I. Overview of Topic
Incredibly, about 1 in 9 American Internet users is now involved in investing online, according to Pew Research. This is indeed one the Internet's most widespread and commonly-used services. It is also a great improvement, in my opinion, over the way the securities trading business used to work.
For it used to be that to trade stocks you had to call your broker to make the trade for you. This meant sitting through the requisite sales talk from your broker, whose livelihood, after all, depended on selling you commission-based securities (and still does). It may also have meant being forced to listen to your broker's dismissal of your stock-picks or other investment decisions, insisting that the "smart money" was doing such-and-such. Yet how often did this guy turn out to be right? If your experience was like mine - not often. In fact, he/she was often dead wrong.
So investing online liberates you from all this "professional" wisdom. You can research the mutual funds, stocks, bonds, options, etc. you want, then quickly and with no static from a broker make the buys you want, or sell whenever you want. And you can do this much more inexpensively with most online brokerages than with a full-service firm.
There are, of course, still some good reasons for also using a full-service broker, such as tax advice, IPO access, occasional research or recommendations (as long as you don't lose sight of the sales relationship you have with the broker). Many people, needless to say, utilize both online and full-service brokers, sometimes using a company offering both, like A.G. Edwards.
If you're new to investing online, it may seem - based on TV or print ads you've seen - that there's not a lot of difference between the various online brokerages. All seem to offer the same basic services at more or less the same price. But that's a misconception. Actually, there are huge differences in the amounts, kinds and quality of service and in the costs involved. In choosing among the various offerings, you need to first decide what kind of investor you are - novice, mainstream or upper income/active.
Investing Online for Novices
Investing online (online trading) can seem a little weird at first, especially if you've been using the Internet mainly to play games on Yahoo or read about Britney Spears. After all, this is your money you're now transferring to a faceless website. So, notwithstanding that online trading is commonplace nowadays, you may appreciate learning more about how to set up an account and what to expect next before going further with this. You can experience exactly what's involved in online trading at the Investing Online Resource Center. Here you'll find out what it's like to set up an account and get starting with trading, and you'll also find descriptions and rankings of the various online brokerages. If you're an experienced online investor you may also find the site useful. It covers a variety of topics in-depth, like day trading, after-hours trading, and provides discussion groups and even a complaint center.
The online brokerages most newcomers know are AmeriTrade and E-Trade. Both are pretty good choices for getting started. It costs $2,000 to open an AmeriTrade account and market orders (buys or sales of securities) cost $10.99. You get a trading demo and an investment education section called Investor Basics. E-Trade requires a $1000 deposit and market trades are $14.95 per trade up to 1,000 shares. E-Trade is known for its superabundance of investment tools, charts, reports, and market news.
But I personally use a lesser-known company called TradeKing. This is a very good service if you want to pay very low fees for trades but still get fast, reliable service. TradeKing is a nationally licensed online broker offering low flat fees ($4.95 per trade and $0.65 per option contract)
with no hidden costs or account minimums. It offers almost as much in the way of tools, research, charting, and educational information as E-Trade but at a lower cost. Personally, when investing online, I don't see the point in paying any more than necessary for a standardized service like stock or bond trading.
Online Brokers for Mainstream Investors
By "mainstream" I mean investors who are experienced in investing online and do ten or twenty trades a year, but usually involving moderate amounts of money. These are average citizens like most of us who use online investing as a convenient way to manage all or a part of their portfolios. So they are looking for user-friendly online service, totally reputable and reliable (of course!), combined with easy access to their funds. But they are not professional investors, nor are they wealthy individuals dealing in six and seven-figure trades.
For experienced mainstream investors Charles Schwab is an excellent choice. It offers top-notch basic service plus a variety of premium services like access to professional research and fee-for-service financial advisors. Schwab has extremely good customer service and is a premium online brokerage. Trades cost $9.95 and you must depost $10,000 to open an account.
Another possibility is TD Waterhouse. Waterhouse has the distinction of being associated with Goldman, Sachs, the powerhouse investment bank, and can provide you with access the Goldman, Sachs research reports and IPO information. An initial deposit of only $1,000 is needed.
