The Ups and Downs of Trading Online
By Kara Stefan
always figured if I tried to get my own broker or financial
planner, I wouldn't be taken seriously based on my meager
asset base and middle management income.
That fear--or the intimidation factor--is probably the number
one reason I waited so long to start investing. Well okay,
that and having no money left over at the end of the month
to invest, no idea where to invest it if I did, and no idea
how to begin.
But the Internet has changed all of that. Now I have access
to gobs of user-friendly information and don't even have to
reveal my investment ignorance to a professional who would
much prefer to deal with old money or a dot com millionaire.
I'm empowered--I can do it all myself.
In short, I can choose an online broker.
A New Industry Emerges
A few years ago, nobody ever heard of such things as online
brokerages. Yet this year alone, Jupiter Research reports
that U.S. investors will have $1.5 trillion dollars held in
online investing accounts. Moreover, that number is expected
to reach $5.4 trillion in 2005--representing one third of
invested stock assets throughout the land.
Cheap and Easy
It's rare to hear the words "cheap and easy" in the same sentence
as "investing," but most online brokerages make it easy to
sign up, and minimum initial investments can range from nothing
to $2,000 or more. You can usually apply for an account in
less than 20 minutes, and it's especially easy if you enter
your bank account information and authorize automatic deductions
each month from your checking or savings account.
With brokerage commissions down around $8 per trade, $5 per
trade, or even free trades, investing your money no longer
has to cost you money. I liken it to getting money out of
my bank's ATM. Why should I pay to invest my own money?
Traditionally, you pay for investment advice. It's not uncommon
for large, full service brokerages like Merrill Lynch to charge
anywhere from $150 to $300 per trade. Obviously, the average
investor won't want to go that route since the total amount
of many individual trades falls into the $150 to $300 range-who
can afford to pay a commission equal to the sum they're investing?
The trade-off, of course, is that you're on your own when
it comes to investment advice. But most online brokerages
offer substantial research materials, real time share price
quotes, investment tools, and educational articles to help
you gain sound footing on the oftentimes rocky path of investing.
In fact, these days, some online brokerages are starting
to look more like the Merrill Lynches of the world, making
personal financial advisors available via phone or instant
chat, and even establishing brick and mortar branches where
you can visit with a real live broker. For example, E-trade.com
is opening 200 branches inside Super Target stores all over
the country. That way you can pick up a pair of jeans, your
favorite CD, and buy shares in AOL all in one fell swoop.
The principal downside to an online broker is that, for the
most part, you don't benefit from a personal financial advisor
whose job is to profile your financial situation, assess your
tolerance level for market risk, and then make reasoned recommendations.
You have to do this for yourself.
And if the market starts going haywire and you get a little
nervous, you don't have a support system the way you would
with a full-service broker. For example, if you have a Merrill
Lynch account, you could call up and tell your broker, who
knows you by name, that you're beginning to panic and want
to dump all your shares in Intel. Chances are your broker
will take some time to calm you down, relay a few comforting
facts and figures from the Merrill Lynch experts, and basically
reassure you that Intel's still a good investment.
But with an online brokerage, you're free to execute a sell
order online, and then click a mouse button. No one's going
to call and tell you that Intel's quarterly report is coming
out next week and the advance word is that earnings are way
up. That's the kind of insight for which you typically must
Other potential downsides with online brokerages include
heavy Internet usage, service provider trouble, and difficulty
with phone service connections.
All in all, I'd say choosing to go with an online brokerage
also requires a certain amount of personal commitment to do
the research and learn about investing on your own. And there
are plenty of books, Web sites, and in-laws to assist you.
The most important point is that you should go ahead and
start investing. The earlier you start, the more time your
money has to compound, and even recover from any mistakes
in judgement you might make early on. And remember, even full-service
brokers make mistakes and lose money for their clients. With
an online brokerage account, at least you're in full control
of your money and investment decisions.