investor
education initiatives.[81] Again, how this might be done will require further
investigation. Nevertheless we think this is a significant regulatory direction, given
the importance of investor education in an investing environment where the advisory
role of brokers is diminishing. In particular we think that these investor groups might
be used to counteract some of the ‘irrational exuberance’ that has been identified in
online retail investor decision making.[82]
In formulating such a regulatory strategy, it will be important to know whether these
investor groups are mostly recruiting grounds for investment customers, or whether
they are truly disinterested. It will also be important to identify opinion leaders in
such groups, who may be powerful influencers of opinion. It will be necessary to be
assured of their capacities and willingness to promote a public interest perspective,
not only a self regarding one. It may be that such opinion leaders themselves would
require education in the most effective ways to educate other investors, and in insights
such as the tendency of investors to hide their losses in social interaction, and the
influence of that trend in group dynamics.[83]
Continuing Need for Investor Protection
The social or group nature of communication about investing, and its identification as
a leisure activity by some of our respondents seem to us to be related observations.
Our findings suggest that online investors may identify themselves in segments. First,
there are those who consider themselves as ‘serious’, who undertake considerable
independent research and verification of information they take away from group
settings. Second, there are those who are identified by the former group, and who
sometimes self-identify, as more casual and oriented to leisure in their investigations
and decision making.
Both groups seem to spend quite a lot of time on online investing, though our findings
suggest that the leisure group spends it networking and communicating with others,
rather than in the fine grind of information seeking and analysis. We wonder whether
this more casual attitude to information seeking is induced by the framing of online
investing as a leisure activity, and perhaps akin to online gambling. Shiller has
suggested that the involvement and apparent approval of gambling by public
institutions may have led to a more risk loving approach to other aspects of life,
including investment in the stock market.[84] We wonder further whether the
supposed gullibility of online retail investors is partially induced by this casual,
leisure-related attitude, perhaps accompanied by insufficient information about the
stock market generally.
We also think that there is further justification here for regulatory action that takes
online investor education very seriously. If the attitude that online investing is a
leisure activity, or even as a form of gambling is prevalent, it means that it will be
insufficient to educate investors about the factual aspects of online investing.
Education for a change of attitude amongst some investors will be required, and that
may be much more difficult to achieve. That it is important cannot be doubted in the
context of the additional choice and investing autonomy that current policies on tax
preferred retirement income accumulation support. This is especially the case, where
there are arrangements which allow retirees access to the corpus of their retirement
funds on retirement, rather than making them available through pensions or annuity
payments. In this situation, there is a premium on ensuring that investment is taken
seriously, and not treated as a leisure activity, especially not one akin to gambling.
A further important regulatory implication is that investors who see online investing
as leisure or gambling, are not really the empowered variety of investor that
advertising for online sites portrays them as. They are really very vulnerable, because
their easily influenced and badly informed stance, opens them to all the additional
risks of the online mode that are outlined in the Introduction to this article. For them it
is important that investor protection remains an objective of the policy and action of
financial regulators. In recent years there has been a trend towards assuming that
investors, especially online investors, are an undifferentiated group of knowledgeable
and diligent decision makers who need neither a broker, nor regulatory protection.
Ensuring investor confidence has become the regulatory watchword, along with
framing such individuals as empowered by the technological tools of online investing.
Our research shows that this is a correct picture of some investors. But it equally
shows how dramatically this is not the case for others. A major task for online
investment regulation now is to identify ways to protect those who persist in the more
casual approach to investment decision making, while supporting but not impeding
those who are in fact careful and capable investors.
Regulatory Warnings About Investment Decision Making in the Online World
Mastery of computer skills is an important determinant of whether an investor will
invest online or not. But where this is a given, probably the most important single
determinant is the time involved in online investment information seeking and
analysis. As our findings show, many of our investors spent considerable portions of
the day on this activity. Of those in our sample who did not invest online, the time
involved was the leading reason why not. This corresponds with observations
elsewhere that the time involved (and by implication the amount of information that
must be processed), is just too great for the average investor. [85] We think this
suggests that online investors could profit from warnings that good investment
decisions take time, and that professional advice may be warranted where significant
time cannot be applied to investing.