If you're dealing in large trades, or dealing in smaller trades frequently, you probably engage in a level of analysis and research beyond what most of us need. You may monitor your portfolio on a daily or weekly basis - and for this, the Internet is a godsend, of course. Also, you may be very concerned about the quality of customer service available through your online brokerage.
Two premium online services for you to consider when investing online are Fidelity and Merrill Lynch Direct .
Fidelity has the unusual feature of allowing you, the investor, to personalize their Web site to fit your own interests, making it easy to navigate to sections that concern you most directly. The site has an amazing variety of online research products and tools. If you have assets of $1,000,000 they make you a "gold client" and only charge you $8.00 per trade.
Merrill Lynch Direct, with the resources of the giant full-service brokerage behind it, offers luxury-class service, tools, research, and customer service. You can conduct the usual online trading or open a cash management account. Naturally, you can also interact with a full-service broker at a local Merill Lynch branch is you wish. An initial $2,000 deposit is needed to open a trading account, and trades cost $29.95 for up to 1,000 shares.
Choosing an Online Brokerage
Want to do some research before choosing an online (or offline) brokerage? A good source of information on the background of brokerage companies is the Central Registration Depository, available through the National Association of Securities Dealers website. While you're on the NASD website you may wish to develop some background information on your broker through the NASD Regulation's Public Disclosure Program (also known as the NASDBrokerCheck). Also visit your state securities commision's site - many state commissions provide cautionary lists on their sites.
Ratings and reviews of online brokers can be found on Consumer Search and Kiplinger.
Concerned about speed of response times and success rates in executing trades when investing online? The Keynote Web Broker Trading Index compares a variety of online brokerages based on these criteria.
About ten years ago, Congress passed its monumental Financial Services Modernization Act, which in effect removed the wall between banks and brokerages in the United States. As a result you can now get banking services from your brokerage (and vice-versa). So why have separate accounts at a bank and a brokerage, and have to manage each separately? Combining the two financial functions can save you time and money (lower fees), makes money transfers between accounts easy, and is definitely worth considering. Institutions offering both banking and brokerage services are sometimes called bankerages. Here you can get checking accounts, savings accounts, cash management, brokerage services, bill paying services and even an equity line of credit, with all your financial activities reflected in a single monthly statement.
Among the major online bankerages are Citibank, Fidelity, Netbank, and Wells Fargo Bank.
By the way, if you decide to start doing your banking with a brokerage, your accounts will continue to be insured by the Federal Deposit Insurance Corporation (FDIC).
That's it - our ten minutes are up! (OK, maybe twelve or thirteen.) Below is a listing of Web resources to help you
continue your research on investing online.
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II. For Additional Research
This Section provides reviews and recommendations of Web sites and other
If you're planning on investing online in stocks or mutual funds it's a good idea to subscribe to a couple of good investment-advice letters. One of the best is put out by ValueLine - The ValueLine Investment Survey. On their website, the company claims the publication is highly recommended by none other than Warren Buffet. They also claim that their recommendations have vastly outperformed the Dow for many years. These claims have to be give some credibility coming from ValueLine, which is of course highly reputable. You may not follow all or any of the advice in their letter but it's always valuable to have available the insights and forecasts of top-notch investment analysts. The cost of the weekly ValueLine Investment Survey is $75 for the first 13 weeks.
Recommended by Barrons, TradeKing is, as I indicated above, a basic but reputable investment service for those looking to pay very low fees for trades when investing online but still get fast, reliable service. TradeKing is a nationally licensed online broker offering low flat fees ($4.95 per trade and $0.65 per option contract) with no hidden costs or account minimums. The TradeKing Web-based platform features online equity, options and fixed-income trading tools including real-time portfolio information, advanced order entry, customized charting and alerts, free research and integrated news, stock, option and mutual fund screeners, volatility charts, a pricing probability calculator, enhanced option chains and interactive educational information. TradeKing also features community networking capabilities to help connect like-minded traders for enhanced strategy development and information sharing. TradeKing is definitely worth a look if you're thinking of getting into online investing.