Financial Impact of the Internet on Stock Market Participation in the Last 2 Decades

¶ … E-commerce, efficiency in terms of time and cost has been experienced by almost every sector of the economy. International markets came closer and economic participation in every market increased significantly as it became easier for buyers and sellers to communicate. This had also affected the Stock exchanges or the stock markets.

With the cyber world taking over the conventional corporate climate, in the recent past, online financial services, brokerage houses and trading portals sprang up. This trend not only triggered participation from existing investors but also attracted newer smaller investors. Moreover, the cyber fever also changed the way companies offer and sell stocks to the market.

Corporations are private sector business ventures with a limited liability. Moreover these businesses are incorporated and can issue stocks in order to generate finances. There are two major types of corporations: private limited company and public limited company. In a private limited company the stocks can only be issued to a limited number of people, generally those within the business. This means that shares cannot be issued to the general public. On the other hand, a public limited company is listed on the stock exchange and can issue shares to the general public. In both the cases, the shareholders have a right of ownership in the company with each share having a voting right. All shareholders get a share in the company's profits in form of a 'dividend' (Emerson, 2009).

As technological advancement grew rapid and the advent of information technology triggered E-commerce, like any other business sector, it also created a new revolution in the financial sector. Online and Internet banking, online mutual funds accounts and online brokerage houses became very common. In the pre-internet era, where a new investor had to take the pains of paying a personal visit to the brokerage house can now easily make his investment decision and make dealings through user friendly brokerage websites. Not only that, but other services such as Annual Reports and Securities and Exchange commission filings and other relevant documents are also accessible at the ease of a click. The incorporation of internet in stock markets and financial institutions are now a two way stream that is producer to consumer and vice versa. This is not only because of the ease, convenience and time efficiency that it provides but also the efficiency in terms of costs.

ver the years, telecommunication technology has improved not just in the western world but across the globe. Not only developed but the less economically developed countries are also now enjoying the accessibility to the World Wide Web. This has resulted in the increase in globalization and in turn, paved way for the advent of E-commerce (Lauden & Traver, 2008). When Ecommerce came took over, there was a notion that it is only going to benefit the B2B sector (Plant, 2000). However, proving the myth wrong, it went on to target the mass consumer market. This became evident when huge online shopping arenas started to spring up all over the internet. From groceries to garments to holiday trips, everything can now be purchased from anywhere in the world in one click. Initially, people were still reluctant to freely give their payment details. Credit card thefts were a serious issue. Then came more secure websites that ensured never like before secured payment options. With Verisign and PayPal entering the cyberspace, online shopping has seen a phenomenal growth. This evolution of E-commerce, which initially attracted cyber consumers to petty transactions such as small budget online shopping later evolved into a global market of multi-digit transaction. Like many other industries, even the stock markets enjoyed the benefits brought in by the new trends if cyber markets.

The Stock Markets

There are various types of shares that can be issued each having their own characteristics and benefits.

Debentures

Although debentures are not stocks by nature and are more like loans, they are issued to the general public and are traded in stock exchange. When the company announces its profits, debentures are paid out first, a fixed amount of interest rate as mentioned on the debenture certificates. Debenture holders can sell their debenture certificates further to for cash. Although debenture holders are the first one to get paid and are paid whether or not the company makes a profit, they have no say in the decision making and have no voting rights.

Preference Shares and Cumulative Preference Shares

Preference shares get the first preference (after debentures) when dividends are paid out. Cumulative preference shareholders enjoy an additional advantage that if in any year, the company does not announces a dividend than it gets accumulated and is paid out the year when the dividends are announced. This benefit is only enjoyed by the cumulative preference shareholders. Both these types of shares do not have any voting rights in the company (Adair, 2011).

Ordinary Shares

This type of shareholders gets the last preference when dividends are paid out. The only advantage that these types of shareholders get is the voting right in the company. The larger proportion of ordinary shares a shareholder has, the greater right s/he has in the company.

In order to issue its share, any company is required to make an offering to the general public so that potential investors could be attracted. The first part of the total authorized share capital that the company issues to the general public is known as the Initial Public Offering (IPO). These Initial Public Offerings are of immense importance to the company. This is because these IPOs help in deciding the price at which the company would be selling its shares at the stock exchanges.

Cyber markets and Smart Phones

Like conventional stock markets, over a period of time cyber markets have emerged on regional and international brokerage houses where buyers, who in this case are small and large investors and sellers, who are brokerage houses and financial institutions meet. These cyber markets have triggered stock market participation as they have supported greater awareness among small and naive investors and have attracted newer investors. The biggest financial and economical impact of this wave on a larger scale is the fact that the generation of a new influx of small investors have resulted in swelling of stock market indices in various regions.

The evolution of these stock markets into cyber markets did not stop at conventional IT systems. Further innovations were brought in with the advent of smart phones, where each Smartphone offered personalized apps for stock market updates and trading. With a personal account, a smartphone user can easily get latest stock market updates pertaining to share prices and other relevant information and make dealings and transactions at the convenience of his or her personal phone. Smart phone technology's assistance to stock tranding however has still faced technical hindrances in many countries. This is because the government recognizes entertainment and cyber world as a key industry and provides immense support to the leisure and tourism industry. An important step taken by the governments worldwide in this direction is the launching of a technology promotional plan. In order to promote these plans, the application of smart phones can be very useful. These campaigns are affected by government regulations as the recent example can be taken from the Saudi government implementing a ban on Black Berry services. Such regulations pose a threat to the functioning of these applications.

