Monday, February 20, 2006

Investing in Stocks: Part I

Investing in the stock market can be a scary thing. It is something that I've heard about a lot but never actually took the time to understand. Part of the reason why it seems so difficult is because you may not know where to start.

Do you start by looking up ticker symbols and viewing graphs and charts that mean absolutely nothing to you?

Do you start by reading about companies and industries and what is going on in the market as a whole?

Do you start by looking up definitions and terms so you might stand a fighting chance of understanding investment jargon?

NO.

Personally, I think the first move that someone interested in investing in the stock market should take is to choose a brokerage firm where you will conduct your business of buying and selling stocks. Why is it so important? Well for starters, for every transaction that you conduct you will have to pay a fee. The total amount of fees that you pay for buying and selling shares could have a significant impact on your total overall return on your investment. The amount that you are willing to pay may vary depending on any number of factors including how often you want to buy/sell, how much you are investing, and what kind of tools you are looking for to research and track your investments.

For the beginning investor (like myself) there are a number of online investment companies. Each one offers a different fee schedule, different plans and research tools.

Sharebuilder: Offers the lowest fees for trading that I have found so far. There are 3 levels of accounts:

Basic: $4 per investment, $15.95 for a real time trade (buying or selling a stock at the current market price), and $19.95 for a real time trade limit order (buying or selling at a specific price).

Also includes a Portfolio Builder tool which recommends stocks based on a simple survey that tests your risk tolerance, goals and experience.

Standard: $12/month which includes 6 free investments per month + $2 per additional, $14.95 real time trade, $18.95 real time trade limit order.

In addition to the Portfolio Builder you get a Gain & Loss tracker which tracks the performance of your stocks.

Advantage: $20/month which includes 20 free investments per month + $1 per additional, $11.95 real time trade, $15.95 real time trade limit order.

In addition to the Portfolio Builder and Gain & Loss Tracker you have access to a tool that tracks your capital gains for tax purposes and an IPO (company's first sale of stock) priority notifier.

Transferring money is simple. You can link it directly with your checking and savings account and transfer money online. Under the basic plan you set your investment plan to do everything automatically for you.

For example, let's say that you have $100 to invest every month. You can create your own custom portfolio and have it invest in those same stocks every month (or every week). You can also set it up so that you can make a one-time investment. The only problem that I have is that investments can only be made on a Tuesday so if it is Wednesday you will have to wait nearly a week to buy (unless of course you want to pay the $14.95 for a real time trade).

Also, I decided on Sharebuilder because of a promotion through Costco where new members earn $65 just for signing up for an account and conducting their first transaction. Can't beat that if you are already a Costco member and are interested in beginning to invest.

Ameritrade: There is only one type of individual investing account. They charge $10.99 per internet equity trade which includes stop and limit orders.

Their fee structure seems to be a lot trickier. For instance, the $10.99 fee for trading only applies to stocks being traded online. If you decide to do it over the phone they will charge $14.99 and if you want to talk to an actual broker it is $24.99 for a market order and $29.99 for a limit order. OR if you want to trade a mutual fund rather than a stock you will be subject to a whole different fee structure. And it doesn't end there. They will charge a $15 maintenance per quarter if the liquidation value of your account is below $2,000 in addition to the normal trading fees.

Bottom line that they will probably find a way to charge you for anything and everything they possibly can.

Ameritrade offers a variety of tools, some of which come with a fee. Some of the complimentary services they provide are the Ameritrade Streamer which gives you customizable real time streaming quotes and the Quote Scope feature which will give you the best bid and offer and last trade prices for a stock and displays such things as the Liquidity ratio and Flow indicator for your selected stocks. There is also the Advanced Analyzer which tracks the performance of your portfolio for $19.99/month.

Scottrade: As with Ameritrade there is only one level of account. They offer $7.00 online trades, $12 for a limit order and a minimum of $500 to open an account. They do not charge inactivity fees so that is a plus. Reading some customer reviews I noticed many people had the complaint that they had lots of technical errors (servers crashing, website being frequently unavailable) which would be frustrating if you are used to have 24/7 access to your accounts. The layout of their website leaves much to be desired; searching for info on their fees and services is quite a challenge. From what I can tell they offer the following research tools:

Scottrade: Online portal to track your account including news alerts, access to stock quotes and research.

Scottrader: Live streaming quotes, Top Ten lists and interactive charts, personal stock lists and Quick quotes to track individual stocks.

Scottrade Elite: Free if your account value is over $25,000. With this tool you can get Dow Jones News, Comtex News, advanced charting capabilities, and technical analysis.


Plus they were rated 6 times in a row for Highest Investor Satisfaction with Online trading services.

Well, I'm sure there are lots more that I haven't covered yet like E*Trade, Buy and Hold, etc but you get the idea of what types of things to consider when you are on the hunt to find a right match for your investment needs.

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4 comments:

Amdollar said...

I had ameritrade when they did their $50 new account promo. Then it was all downhill from there. I had nothing but problems and they charged me fee after fee, sometimes double fees and even though these were adjusted, it became a hassle. I recently went with Trowe price to handle my mutuals and IRA and had no complaints.

Debt Hater said...

Very interesting post. I think I'm still chicken about doing my own investing, but since I started "Rich Dad, Poor Dad," I am shedding my money fears. Like you, I want out of debt and, my dream, is not to work for a living at all. Thanks for the tips!

Bailey said...

Like I said before, I have an account with Scottrade. I have been very pleased with their service. I also read about some of the problems with the website, but in 2 years, I have NEVER had a problem.

I like it, because of their cheap trades and features (Scottrader is a nice way to keep a live view of the market and your positions).

I also do some investing with a Direct Stock Purchase straight through the company (GE, Exxon, Altria).

Gavin J Dent said...

I have been investing for many years and consider myself to be reasonably successful. I currently have two main trading accounts - ameritrade and a full service account.

Year over year I have found that the full service account out performs my ameritrade account. Why? I tend to trade too much in Ameritrade cause the fees are low. I also make more impulsive decisions in this account.

In the full service - I pay more on fees but the returns negate these costs. I also get access to better advise. I will admit that most brokers I have dealt with added little value. But - right now I have a great broker and our combined input to the portfolio has created great returns.

I have come up with an idea to help people learn about portfolio management and pay them money - check out the investment challenge at www.investment-challenge.blogspot.com