A cheaper and easier way to trade stocks

A cheaper and easier way to trade stocks

You can save a small fortune by using the Internet. We'lltell you about the best Web brokers—and what to watch out for.

By Jonathan Burton

The author is a West Coast-based freelance writer and a co-author ofthe book Electronic Day Traders' Secrets (McGraw-Hill, 1999).

Online investing has become main stream. Individual investors now conduct one in three US stock trades through the Internet. You need try thisfingertip trading only once to understand the reasons for all the fuss.Not only is online trading convenient, it's frequently dirt cheap.

Moreover, brokerage firms are unveiling many attractive online optionsto keep investors wired, including access to initial public offerings, equityresearch from top Wall Street firms, unlimited free stock quotes—even checkwriting and credit cards. Some firms also allow you to trade certain stocksafter the major exchanges close.

"Someday, we'll all invest this way," one pioneering Net brokerage,aptly named E * Trade, brashly asserted in its ads. The blue bloods on WallStreet may have chuckled over that, but no longer. Today, even old-linebrokerages such as Merrill Lynch and Prudential Securities are being forcedto remake themselves online.

A trading floor right in your own home

Jeffrey Richer, a retired podiatrist in Bala Cynwyd, PA, gave up hispractice four years ago, at 44. He now devotes full attention to his investments,trading exclusively through online accounts at Charles Schwab and TD Waterhouse.Like most Internet investors, he wants quick transactions at low cost, readilyavailable information, and the independence that comes from being able totrade anytime, anywhere. "The thing that really attracted me to tradingonline was that it was virtually instantaneous," he explains. "Iwent to the Web site, pushed the buttons, and within minutes got a confirmationthat the trade had been executed."

The rock-bottom cost of an online trade gets folks in the door. Internetbrokerages often charge from $10 to $20 on orders up to 1,000 shares, anda penny or two per additional share. Some charge even less. For instance,to buy 500 shares of Microsoft over the phone, you could pay as much as$525 to a full-service broker or around $200 to one of the major discounters.Making the same trade via a Net broker who deep-discounts online tradescould cost as little as $8.

Another top draw: convenience. Your online broker never takes a lunchbreak, never sleeps, and never gets preoccupied with a more important client."Your traditional broker wouldn't put up with you calling him every10 minutes just to get quotes on stocks," says John Robb, presidentof Gomez Advisors, a research firm that publishes in-depth reviews and ratingsof online brokers on its Web site (www.gomez.com)."There's an immediacy to the information that you can't get with aregular broker. If it's midnight and you want to check your account, youcan."

You can also get financial data and research. Nowadays, a good onlinetrading site has free information that once was available only to high rollersand institutional traders. And chances are that most anything you can'tfind at the brokerage site—such as general information on insurance, debtmanagement, or retirement planning—is available elsewhere on the Web. Youneed the online broker only to execute your trades.

All of the online brokerages mentioned in this article provide informationin what the cognoscenti call "real time." Investors can retrievestock quotes with simultaneous, current prices for the "bid" (whata buyer is willing to pay), the "ask" (what a seller wants), andthe "last sale" (the most recent sale price). You can also createcustomized "watch lists" of targeted stocks and get alerts bye-mail when important news hits.

Know the risks before you sign up

It's important to realize that Internet investing carries risks and pitfalls.

One prominent misconception is that you have a direct link through yourmodem to the securities markets. You don't. "Sending the order isn'tthe same as executing the trade," warns Jan Parr of Oak Brook, IL,editor of Online Investor magazine.

Your order doesn't go to a stock exchange; it lands with a broker, whothen sends it to a market for execution. It's usually a seamless transaction,but it's not guaranteed. Lines get jammed, systems crash, and, on volatiledays, orders back up. "It's a mistake to assume the order has gonethrough," adds Parr. "You have to get confirmation."

If confirmation isn't immediate, don't re-enter the trade. You couldwind up placing two orders, both of which could go through.

Also, don't assume that the real-time quote for a stock is the priceyou'll get. By the time you reach the front of the line, the price mighthave risen or fallen—sometimes dramatically. Accordingly, it's advisableto use a "limit" order instead of a "market" order.Limit orders direct a broker to buy or sell a stock for no more or lessthan a certain price. Market orders, in contrast, instruct a broker to tradeat the best available price. Some brokerages charge a few bucks more fora limit order, but it's worth the money.

Market orders can have unintended consequences, particularly with fast-movingsecurities. In November 1998, an Internet company called theglobe.com wentpublic at 9 a share. Investors gave market orders to buy the stock, hopingto sell it quickly at a higher price. Because of incredible demand, theopening trade of the day wasn't 9, but 87. The stock jumped to 97 beforeclosing the day at 631 /2. Investors who'd expected to spend $9,000 fora 1,000-share market order wound up paying many times that amount. A limitorder would have kept them out of trouble.

Another potential drawback to Internet investing stems from its electronicnature. System outages can bring trading to an abrupt halt, but online brokerssay they're doing their best to prevent them. "This is emerging technology,and these things happen," says Craig Prickett, director of electronicbrokerage marketing at Charles Schwab. He recommends that investors havemultiple routes to a broker, including the option of calling him directlyor placing an order via an automated phone system.

