News Column

Online Trading Primer

October 2002, HISPANIC BUSINESS Magazine

Derek Reveron

When it surfaced in the mid-1990s, online trading was dismissed by many as a fad of the rich that would fizzle once the stock market slumped and trading declined.

As it turns out, that prediction was off the mark. The number of online accounts will exceed 50 million by 2004, up from less than 2 million in 1991, according to Forrester Research, based in Cambridge, Massachusetts.

Still, the industry has struggled since the market tumbled in early 2000, analysts say. Many online brokers, including heavyweights Ameritrade and Charles Schwab, have cut costs and laid off up to 25 percent of their workers.

With Web brokerages locked in fierce competition for customers, now may be a good time to shop cautiously for an online trading service. Says Dan Burke, director of brokerage services for the consulting firm Gomez Inc. in Waltham, Massachusetts: "Firms realize that to make money, they need active traders or big-asset accounts. Thatís why the industry is going through a consolidation phase, and offering more services and discounts."

Each company offers its own combination of costs and services. Some firms are cutting commissions. Some are raising commissions and fees. Some are expanding investment research and service offerings. Others are buying new customers. Ameritrade added more than 800,000 clients though its recent purchase of Datek Online Holdings for $1.3 billion in stock.

Not all Web brokerages are created equal. Services such as E*Trade began as Web-only operations and later added a broad range of financial products and services. Brick-and-mortar brokerages, mutual fund companies, banks, and financial institutions such as Fidelity and Schwab expanded their services to the Web. Online-only broker focuses on stock trades, while BrokerageAmerica offers stock trades and a handful of other basic investments.

When searching for an online broker, analysts say, you should keep in mind the following basic points.

•No trading Web site offers everything. The industry is changing rapidly, and sites are constantly adding new features and altering prices and services. "Hunt around for a firm thatís right for you," says Forrester analyst Jamie Punishill. "By doing a little homework and asking the right questions, you can figure out whatís going on."
•Consider your investment style. How much do you want to invest and over what period of time? Do you want to buy stock frequently, infrequently, or at regular intervals to hold long term? Do you want low trading fees or good research, or a combination of the two?
•Be wary of commissions and fees. "If youíre a small investor just getting started with a few thousand dollars, you could get hit with fees that eat away at your principal," warns Mr. Burke.
Most per-trade commissions range from $4 to $30. Some brokers require an opening minimum balance of $500, $1,000, $2,000, or even more. Donít let low minimums fool you. Ask about fees for not maintaining a minimum balance.
•Also inquire about order-handling fees, annual fees, fees for transferring money into an account, wire transfer fees, fees for closing accounts, and IRA custodian fees.
•Pay special attention to inactivity fees charged to infrequent traders. They can range up to $45 a quarter. You can usually avoid the fees by maintaining a certain account balance. Most online traders make fewer than five trades a year, says Mr. Punishill. "If you trade twice a month, you can find good deals. At four times a month, you start to qualify for high-end services. People who trade once every few months have to worry most about fees."
•Closely examine research and customer service. Do you have to pay for research, such as analyst reports and other financial data? Remember that much of that information is available free of charge on the Web.
•Ask questions. Do you want to talk to a live person for personal advice? Do you require a wide range of investment options? Some online brokerages offer mutual funds, bonds, annuities, IPOs, money market accounts, credit cards, loans, check writing, and retirement accounts, for example.
•Always double-check your transactions. "Iíve heard stories of people who thought they executed trades but found later that they didnít go through," says Mr. Punishill.
•Review rankings. Rankings of online trading firms are available at and


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