| PC Today: Personal Finance, Web Browsers, PDAs & Handhelds | |
| February 2001• Vol.9 Issue 2 |
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Basics To Investing On The Web Learn To Plan Your Financial Future Online |
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[
INVESTING
] [
WEB
] Though the hey-days of the technology stock gold rush are apparently behind us, investing in the stock market is still a good financial strategy, and the Internet is making it easier than ever for even the most casual investor to get involved. Education is probably your greatest asset where investing is concerned. Taking the time to bone up on investing basics and learning the ins and outs of online brokers, dividend reinvestment plans, and other investment areas will greatly increase the chances that your online investing experience will be easy, fun and, of course, profitable. 
Basic Investment Choices.
One of the primary decisions that faces beginning investors is what
to invest in. Three of the most popular types of investments are stocks,
bonds, and mutual funds.Stocks. When you buy stock, you are actually buying a piece of a company, including all the risks and benefits therein. Anyone can buy, sell, or own common stock, and each share you own gives you one vote to elect the board of directors, the governing body of a company. Bonds. Bonds are a type of indebtedness. If a company or the federal, state, or local government needs to borrow money, they will sell bonds, usually in increments of $1,000, to the public. In return, each lender will be repaid the amount of the loan plus interest on a set date. Bonds are also called fixed-income securities because the amount of interest (income) the bond will collect each year is fixed. Bonds are a lot less risky than stocks, and as such, the return is generally lower, on average, than stock returns.
Online vs. Traditional Brokers.
Most beginning online investors will want to consider
signing up with an online broker to get started, but there are advantages
and disadvantages to doing so. It usually costs less to research,
buy, and sell stocks with an online broker than a traditional broker.
Online brokers give you 24-hour access to your account and any news,
research materials, and message boards that the broker keeps online,
so you can place orders anytime. Additionally, perks such as e-mail alerts
and real-time quotes keep you up-to-date on the market and your
investments.A disadvantage of an online broker is that you have to be comfortable with doing a lot of the investing yourself. (If you want, though, you can always go with a more full-service online broker, which offers more guidance but generally costs more.) Computer novices may be uncomfortable doing a lot of their investing online, and such things as computer crashes, Internet problems, and even broker technical problems have the potential to crop up when you least want them to, costing you money. Beginning investors may have concerns about the security of online brokers, but security isn’t really a problem here. Brokers have a tremendous stake in making sure that accounts and transactions are secure, so they employ several different tools to assure this. They send transactions using high-end encryption (a locked padlock in the bottom left corner of Internet Explorer signifies an encrypted site), and your account is password protected. Make sure a potential broker uses both of these methods and that it is insured by the Securities Investor Protection Corporation (which provides up to $500,000 in coverage for your investments).
Selecting An Online Broker.
So what should you look for when comparison shopping for a broker?
First, you should decide if you are looking for a full service or
a discount broker. You’ll pay a lot more for a full service broker,
but you’ll also get a lot more hand-holding, advice, and services.
Discount brokers offer various amounts of research and services as well
but are geared specifically toward people who want to trade inexpensively.
Here are some things to keep in mind when choosing an online broker.
Services. Check several brokers to see whether they offer special sign-up perks, such as free trades or other sign-on bonuses. Everything else being equal, freebies are always good. You should also see what they offer in terms of research, educational materials, and services. Many offer the ability to not only buy and sell stocks, but also bonds, mutual funds, and more. Most brokers also have special sections on retirement and financial planning tools, and they offer IPOs, IRAs, real-time quotes, and e-mail notifications. If you are interested in any of these services, pay close attention to whether these services are free or fee based. Extra fees. Speaking of fees, make sure you know what the broker charges for everything from commissions and wire transfers to customer service, IRA maintenance, and even inactivity. You should also know how much money you will need to get started. Many brokers require $1,000 to $2,000 to open an account. Ease of use. Another important consideration is whether a site is easy to use. Click around several sites to get an idea of how they’re organized. Some brokerage sites are a joy to use; some are a maze. Customer service goes hand in hand with ease of use. Is their customer service strictly e-mail based, or do they provide a phone number? Can you contact someone 24 hours a day, seven days a week, and are you charged extra for using the service? Send customer service a question to see how long it takes them to respond. How helpful is their response? A clean record. Do some research to see how fast a broker makes trades and find out how you are alerted when a trade has gone through. You might also want to look into the broker’s track record. You can check out a firm’s history and background on their site or, for more unbiased information, go to a source such as the National Association of Security Dealers ( http://www.nasdr.com/ ). Gomez (http://www.gomez.com/ ) also maintains a detailed scorecard on brokers that is updated quarterly. This is an excellent way to compare brokers in areas such as ease of use, customer confidence, on-site resources, and overall cost.
Set Up An Account.
When you have made your choice, you are ready to set up an account.
It’s easy to do so; fill out the appropriate form on the broker’s
site and either electronically submit it or mail it in. (The specifics of
this procedure vary from broker to broker.) You’ll need funds to get
the account going; you can usually wire these funds electronically
or mail them in. If you already have a traditional broker account,
you can transfer all or part of your existing account to an online
broker. Just check with both brokers to see if any fees apply.Account types. Brokers offer investors several different options when it comes to trading. One of the most popular accounts is the cash account. This is pretty cut and dried: With a cash account, you can buy such things as stocks and bonds based on the cash that is in your account. If you have $2,000 in the account, you can buy up to $2,000 in stocks. A margin account, on the other hand, lets you treat the cash and securities in your account as collateral, meaning you can borrow money to buy stocks. The broker charges you a margin rate to do this, making this a potentially expensive and dangerous way to trade. While there are 10 different types of IRAs (individual retirement accounts), the most well-known are the Roth IRA and the traditional IRA. Both are retirement accounts, but the money you deposit (up to $2,000 a year) in a traditional IRA account is tax-deductible, which means you don’t pay taxes on it until you take it out of the account at retirement. A Roth IRA is not tax-deductible; you have to pay taxes on the deposited money, but when you take the money out of the account at retirement, you pay no taxes on it. Order types. Once you start investing in the stock market, you’ll find that there are a number of ways to buy and sell stocks. The most typical is the market order, which is placed with the broker, who then immediately executes the order for whatever price the stock is at when the order comes through. Another popular order type is the limit order, which essentially lets you queue up an order so that it goes through when a stock reaches a certain price. Check to see if your broker charges more for limit orders. A day order is an order that executes or expires at a designated time.
Other Investing Options.
A couple of other popular solutions are available to those looking
to ease into the stock market. Dividend Reinvestment Plans and Direct
Investment Plans (known jointly as Drips) let you buy individual stocks
directly from companies, usually on a monthly basis. These are good
for investors looking to put small amounts of money into stocks on
a regular basis and can usually be started by simply buying one share.
Sites such as The MoneyPaper (http://www.moneypaper.com/
) let you get set up in any of over 1,000 companies for a small charge
of $15 to $20 per company.Investment clubs are another possibility for beginning investors. These clubs let you invest in a group and combine low cost with a shared risk model. To find clubs, try Wild Capital ( http://www.wildcapital.com/ ).
Additional Resources
Sites such as The Motley Fool (http://www.fool.com/
) offer a wealth of information for investors. Those looking to get
their feet wet before chancing their wallet could also check out risk-free
stock games such as the Virtual Stock Exchange. 
by Rich Gray
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