Yet as investors become increasingly comfortable handling their financesonline, they'll have fewer reasons not to do all or most of their tradingin cyberspace. The risks of electronic investing are nothing that practice,patience, and realistic expectations can't defuse.

Tools of the trading: Finding the right broker

On the Net, you have a choice of more than 140 brokers. Some are cheaper,some are faster, and some have better information. Few manage to excel onall three counts. So before signing up with an online brokerage, check outits Web site. See whether it offers a free demonstration of how its systemworks; that's a good place to begin. "Use the same care and cautionin selecting your online brokerage as you would in choosing any other serviceprovider," suggests Bill Burnham, an electronic-commerce analyst withSoftbank Capital Partners in San Francisco.

Just as as online brokers vary, so do Internet investors. Gomez Advisorsbreaks them into four groups—one-stop shopper, hyperactive trader, seriousinvestor, and life-goal planner—and recommends the best brokerages fortheir temperaments.

For the one-stop shopper, Gomez suggests Charles Schwab and FidelityInvestments. Like Schwab, Fidelity is relatively expensive. Its pricey commissionsand $5,000 account minimum will keep away the small-time, quick-buck traders(see the chart on page 197). But Fidelity, the mutual fund titan and nowa leading brokerage, has a reputation for quality customer service and investoreducation. Account holders can speak with a broker at any time of day ornight, pay bills online, and access institutional stock and market research.But the broker can't give investment advice; for that, Fidelity offers onlineaccess to research from Lehman Brothers.

Burnham also adds TD Waterhouse to the all-under-one-roof list. The siteis well-organized to handle orders and offers extensive market research,stock charting, and top analysis from Standard & Poor's and Zacks. Whenyou open an account, you're assigned to an account officer who can helpyou with research—but not with advice—and complete the transaction. Thishand-holding, however, will cost you $45 a trade.

Unlike the one-stop shopper, who may be putting his first toe into theonline trading pool, the hyperactive trader wants quick trades—period.Datek Online and Suretrade make this grade, and they're intended for sophisticatedinvestors. A neat feature of Datek is free "streaming"—live quotesthat reflect a stock's continual price changes without requiring you toretype the symbol or "refresh" the screen. Datek has also extendedits trading day, from 8 am to 8 pm.

Suretrade's site, meanwhile, is easy on the eyes, and its per-trade pricesare the cheapest we found for market orders. Plus, there's no account minimum.Both Datek and Suretrade offer broker assistance by telephone, for additionalfees.

The third investor type, the serious investor, is an active trader whovalues high-quality research tools and information but doesn't need hand-holding.The three highest-scoring firms in this group, according to Gomez Advisors,are E * Trade, Charles Schwab, and Fidelity Investments. These same firmsalso rate best for the life-goal planner, whom Gomez describes as a long-term,buy-and-hold investor who wants financial planning.

A closer look at the Big Three

E * Trade, which Gomez recently ranked No. 1 overall, offers a comprehensiveand easily navigable site at low cost. It has lengthened its trading dayuntil 6:30 pm for certain stocks. The firm also has one of the Web's bestbond investing sites.

Charles Schwab, which made Gomez's list of the top five online brokers,is by far the largest. It handles nearly one of every three online trades,but the firm hasn't been a price leader. And its $29 annual maintenancefee on balances of $10,000 or less is among the stiffer requirements.

However, in return for Schwab's fees, you get a well-planned Web sitewith easy order-entry screens, quick confirmation messages, 24-hour phoneassistance from brokers, and research (currently free) from investment bankersCredit Suisse First Boston and Hambrecht & Quist.

DLJdirect is the online broker of Wall Street investment bank Donaldson,Lufkin & Jenrette. Customers at its Web site have access to stock research,earnings estimates, insider-trading news, and live market commentary. There'seven a feature that projects weekly and monthly cash flow from dividend-producinginvestments. And for clients with accounts of at least $100,000, parentDLJ provides IPO access and institutional-quality research.

Two more good sites for no-nonsense traders

If you're a frequent trader, you might also want to consider Ameritradeand Discover Brokerage Direct. Although Ameritrade is cheap, its rates comewith strings: It provides no IPO access or institutional research.

Discover Brokerage Direct is the retail Web site of Morgan Stanley DeanWitter. Trades cost the same whether you make them on the Web or with thefirm's Touch-Tone phone service. Use a broker and the cost is 2 cents ashare, with a minimum commission of $34. Discover Brokerage also offerssome after-hours trading, plus online trading for US Treasury bonds andstate- and locally issued municipal bonds. Access to Morgan Stanley's highlyregarded company reports will cost you $20 a month (for up to 20 reports),a fee that's waived if you keep at least $100,000 in your account.

In just a few years, the Internet has brought tremendous benefits toinvestors. But Web-based investing—despite its democratizing influence—isn'tfor everyone. If you lack the confidence to manage your own investmentsor don't have at least a basic understanding of how securities markets work,then park your dollars in a professionally managed mutual fund, or witha stockbroker or financial adviser.

The best online brokerages, at a glance

Jonathan Burton. A cheaper and easier way to trade stocks.

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