Point, click, trade—these three little words sum up
the allure of investing online. Using nothing more than an Internet
connection and an account with an online broker, Internet users can buy and
sell shares of stocks and mutual funds with mere keystrokes with no waiting
to place an order with a brokerage house, no high commissions gobbling up
big pieces of a nest egg.
Online brokers are revolutionizing investing. Anyone with
a computer and $500 can open an online account and trade at will. And
according to Forrester Research, millions of people are doing exactly that.
By the end of 1999, online brokers managed a projected 5.4 million active
accounts. By 2003 the number of active accounts is estimated to reach 20.4
million. And they won't all be adrenaline-driven hyperactive traders--the
Web is equally useful for casual or long-term investors.
So how can novices begin online investing without losing
their shirts? Before going online, users should figure out their investor
profile: Are they planning to make several trades a day or invest for the
long haul? Do they need access to stock analysis and expert research, or
just a bare-bones trading screen?
Every online broker is not the same. Services range from
no-frills trading to in-depth analysis and expert research. So how do
novices know which brokers are right for them? It depends mainly on their
investing style--the hyperactive trader, the serious investor, the
mainstream investor, or the long-term investor.
A hyperactive trader is someone who makes 80 or more
trades a year, according to Gomez.com. Holdings might be kept for a few
minutes or hours, but more likely they’re held at least overnight or
longer. Serious investors are active traders who want a lot of data at the
ready as they trade. This includes news, charts, research, information about
initial public offerings and company filings, and e-mail alerts. This type
of trader has a good chunk of money to invest, might make between 10 and 12
trades a year, and is well versed in the markets.
The mainstream investor generally buy and hold securities
for months or years and are more interested in maintaining their
already-established offline portfolios than in getting rich quick. Mutual
funds and individual stocks are their securities of choice. And the
long-term investor is interested in building a portfolio based on solid
growth. Mutual funds are at the core of their investment strategy. They want
interactive tools that will help them plan for larger financial events like
college, retirement, and buying a home.
Different online brokerage features appeal to different types of investors.
For example, a hyperactive trader likes low commission rates, streaming
quotes, and site speed.
No matter what a user’s investing style, there some
features to expect from every online broker. One is speed.. If a broker site
can't execute a trade quickly, the investor could lose money. Trading
screens, quotes, and charts should load quickly, and trades should be
executed within seconds followed by quick online confirmations.
The site should also be simple to navigate. Quotes should
be accessible from the trading screen, along with charts and news. Can users
switch accounts easily? Can they get to the service they want with one or
two mouse clicks?
Customer service is important, too. There should be a
toll-free number listed, as well as a support E-mail address. Users should
send a test message or call the customer service number to find out how long
it takes to get a response.
Time is crucial when trading. Online brokers are known for
their dealings in stocks. But what if users want to trade options or mutual
funds? What about penny stocks and bonds, and access to IPOs? It’s
imperative to know what securities the broker offers.
For novice traders, the brokerage sites offer informative
tutorials and articles, as well as investment simulation games, interactive
tools, and a basics section.
Charles Schwab is the number-one online broker, providing
customer service 24 hours a day, seven days a week, as well as extensive
company research, news, and charts, and perks for big account holders and
frequent traders. Users can view their account histories by date and
category; trade stocks, bonds, options, and mutual funds, customize the
homepage and receive E-mail alerts when their stocks are on the move.
E-Trade, the second most popular online broker, gears
itself toward serious and mainstream investors. Users can join discussion
groups, sign up for free E-mail or a charge card, and read the news, all
from the homepage. But E-Trade charges hidden fees and its customer service
numbers are hard to find.
With DLJdirect, users can begin trading as soon as they
open an account online–as long as their credit is approved for up to
$15,000. A simple layout, plus a lot of information and help, including
trading demos, market monitoring, commentary, and headlines, make this a
For those who to just execute a trade, Datek fills the
bill. Instead of fancy graphics and loads of research, it offers simple
interface and a speed guarantee: If a trade isn’t executed within 60
seconds, the transaction is free.
Once a user has chosen a broker, it's time to open an
account. Most brokers let users do this online, with a receipt of deposit.
Alternatively, users can request that an application be sent to them in the
mail. For those brokers that don’t allow immediate trading, users might
wait up to six weeks before their accounts become active.
Be an Informed Investor
Research is the key. Relying on unfounded tips from friends or discussion
forums isn't a smart way to invest. Investors should use the Web to do their
own research before they buy or sell, finding out a security's past
performance, any recent sales and acquisitions made by the company, and what
the analysts are saying about their picks.
Just because an online broker claims to offer the lowest
commission rates doesn't mean users end up paying less. Often those low fees
apply only when users trade a certain number of shares or if they maintain a
certain amount of money in their accounts. In addition, there could be
hidden costs like fees for late payments, delivery of stock certificates, or
Unless users are absolutely sure of the source, they
should take advice from financial newsletters and online discussion boards
as true. A company may produce its own newsletter, touting its own stock.
Discussion board participants might talk up a specific stock in hopes of
getting others to invest and pump up the price. The SEC calls this practice
"pump and dump."
And before novices start trading online, they should make
sure they know trading terms–market order, stop limit, GTC, and
fill-or-kill are just a few.
For days when the market goes haywire, investors should
choose a broker with a "market meltdown policy" that offers
telephone trading at the same price as online trading or will waive the
difference if they can't log onto the site.
Online trading isn't necessarily one-stop shopping. Though
brokerages offer plenty of useful information, it's smart to have other
sources. For straight-up market news, there’s CBSMarketWatch, which lets
users look up news by ticker symbol or surf directly to the Stocks to Watch
section for a summary of the day's hottest stocks and projections.
CyberInvest.com offers a site overflowing with investment
information, links, guides and surveys. Broker Guides compare top listings
from Barrons, Gomez.com, Kiplinger, SmartMoney.com, TheStreet.com. The
Investor Education center points users to sites that can help improve
For information on the best online brokers, go no further
than Gomez.com. Each quarter users find an updated ranking of the top 20 Net
brokers based on customer confidence, ease of use, relationship services,
onsite resources, and overall cost.
Of course, no one can guarantee an investor will make
money online. But with all the tools on the Internet, a user has a fighting
chance of retiring in the tropics.