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Online Trading: The Bottom Line

Trading stocks over the Internet is only a few years old, but already more than a quarter of all trades by individual investors are handled by online brokers. There are now almost 100 such sites - almost double the number a year ago. CBS This Morning Money Editors Ken and Daria Dolan have valuable information if you're thinking of using a broker on the Internet.

Following are some answers to questions commonly asked:

How do the sites work and how are they different than dealing directly with your broker?
According to Ken Dolan, some of the biggest and best are sites like E*TRADE, Ameritrade, DLJdirect and Datek. There, you can make a trade for as little as $8 or $9. Full-service brokerage firms may charge $200 to $300 for a trade. Once you open an account, you just fill in the blanks on the trading page telling them what you want to buy and sell and at what price. Push a button and it's done. So it's speed and value.

"Of course" Dolan adds, "You don't get all the advice, products, and services that full service brokerage houses offer but even no-advice discount brokers can charge over $100 a trade."

In addition, Dolan says, it's faster because "once the customer has made the order, he gets a report directly back to him on his computer screen. At a brokerage house, the broker makes the order and reports back to the investor, usually by phone."

Managing Your Money

What kind of investor should consider signing up with an online broker, and how do you pick one?
Daria Dolan advises busy investors who make trades several times a day to choose an online broker that charges very low commissions and gives rapid-fire executions. Also, she points out, if you don't want or need the human contact or services like research reports, home mortgages, and checking accounts, an online firm may be for you.

Before picking an online firm, she says, check several to compare the prices that they charge and the kinds of services they provide. Make sure you get an end-of-the-year statement for tax purposes.

There's a company - Gomez Advisors - with its own site that ranks Internet trading firms on a quarterly basis according to such factors as ease-of-use, customer service, cost, and customer confidence.

The following are some questions you need to ask in oder to narrow your search for the right online trading firm:

  • "How much money do I have to invest?" Some firms require more than $10,000 to start.
  • "What is the firm's history and background?" Read the press releases and historical material posted on the site and try to pick firms that have been in business for a while.
  • "Is the site easy to use?"
  • "How reliable is its customer service?" You may need to talk to an actual human one day, so find out their hours and test them by trying to get through on the telephone during busy and slow periods.
  • "Are there any special services?" They are generally no-frills. But online firms have become ultra-competitive with each other, with deep discount firms and, of course, with full service brokerage firms. So now, they are offering such services as check writing, unlimited free quotes, research reports, and mutual funds. Soon, pending SEC approval, E*TRADE will offer its own mutual fund, the first purely Internet mutual fund.

You might be wondering, however, if trading online means you can get a better price buying or selling a stock. It should be quicker to get an order executed and reported back to you online, but full-service firms are also looking at online possibilities for their clients and - believe it or not - your brokers have several options on where to buy or sell your stock. "So" Dolan explains, "There's really only one way to compare the 'execution capabilities,' as it is called, and that is to simultaneously enter part of the order at both an online and full-service brokerage firm and see which does better for you."

Shop for an on-line broker if:

  • You are an investor who feels comfortable sitting in front of a computer instead of talking on the phone with your broker.
  • You don't always need to talk to a human being and make some or most of your own investment decisions.
  • A quick execution of your orders at a cheap price is critical to you.

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