In the heyday of Net stocks and do-it-yourself investing, the question wasn’t whether you traded stocks online, it was with whom. It seemed like everyone was doing it. By the time the market peaked in March 2000, there were 12 million to 15 million online brokerage accounts, and more than a third of all trading on the New York and Nasdaq systems came from these accounts.
You don’t have to be Alan Greenspan to know things are different today. The market has tumbled. Trading volume from online accounts has plunged a whopping 40%, says Gomez Inc., the Internet research company.
But the online brokerage business hasn’t collapsed. At the end of 2001, Gomez says, there were 19.7 million active online accounts, up slightly from 2000.
Perhaps, given the recent rally, there are probably more than a few hopeful souls who are only now feeling ready — financially and emotionally — to think about taking the plunge. You may, like MSN Money columnist M.P. Dunleavey, be among them. She recently began investing with just $1,000 and has started an investment club with friends.
Dunleavey picked her broker, E*Trade, because she was already familiar with the brand name. But if you’re likely to confuse Datek for a techie dating service, how can you uncover the best online broker for you?
Luckily, the world of online brokers is sliced and diced by a number of different “experts,” from research houses such as Jupiter Media Metrix to editorial publications such as Barron’s and BankRate Monitor. They rate brokers according to any number of criteria, including overall cost, account minimums and how long it takes a trade to go through (in seconds). But first, a couple of pit stops on your way to finding your perfect match.
First, a quick — and important — gut check
Given the market’s volatility in the last couple years, it’s important to gauge how you’d stomach the wild dips and dives.
You can use MSN Money’s risk tolerance quiz for your initial gut check. It will ask you things such as your age and income, what you’d do if you lost your job shortly before a big vacation, and how you typically make financial decisions (e.g. do you flip a coin or heavily research your options?). Your answers will be evaluated for both your capacity for risk — can you afford to risk any money or do you need everything you’ve got? — and how well you’d likely handle it on an emotional level — are you a white-knuckle trader or loosey goosey?
The Investing Online Resource Center (IORC), a nonprofit project funded in part by the North American Securities Administrators Association (NASAA), also has a quiz to help you determine your readiness for online investing. This quiz is less about your finances and more about your expectations and experience. If you want a lot of handholding or have a gambling problem, for example, the tool will likely advise you against opening an online account.
More useful is IORC’s Investing Simulator Center. It has three separate interactive programs to show the workings of trading on margin (borrowing money to trade) and limit orders. In one simulation, you hit the “order” button but do not get the price quoted. In the “Don’t Get Burned” simulation, you’re victimized by a pump-and-dump scheme.
Deborah Bortner, director of the Washington Dept. of Financial Institutions, which launched the IORC site in 1999, says many complaints the department used to get about online brokers were often due to false investor expectations. (A frequent one was an investor’s belief that he was guaranteed the quoted price.) So, the IORC reworked its site and, with the simulator included, relaunched it in August 2001.
It’s also worth asking yourself about your goals for the money you’ll invest. Are you saving for a specific goal, such as buying a home? And how soon will you need the money?
2 things to check right away
OK, now that you’re in touch with your gut and you’re sure it, in fact, wants to invest online (even in this market — maybe, especially in this market), Bortner recommends checking all brokerage sites for two things: customer service and fees.
By customer service, Bortner largely means how easy it is to reach a fellow human for help when you need him or her. Are the company’s fees low because it runs on a skeleton staff that won’t be able to return your call for a week?
Though online investing is supposed to make it easier to interact with the brokerage and make trades, unusually high volume on the site (often caused by unusually high volume in the overall market) can mean delays online. While being forced to call can make it feel like all the technological advances are for naught, it’s good to know you’re with a broker that will actually take your call when you need them to.
The issue is not raised lightly. “With the crash of 1987, one of the things we saw was that people really had a hard time getting a hold of their brokers,” Bortner says.
She recommends calling the site before opening an account to ask a number of questions, including:
– What kinds of fees does the firm charge? Do the fees change depending on the type of account the customer has?
– Do you need to meet an account minimum to open an account? These can vary widely, from $0 for the time being at Datek, to $1,000 at E*Trade and more at places like Schwab.
– Do you need to maintain an account minimum?
– What happens if you don’t make any trades for a while? Will you be assessed an “inactivity” fee?
“There can be a lot of hidden fees,” she says. “And just by calling to ask these questions you should be able to tell something about their customer service.”
Use your online resources
Next, Bortner recommends utilizing online resources that rate brokers. The IORC site links to several rating services, but you can also do a general Net search and uncover plenty of others. Some of the better-known ones include Gomez Advisors, Jupiter Media Metrix and Barron’s.
These can be a great way to quickly compare sites based on criteria that are important to you. If you’re starting small, you’ll probably want to pay special attention to minimum initial deposits (many hover around $1,000), costs per trade for stocks, penny stocks and funds (both load and no-load) and account services, like how easy they make it to deposit funds. Also, you may want to check on whether you can invest in options and bonds, and whether extended-hours trading is available. Barron’s ratings do a great job of breaking out all this information.
Gomez Advisors puts out “scorecards” of the top 20 discount brokers based on overall cost, ease of use, on-site resources, customer confidence, customer service and overall score. When I checked the site, Charles Schwab was at No. 1 for overall score and on-site resources, but E*Trade won out for ease of use. Financial Café got top billing for overall cost, but it has since been bought by Brokerage America, which wasn’t included in review.
Also view Gomez ratings according to user profiles. E*Trade won for the hyperactive trader, but Schwab won for the other three categories: life-goal planner, serious investor and one-stop shopper. Reading about the methodology will give you a better idea of what these user profiles really mean.
Fast-moving markets increase the likelihood that you’ll get a different price than the one you’re quoted. Keynote Systems rates sites weekly on how quickly — or slowly — trades go through (in seconds). Harrisdirect had the fastest record for the week of July 14-20, with the average trade taking just 5.02 seconds; Ameritrade was a close second with 5.03 seconds. Keynote also developed the Broker Meter, a fun java applet that lets you see how your broker’s site is performing on a daily basis (use the link at left). This measures things like how long it takes a page to download, rather than transaction speeds.
These tools won’t eliminate the homework in researching brokers, but they’re great study aids.
By Jennifer Mulrean
Source: CNN Money
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