8. Conclusion
To reiterate, the aims of our study are to explore the role of information in investors’
decisions to invest online and to identify the implications of these findings for
regulation of online investing. We aim to do this by relating our findings to generic
theory and empirical research in the field of information-seeking behaviour. In
particular we have addressed what we see as a gap in the financial economics and
information disclosure literature, which rarely address how investors seek
information. Because online investing is deliberately non-advisory the question of
how investors seek information can no longer be dodged by assuming they use a
broker.
The results of our study are notable in disclosing the multiple channels of information
seeking used by investors. The regulatory implication of this is clear – regulation
should be technology neutral so as to foster all information channels. The study also
shows the importance of social inter-communication in financial information seeking.
This raises questions about the picture of investor decision-making presented by
financial economics. No longer can the investor be seen as only motivated by
objective information, or the distilled financial wisdom of a broker. Opinion,
influence and collective sentiment must also be considered. These emanate from the
social actors and groups the investor seeks out or is in contact with. This is a line of
inquiry consonant with recent theoretical and empirical developments in the
behavioural finance literature discussed earlier.
There are also policy implications from these findings about investor social
communication. As we have said, we think such groupings could be explored for
investor education possibilities. In particular they may be a location for adjusting
attitudes to investing so that it is taken more seriously by those inclined to play with
money, rather than invest it.
A related finding is the segmentation of investor types – a varegation from very
diligent to dilettante. For regulators we think this implies a renewed attention to
investor protection strategies and scepticism about the view that all non-advisory
investors are capable and empowered. Finally, we think that warnings should be
employed to alert investors about the time required for wise investment decisionmaking.
Notes and References
[1] D. Langevoort, 'Angels on the Internet: The Elusive Promise of ‘Technological
Disintermediation’ for Unregistered Offerings of Securities” (1998) 2 Journal of Small and
Emerging Business Law 1 at 1.
[2] C. Bradley, ‘Online Financial Information: Law and Technological Change’ (2004) Law &
Policy (in press)
[3]B.M. Barber and T. Odean ‘Online Investors: Do the Slow Die First?’ (2002) The
Review of Financial Studies 15(2) 455, 455-487; Barber and Odean (2000) 'Trading is
Hazardous to your Wealth: The Common Stock Performance of Individual Investors', 55
Journal of Finance 773.
[4] R. Shiller and J. Pound ‘Survey Evidence on Diffusion of Interest and Information
Among Investors’ (1989) Journal of Economic Behaviour and Organisation 12, 47-66.
This is now extended to online investing: Barber and Odea (2000), (2002); Barber and
Odean (2001) “The Internet and the Investor” 15(1) Journal of Economic Perspectives
41-54.
[5]Office of the NY Attorney General Eliot Spitzer, From Wall Street to Web Street: A
Report on the Problems and Promise of the Online Brokerage Industry (22 November
1999) 4.
[6]Spitzer, ibid, ch I and passim; Phillips, 'Avoiding Share Scams in Cyberspace',
www.asic.gov.au 20 September 1999, p 6; ASIC (August 2000), Survey of On-Line
Trading Sites http://www.asic.gov.au
[7] ASX, Share Ownership Survey 2002 (5 Feb 2003) at
http://www.asx.com.au/shareholder/pdf/sharesurvey050203.pdf
[8] ABS, Australian Social Trends 'Household Use of Computers and the Internet',
http://www.abs.gov.au/ausstats/abs@.nsf/0/C1D866341D03D9E9CA256D39001BC362
?Open
[9] Phillips, op cit., n. 6, 6.
[10] Spitzer, op cit, n. 5, 2.
[11] Op cit note 5, p. 1. Also B. A. Bell, ‘Online Brokerages Under Siege for Trading
Outages and Delays’ (April 1999) 2 (11) Wallstreetlawyer.com: Securities in the
Electronic Age.
[12] J. Coffee Jr, ‘Brave New World? The Impact(s) of the Internet on Modern
Securities Regulation’ (1997) 52 The Business Lawyer 1195, 1223.
[13] E. Boros, ‘Corporations Online’ 19 Co & Sec LJ (2001) 492-514.
