The Ups and Downs of Trading Online
By Kara Stefan
I 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 pay.
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.