The economic factors for this venture are far more viable. The current economic crunch has made leisure and entertainment too expensive for most people. Smart phone apps will provide not just mental but al economic relief to such people as they will be able to enjoy their leisure hours with free communications with not only their friends and family, but also their other entertainment options. Certain services such as special gaming options will be charged but even those charges will be kept as low as $1 and even a few

The users shall be well equipped technically. This will help strengthening the Business to Business dimension of the proposed venture, which will in turn have positive and progressive implications on the Business to Consumers dimension. The rapid advancement in technology sector has resulted in emergence of world class theme parks such as Disney Land along with other hi tech entertainment facilities. The infrastructure and Information Communication Technologies in investor oriented countries like United States of America does not only attract small investors, but also opens prospects for huge corporate investments.

networking forums and smart phones. The overall target market includes people of varies income groups, demographics and socio economic backgrounds travelers. The market is segmented into two main groups. One is leisure tourists and the other one includes business tourists. Business tourists are usually an age group of 28 years old and above and they include a large number of corporate clients as well. A large number of this market segment use smart phones especially Blackberry phones. The second market segments are leisure tourists which include youngsters, families and couples. For the purpose of marketing the segment starts from people of 15 years of age and above. Since these people belong to the income group that have a high purchasing power, a large number of this people from this segment are smart phone users. iPhone and Android are especially gaining popularity among youngsters. This provides immense scope for Brokerage house to use a smart phone application as an integrated marketing tool. It will be easy for the administrators and corporate clients to identify what kind of information a customer would be looking for. This can be done byassessing the kind of interests the users indicate on their profiles. The new strategy used by these apps is focused on the integrated marketing strategy. User accounts for both individual and corporate clients would be available for free. Corporate clients will have to pay a nominal commission fee in order to user promotional services provided by the company, which will offer access to a large market along with an opportunity to identify and understand individual clients and consumer markets. Individual users will have to pay for using certain services such as online Trading and auctions.

Likewise, the corporate clients will be able to have their personalized pages with the name of their businesses. They will be able to track their customers by the interest the customers show towards their 'pages'. This will provide as an effective marketing and customer tracking facility for the corporate clients. While user accounts for individual and businesses would be free, corporate clients would be charged a nominal fee if they would like to use the advertisement invitations to the general users. This will attract and will be beneficial in a lot of ways. For example if an investor is in Florida and indicates 'Microsoft' as an interest, s/he would be automatically connected to the respective company's trading database. S/he would then be able to receive all news feeds about the latest offer and promotional activities. Corporate clients will also be offered 'brand partnerships'. These partnerships will aim to provide customers who show interest in participating firms with special discounts and other incentives. This will not only attract more customers for a brokerage house itself, but will also act as a promotional activity for our corporate clients.Using the smart phone applications, customers will not only be able to get required information, but will also be able to enjoy facilities such as participating in online auctions and IPOs from any location.

Financial and Quantitative Analysis of Internet Use and Stock Market Participation

While there has been very little work done in the past in order to do a litmus test in terms of quantification of the implications of internet on stock market participation, however a few researchers have researched the matter in limited capacity.

Yang (2006) claims researching the coorelation between stock market participation and online trading using a sample population of six major brokerage houses from NASDAQ. The results of his Quantitative Analysis showed very high co-relation rates.

Case Study: Online IPO Auctions vs. Commercial Banks

Twitter is an online social networking website that allows users to post updates or 'tweets' and communicate with others using about 140 characters. Lately, Twitter has gained immense popularity and the company is ranked as the third most popular social networking website after Facebook and Myspace. The company, despite of generating huge revenues is still a privately owned company. The company is now assessing Twitter's use to the corporate sector for advertisement purposes. If this becomes successful Twitter is expected to go much larger in terms of scale of business activity. The company therefore is expected to go public any time soon. Being a social networking website Twitter is considering issuing Initial public Offering using an online auction rather than the traditional offering methods.

Traditional vs. Online Auctions

When Initial Public Offerings are issued using traditional auctioning methods, the company has to outsource services of banks and underwriters each of which keeps their commissions that increase the costs for the company (Lowes, 1997). Moreover, the fact that the advertisements are published in the nationwide newspapers results in a further rise as these advertisements can be very expensive. Moreover, the company has to be completely dependent on the commercial banks while the IPOs are issued and investors are issued the shares. The same goes if Initial Public Offerings are auctioned through stock exchanges. Only those investors will get the news of the offerings being made who keep close tabs with the stock market. What makes traditional auctions of Initial Public Offerings more appealing to many companies is the fact that investment banks and commercial banks that are hired by the company helps in determining a realistic value at which the shares would be issued to the general public. The bank in turn charges a commission out of the sales of the Initial Public Offering from the company (Schuck, 1991). Considering the fact that the company issues the shares in order to generate finance for the company operations, these commission banks to the banks and underwriters can be a drawback for the company making the Initial Public Offerings. An added advantage of taking assistance from the investment banks is that they can directly distribute the Initial Public Offerings to the preferential investors (Young, 1990).