[14] The best example of this involved the unlisted Spring Street Brewing Company in
the USA, too small for an underwriter and with no market maker in the after-market. It
offered its shares directly to investors, creating its own primary market. To create a
secondary market for its shares it established Wit-Trade, an electronic bulletin board on
its website where shareholders could trade their shares. When the SEC found out about
the arrangement it did not shut down Wit-Trade. Instead, it made arrangements that
allowed trading without requiring registration as a broker-dealer. Coffee, above n 12,
1215–16.
[15] E. Boros and ASIC, Multimedia Prospectuses and Other Offer Documents: Issues
Paper (December 1999) 5.
[16] ASIC, Electronic Prospectuses, Policy Statement 107 (10 February 2000); Offers of
Securities on the Internet, Policy Statement 141 (March 2000).
[17] Eg s945A Corporations Act 2001 (Cth).
[18] Eg s947B(2) Corporations Act 2001 (Cth).
[19] J. Longo, ‘Cyber Enforcement in the Financial Services Sector’, address to the
ACCC’s Global Commerce Conference (9 November 1998) 6, available at
<www.asic.gov> (visited 29 August 2003).
[20] The latter requires advice about suitability of a financial product for the investor,
and disclosure about fees and product risk to ensure the adviser’s independence.
[21] J. Coffee Jr, op cit n 12, 1223
[22] ASIC, Interim Policy Statement – Exposure Draft, Internet Discussion Sites, IPS
162 (15 August 2000). There has been no further action on this Interim Policy
Statement, and it may be that Internet discussion sites will be treated as “mere
conduits” under the Financial Services Reform Act 2001as elaborated in ASIC Licensing:
The Scope of the Licensing Regime: Financial Product Advice and Dealing, Policy
Proposal Paper No 1, April 2001. In either case they are less likely to be required to
hold a license.
[23] E. Boros, op cit., n. 13.
[24]http://www.fido.asic.gov.au/fido/fido.nsf;
http://www.fsa.gov.uk/consumer/consumer_help/;
http://www.sec.gov/investor.shtml.
[25]: Spitzer, op cit., n. 5, 187; Unger, Keeping Apace in Cyberspace (SEC,1999).
[26] R. Jennings, H.Marsh, J.Coffee and J. Seligman Securities Regulation Cases and
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[27] F. H. Easterbrook and D. R. Fishel, The Economic Structure of Corporate Law
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[29]J. Gordon and L. Kornhauser ‘Efficient Markets, Costly Information and Securities
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[30] Though more generally see R. Gilson and R. Kraakman ‘The Mechanisms of Market
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[31] E. Fama, ‘Market Efficiency, long term returns and behavioural finance’ 49 (1998)
Journal of Financial Economics 283-306.
[32] R. Shiller, Market Volatility (1989).
[33] H. Shefrin, Beyond Greed and Fear – Understanding Behavioural Finance and the
Psychology of Investing (2000).
[34] Eg., M Klausner, ‘Sociological Theory and the Behaviour of Financial Markets’ in
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[36] Langevoort, ibid; Shefrin op cit.n 33; R Shiller, Irrational Exuberance (2000).
[37] Shiller and Pound, op cit., n. 4.
[38]This has also been observed by others, even amongst institutional investors: J
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[40] Shiller and Pound, op cit. n 4, 28.
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needs of the citizens of the Western Region of Melbourne (1976); J. Macbeth and D.
Hitchens, A Report on Community Information Needs (1977); K. Williamson, Library
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[42] C. Chen and P. Hernon, Information Seeking (1982).
[43] Lipsman, op cit., n. 44; B. Dervin and B. S. Greenberg, ‘The communication
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[44] E. M. Rogers, Diffusion of Innovations(1983) 18-19.
[45] P. Wilson, Public Knowledge(1977) 40.
[46] E.g. Rogers, op cit., n. 44.
[47] M. Sandow-Quirk, Information Seeking in Alfredton and Wendouree West (1983)
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[48] E. Katz, ‘'The two-step flow of information: an up-to-date report on an
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[49] Warner et al, op cit., n. 41, p. 27.
