From the Trading Floor to the Home Front
Washington Post Staff Writer
Sunday, August 23, 1998; Page H1 After watching Internet brokerage ads on television, wanna-be Warren Buffetts may think they can point and click their way to an online fortune by simply forking over a $10 bill to one of the many firms that now have homes on the Net.
Internet trading is easy, but finding the right online brokerage firm can be hard. "You really have to read and study," said Kathleen Orrson, a chemist from Columbia, who started trading online at the beginning of this year. She said she studied the market for a full year before making her first trade.
Julio Gomez, an online financial services consultant, suggests that figuring out what kind of investor you are will be a big help in choosing among the more than 80 online brokers now operating. At his online site (www.scorecard.com), which ranks brokers overall and by investment type, Gomez calls investors who love trading often and like market volatility "Hyper-Active Traders." These investors are best off with an inexpensive online broker that has speedy Web site navigation and trade execution, he said.
Intermediate-term investors who like doing their own research and buying into special investment categories such as initial public offerings ("Serious Investors") should look for firms that offer a wide range of research and analytical tools, Gomez said. Investors who see the stock market as a tool for accomplishing long-term financial goals, such as putting kids through college ("Life Goal Planners") need an online broker that offers several investment options, including stocks, bonds and mutual funds. Investors who want an online service to help them simplify their finances ("One-Stop Shoppers") should look for a firm that offers direct bill payment, mortgage loans and other financial management tools.
After narrowing the search to online brokers that offer the services you need, making the final cut gets a little more complicated and possibly arbitrary. "Take the same precautions you do when choosing a doctor or finding a mechanic," said Michael Jones, head of individual investor relations at the National Association of Securities Dealers, the brokerage industry's self-regulatory organization.
One stop could be a site such as www.onlineinvestors.com, which hosts bulletin board discussions on the advantages and disadvantages of different brokerage firms. "You have to read those postings with a grain of salt. Often competitors are posting," said Bill Burnham, an online analyst at Credit Suisse First Boston. "Just remember that people who are angrier have a much greater propensity to post than people who are happy. But if there is a recurring theme that 10 or 15 people are posting, then it is often an issue. Bring it up with the company."
Next, try to contact the customer service representatives at the firms you are considering. "Something is going to go wrong with your account and you are going to want to talk with somebody," said Kassandra Bentley, president of CyberInvest.com, an online investing site. Bentley suggests investors e-mail and telephone online brokers with questions to test their responsiveness.
"Good customer service is of the utmost importance," said Sheldon Wolf, who owns his own computer software business in Florida. He should know: After problems with how his online broker set up an individual retirement account, Wolf said, he got stuck with a big tax bill. He's now switching brokers.
Gomez added that it's important to check out the way each online broker compiles tax reports for its clients. "This has been a notorious problem in the brokerage industry forever," he said. "The thing to look for there is unlimited account history and profit and loss by security."
Another question to ask of any firm is whether it has a backup way to trade if its Internet connection fails or when its server is overwhelmed during heavy volume days. This was a major problem last October when the market went down dramatically. Can you go to a branch to make a trade? How about trades via the phone?
Another key point is to find out how much interest your uninvested money will earn. Most investors, once they make a sale, don't immediately reinvest the proceeds. Some brokers will sweep this money into an interest-bearing money market account on a daily basis. Others do it weekly. Some don't do it at all.
Finally, look at the remaining firms' price per trade. If the quoted rate is, say, $10 per trade, that doesn't always mean that is all you will pay. Some online brokers charge extra for real-time stock price quotes, research, issuing a stock certificate, making large trades, letting you talk to a human broker or using telephone features, Bentley said.
Morgan Hoffman, a self-employed trader, uses Charles Schwab's online service, Schwab.com. He typically make trades of 500 or 1,000 shares, paying a $29.95 commission the higher end of the online broker scale.
"I could save by going to a smaller broker [but it] just isn't worth the headache," Hoffman said. "As an active trader I have a special team of brokers that is extremely easy to reach and is looking out for my best interests." He said the Schwab team "basically held my hand all the way through my first options trade."
Higher-priced brokers also tend to offer more products, services and original research.
Once you've picked a broker, the next step is to learn everything possible about what's available on that broker's site. Investors "should start slowly," Gomez said. "They need to be serious about learning the site as if it were a new software application."
After a few trades, evaluate the performance of your online broker. As your investment patterns change, you may decide a different broker might better serve you. Online investors tend to switch a few times before committing to one brokerage and many have accounts at more than one service.
Actual trading online is designed to be simple. Basically, an investor fills out a form specifying buy or sell, which security, at what price and hits "send." Most online brokers have areas where investors can practice and get familiar with the forms, reducing the chance of making wrong clicks, which could lead to inadvertent buying or selling.
After choosing which stocks, bonds or mutual funds you want to buy, be wary of the urge to trade too often, experts warn. "It's a little bit like being a kid in a candy store at first and because it is so easy and so accessible, you might find yourself trading more than you should," Burnham said.
"Educated people do stupid things" when trading online, Jones added.
When the market gets choppy, many online traders simply sit on the sidelines and wait for the pandemonium to end. Full-time trader and Cleveland housewife Barbara Andre, for instance, has resisted the urge to leap into the market during the recent upheaval.
"I haven't bought anything in three weeks because I see more of a downside coming," she said. "I'm just watching and waiting."
© Copyright 1998 The Washington Post Company