All That Glitter...
If all that glitters is not gold, it might also be said that “all that matters isn’t just commissions.” At least that seems to be the message in recent surveys of online brokerages.
Six years ago, when Internet stock trading began, the main lure to the investor was low fees. After all, paying $20 to trade a block of 100 shares sure beats paying $100 or more to have a broker enter the same information you could enter from your home computer.
But a funny thing happened on the way to Wall Street. More players entered the online realm and competition got stiff. Traditional brokerages began to lose customers to online trading, so they set up their own Internet shops and lowered traditional fees. Today, the difference between trading online and calling up a broker to place the order has narrowed significantly. The bottom line? Price no longer determines which brokerage firm, online or traditional, gets the customer. Online investors have now come full circle to realize that quality really does matter.
Both SmartMoney.com and Gomez.com have run recent studies ranking the various online brokerages. Both studies used a variety of factors as follows:
Breadth of products
Mutual fund offerings
Staying out of trouble
Ease of use
In the SmartMoney.com rankings, the overall best online broker, Muriel Siebert, ranked 14th for total costs out of 21 sites tested. In fact, of the top ten firms in the SmartMoney.com survey, six of the firms were among the top 50 percent in terms of highest fees. However, when you look at the other categories, the numbers are reversed. The old saying “You get what you pay for” is proving true on the Internet as well as in other areas of life.
The Gomez.com rankings are even more revealing. Gomez ranked 59 firms. Of the ten firms with the highest overall rankings, none fell within the ten least expensive firms with which to trade. However, their rankings in the non-financial areas were consistently among the highest out of the firms ranked. Again, the old adage rings true. You get what you pay for.
Assuming we now have you convinced that cheaper is not always better, what should you look for in an online firm? Since transaction fees with real-live brokers are not all that different from Internet fees, why even go to the Internet providers?
Just as the “Force” was within Luke in Star Wars, the answer to the preceding questions lies within you. Of concern are your patience and telephone time factors, along with your investment abilities and shopping preferences.
Patience factor – If you’re in the market for a quick buck and tend to trade frequently, you will want a firm that is responsive to your needs for quick execution of transactions and provides a simple, easy-to-use interface. You will also want a firm that has very little Internet downtime. The less patient you are, the more likely you will be to trade often. Lower fee brokerages will probably appeal more to you.
On the other hand, if you are a “hold from the time you buy till the time you die” investor, you are likely to be more serious about purchasing high-quality, long-term investments. This means you will want to analyze and research your purchases for some time before you buy. This means the higher cost firms that also provide in-depth research products along with a wide breadth of stock and mutual fund products will more likely appeal to you.
Investment ability – You wouldn’t want to build a house solely with plans your 5-year-old drew, would you? Then why would you want to start investing money when you don’t know the difference between an equity and a debt issue?
Investors who are comfortable with the market and their ability to choose a winner may be better served by using the services of a firm that has relatively little market research available. If, however, you need help in making decisions, you are better off talking to a human being rather than the computer. Another alternative would be choosing a firm that provides extensive research data, and other products, that “teach” you how to invest wisely.
Talk time – No offense to brokers, but they’re human beings like the rest of us. They need to eat lunch and generally take only one call at a time. As a result, you may be left with an “out to lunch” message when you call your broker to place a trade on that hot stock. If you don’t like to spend much time playing telephone tag, online investing can be extremely useful in lowering your blood pressure and optimizing your valuable time. Since online trading is generally open 24 hours a day, you can also place that order at midnight to be filled the next day.
One-stop shopping – If you hate shopping, then you probably prefer a one-stop shop. That means you want a brokerage that can provide you with various products to meet different investment goals.
For a ranking of firms, based on your favored style of investing and your personality traits, go to Gomez.com and check out the rankings on brokers. You can also go to SmartMoney.com. Both contain very useful information.
Just about any broker you look at will make you agree to certain conditions that spell out your rights and responsibilities and their lack of liability for your actions. That’s fair, isn’t it?
Sure it is, but it also means you had better know all the rules and regulations before you start your adventures in cyberspace stock transactions … and the first rule is don’t always believe what you see.
Many people have the misconception that the orders they place automatically make it to the market without any intervention by the broker. This isn’t so. The order you place goes to the broker and then to the market. Generally, there is a time lag, and the sale you intended to make at $10 per share may only fetch $9.50 by the time you reach the front of the line to make the sale.
But what about the confirmation you receive? That’s all it is – a confirmation that you ordered that a transaction be carried out. If you read closely, it doesn’t say that the purchase or sale has taken place. In a fast-moving market, this can be devastating.
Consider that you place an order to buy 10,000 shares of ABC Tech’s initial public offering at market price. Since market on your computer shows up at $9 when you place the order, you think your investment will equal $90,000 plus commissions. However, we all know how volatile IPOs can be in the technology arena. By the time you get to the head of the line, the stock may be selling at $90 per share. That’s substantially different from what you intended to do, and it could be financially crippling.
Another mistake is the tendency to forget that punching the cancel button does not cancel a trade. This is done by the brokerage. Take the example of a woman who wanted to trade 2,000 shares of XYZ stock, but changed her mind after the order was entered. She issued a cancellation order and purchased 1,000 shares instead. Much to her chagrin, the cancellation order wasn’t processed in time and the sale went through. She wound up owning 3,000 shares at a cost of over $250,000 when she originally intended to invest only $18,000. What do you want to bet she didn’t have the $250,000?
Know the rules of the brokerage you are working with. Be certain to understand the rules regarding rescinding orders and placing online trades. If you are uncertain a transaction has been executed, contact the broker before making additional trades. Ultimately, the investor should take responsibility for his or her own actions, not the brokerages or the individual broker.
In conclusion, finding an online alternative to full-service human brokers can be very rewarding. On the other hand, there is great danger if you don’t know what you are doing. Before making a tremendous leap into the market, come by and see us regarding what options and services you may really need.