[50] K. Williamson, ‘Older adults: Information, communication and
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[51] S. Wade and W. Schramm, ‘The mass media as sources of public affairs, science
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[52] C. N. Mooers, ‘“Mooers” Law, or why some information systems are used and
others are not’, (1960) American Documentation, 11(3), Editorial, unpaged.
[53] W. S. Cooper, ‘The “why bother” theory of information usage’, (1978) Journal of
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[54] Ibid, p. 2.
[55] Ibid. p. 3.
[56] Williamson (1995), op cit., n. 50.
[57] Kari, Jarkko and Savolainen ‘Towards a contextual model of information seeking
on the Web’, in Working Papers of ISIC 2002 –Information Seeking in Context: The
Fourth International Conference on Information Seeking in Context, September 11-13,
2002, Universidade Lusiada, Lisbon, Portugal, pp.488-513.
[58] Ibid, pp. 489.
[59] Hektor, Anders ‘Information activities on the Internet in everyday life’. Published
in Working Papers of ISIC 2002 – Information Seeking in Context: The Fourth
International Conference on Information Seeking in Context, September 11-13, 2002 at
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[60] Ibid, p. 450.
[61] Ibid, p. 451.
[62] Williamson (1995) and (1998), op cit., n. 50.
[63] Warner et al, op cit., n. 41 and Chen and Hernon, op cit., n. 42. See also Y.S
Lincoln and E.G. Guba, Effective Evaluation (1981) who refer to the multiple realities
that arise from the interpretive activities of individuals, in perceiving what is real.
Similarly the sense-making theory of B. Dervin ‘Information as a User Construct: the
Relevance of Perceived Information Needs to Synthesis and Interpretation’ in
Knowledge Structures and Use: Implications for Synthesis and Interpretation, eds. S.A.
Ward and L.J. Reed (1993).
[64] See Lincoln and Guba, op cit., n 63 and other references mentioned there.
[65] P. L. Berger and T. Luckmann, The Social Construction of Reality: A Treatise in the
Sociology of Knowledge (1967).
[66] T. A. Schwandt, ‘Three epistemological stances for qualitative inquiry:
Interpretivism, hermaneutics, and the social constructionism’, in Handbook of
qualitative research eds. N.K. Denzin and Y.S. Lincoln (2000) 197.
[67] A. Bow, ‘Ethnographic Techniques’ in Research Methods for Students, Academics
and Professionalsed. K. Williamson(2002) 265-279.
[68] B. G. Glaser and A. S. Strauss, The Discovery of Grounded Theory (1967).
[69] N. Pidgeon and K. Henwood, ‘Grounded theory: practical implementation’ in
Handbook of qualitative research methods for psychology and the social sciences ed. J.
T. Richardson (1993) 86-101.
[70] Each interviewee signed the informed consent form, required by the relevant
Ethics Committee.
[71] Glaser and Strauss, op cit., n. 68.
[72] Pidgeon and Henwood, op cit., n. 69.
[73] C. Marshall and G. B. Rossman, Designing Qualitative Research, 3rd ed. (1999); L.
F. Locke, W. W. Spirduso and S. J. Silverman, Proposals That Work,4th ed. (2000).
[74] Lincoln and Guba 1985, op cit., n. 64; Lincoln & Guba, Effective Evaluation (1981).
[75]Mooers op cit note 52.
[76]Cooper op cit note 53.
[77] Shiller and Pound op cit note 4.
[78] C. Bradley, op cit., n. 2.
[79] J. Segal, ‘Managing the Transition to Cyberworld’ 19(8) Co & Sec LJ (2001) 519531.
[80] See Parts III and IV above.
[81] J. Black, ‘Enrolling Actors in Regulatory Systems: Examples from UK Financial
Services Regulation’ [2003] Public Law 63-91.
[82] Shiller, op cit., n.36.
[83] Though see Barber Odean op cit., n 3, 458-460who suggest that investors who
lose money will blame someone or something else, though they will attribute successes
to themselves.
[84] Op cit n 36, pp. 40-42, 207.
[85] B. Black, “Information Asymmetry: The Internet and Securities Offerings” (1998)2
Journal of Small and Emerging Business Law 91; E. Boros, ‘Corporations Online’ 19 Co
& Sec LJ (2001) 492-514.