How To Be An E-Trader
The rise of the Internet has created a new breed of investor, the "e-trader." More than 5 million people are trading online, each armed only with an online brokerage account, a laptop computer and a phone line. How do you get started? Here are the basic questions and answers, from CBS This Morning Money Editors Ken and Daria Dolan.
- What exactly is trading stocks over the Internet, or "e-trading"?
E-trading is directly placing buy and sell orders with a stock brokerage house from a computer terminal.
- What is the advantage of electronic trading over using a conventional stockbroker?
The answer is simple: cost. A full service brokerage house charges a buy or sell commission that typically costs between $100 and $300 per trade. That's expensive. Online brokers typically charge an average commission of around $20 for each trade of up to 1,000 shares of a stock. Commissions for trades over a thousand shares are proportionally more expensive, but less than what a full service broker would charge.
- So, if a discount online broker is so inexpensive, why would anyone use a full service broker?
The answer here is service. A full service broker can help an investor by creating and planning an investment strategy tailored to that individual. A good full service brokerage is worth its weight in gold. But if you want to make your own investment decisions, trading online can save you a lot of money.
- How do you choose an online broker?
First, ask yourself what kind of investor you want to be. Do you want to trade on a daily basis or for the long haul? Then, you have to establish an account with an online trader.
Some brokers allow customers to file applications over the Internet. Others may require you to fill out a questionnaire and "snail-mail" it in. Some of the larger online brokers like Charles Schwab or Fidelity may ask you to fill out an application and bring it to one of their offices for approval.
A credit check is run on everyone who opens a new online account. You can pay for your stock trades with checks or cash but not with a credit card.
A new online account will take anywhere from three days to three weeks to establish. One broker, Donaldson-Lufkin-Jenrette, will allow a new online account to trade on a limited basis before funds are actually received. If you fail to pay for your trades, DLJ takes the stock back.
Other online brokerages include Discover, Datek, and Fidelity.
How secure is trading online?
It's in the brokers' interest to provide secure Web site for their investors. Online traders have a scrambling or an encryption system built into their sites to ensure security.
Investors who trade online use passwords to access their individual accounts. Online brokers leave it up to the individual to create the passwords. Two safety tips: Create a password that is unusual and hard to guess, and make sure to sign out each time you finish using the site.
- If I want more information on online trading, where can I look for it?
An independent online information service called Gomez Advisors can answer all of your questions.
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