Over the past three years, the number of online brokers has risen dramatically. According to a recent article in The Street.com, the number of Web-based investment companies has grown from 12 to over 70 since 1995. Along with the growth in this currency trend is a parallel boom—investing advertising has sky–rocketed. A few years ago, most of us would have been hard–pressed to know much about companies such as E*Trade, Ameritrade and Mr. Stock. And now that we’re web savvy, what, in fact, do we really know? Many of the large online broker companies are spending millions of dollars to tout the benefits of inexpensive and worry–free investing on the Web. Are we buying what they’re selling or are we looking beyond the over–simplified and often misleading campaigns when choosing an online broker? After all, we know that choosing the right investment company carries more weight (and time and commitment on your part) than choosing a toothpaste. Our advice—put the heavy national ad campaigns aside; do your homework and then ask a lot of questions.
The follow 10 tips should give you a good starting place.
Tip 1.
Is ALL of the Information Available? We’ve conducted our own research and
we’re amazed by the number of online sites that offer confusing or, even worse, no
information at all about some of their services and fees. If you cannot quickly and easily
find ALL of the information you need in order to make your trading decisions, pick another
site.
Tip 2.
Do You Fully Understand the Commission Fees? Beware of hidden costs. Although
commissions for online brokerages range generally from $10–$25 for 1–1,000
shares, many firms promote lower transaction costs in hopes of getting your business. If
you fall for this loss leader advertising, you may find yourself faced with unreasonable
conditions or have hidden charges.
Case in Point #1: One company advertises $9 trades. In reality
they always charge $2.95 per trade for postage and handling. Postage and handling? A
reputable company should send out statements and checks free of charge. In addition, this
company’s $9 trade is only for trades of at least 1,000 shares. So if you buy 500
shares of a $100 stock (such as IBM) you have to pay extra. The fine print also tells you
that this rate applies to Internet Market Orders only. This means you pay extra if you
want to specify a price (Limit Order). And you will pay extra if you want to place the
trade with a broker.
Case in Point #2: Another company which advertises $8 trades has
many of the same conditions noted above. Furthermore they have another hidden
charge—they pay their customers less on cash balances. In fact, if the cash balance
in an account is less than $1,000 they pay no interest at all. For balances of more than
$1,000 they pay only 3%. Most firms currently pay 4.5%. Bottom line—for every $10,000
of cash you have in the account, you lose $150. That’s a lot of trades.
Tip 3.
Trade Much in Options? Just as commissions for equities orders greatly vary, so too
do the fees for options execution. Depending on your trading strategy, you may want to
select an online broker that offers a particularly good value on options commissions. Shop
around and check out the total fee. For example, Mr. Stock offers options at $19.95 +
$1.75/per contract for both internet and live broker orders—other companies will
charge as much as $35 + $1.75 per contract (internet) and $37.25 + $1.75 per contract
(live broker) order for the same service.
Tip 4.
Do You Have Order Entry Alternatives? Choose an online broker with
multiple order entry capabilities and watch out for added charges. Most reputable online
brokers understand the need for building systems which can accommodate large volumes. They
are also building systems with redundant back ups. However problems can still occur.
Protect your ability to trade by selecting a broker with multiple order entry capabilities
including a touch tone phone system and live broker. Watch out for the “Live
Broker” service with a double commission charge.
Tip 5.
User-Friendly Site? All sites are not designed alike. The reason you’re using
the Internet is that you want to take advantage of the low commissions and don’t have
to use a broker. Now the question is, how easy is the site to use? Is it designed in such
a way that you can use it quickly and confidently, or do you find yourself having to call
in for assistance every time you make a trade? Also check for research tools such as
Reuters, a comprehensive Glossary of Terms and a Frequently Asked Questions guide.
Tip 6.
Choose a Site That Understands “Service.” No matter how good a website looks and operates it’s only as good as the customer support behind it. Pick one that understands this. Make sure that support is available during trading hours and beyond, rather than directing you to an e–mail address. And if you do send an e–mail, test to see if a representative responds to your inquiry in a timely manner.
Tip 7. What’s Your Cash Account Interest Rate? No matter how actively you trade, there will be times when you have uninvested funds in your account. Does your account pay interest and what’s the rate? Are uninvested funds automatically “swept” into a Money Market Fund? Some Money Market Funds offer special services such as check writing. Is there a charge? What are the restrictions?
Tip 8.
Do You Have Research/Analytical Tools? Online trading is meant for the investor who
makes his/her own decisions. Does your online broker provide tools so that you can make
educated decisions? What types of research/analytics are offered—are they industry
names you can trust? Will you incur extra fees or does your broker offer these tools as
value–added services?
Tip 9.
Does Your Broker Answer the Phone? When every minute of trading time counts, who
wants to hassle with an automated phone attendant and wait at least 10 minutes to get a
question answered? Although they’re rare, you can actually find an on–line
broker who will answer your phone call in three rings or less. Hint: steer away from the
“big name” firms.
Tip 10.
What Are Your Trading “Must Haves?” Know thyself—this is THE bottom
line when choosing an online broker. Prioritize what is important for you. Some of the
above criteria may not matter. For example, if you already receive research you may not
care what information your broker provides; so price may be more of a factor. On the other
hand, you may trade only 2 or 3 times a month, but carry a higher cash balance. In this
case, you may be willing to pay a slightly higher transaction fee if you receive a better
Money Market rate. And if you don’t have patience and time to spare, get a broker
that answers the phone.
Peter Eberle Managing Director Mr. Stock, Inc. www.mrstock.com peter@mrstock.com 415.398.7565
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