Basics of Money


Discount or Online Brokers

If you feel comfortable making your own investment decisions and don't need or want a broker's advice, then there's no need to pay for such services.

Instead, look for a discount broker.

Today the offices of the major discount firms, such as Charles Schwab and Fidelity Brokerage Services, are virtually indistinguishable from the offices of their full-service brethren, complete with stock tickers, libraries of investment information, all-in-one accounts, plush chairs, and computer terminals for checking on the value of your holdings.

But here you get execution of your order -- no research, no handholding, no advice. (Most firms do make helpful literature available, often including research reports from other sources, such as Standard & Poor’s, Value Line, and Morningstar.) Salespeople are paid a salary, not commissions. Most discounters also offer a long list of account services identical to those of the full-service brokers.

They can all save you money over the full-service shops. Which is best, though, depends on what you need. If the best price is what you’re after, you’ll have to call around to find it. But be aware that the firm charging the lowest fees may not be the best for other services you might want, such as issuing and delivering stock certificates (which you’d need if you wanted to enroll in a dividend reinvestment plan, for instance), or making mutual funds available with no transaction fees.

Many discounters are members of the New York Stock Exchange, with offices in several cities around the country. They have toll-free telephone numbers for distant clients, and most offer online trading. Discounts, depending on the size of the transaction, can amount to as much as 80% of what you’d pay a full-service broker, although 20% to 30% is a more representative saving. You can commonly save about 50% on transactions in the $5,000 range.

Some discounters operate through banks and savings and loan associations. The larger firms have walk-in offices in major cities. But before you sign on, find out whether there is a minimum charge. Some firms set a $20 to $45 minimum fee regardless of the size of the trade. On small trades, that could wipe out the savings you might be anticipating.

Online brokers

A growing number of active investors are bypassing conventional brokerage offices entirely and doing all their trading online. The implications of this trend aren’t lost on the discount brokers who have jumped into the field with both feet.

Schwab is the online market leader. But competitive pressures are strongest from firms created expressly for the online environment, such as Ameritrade and E*Trade Financial. All told, a couple of dozen firms offer trading via the Internet.

The attractions of online trading are price and convenience. Commissions for electronic trading tend to be the lowest around. You can easily shop for the best rate and can make your trades any time of day or night just by sitting down at your computer.

Most firms will also let you trade by phone through a customer-service representative, though they may charge extra for that. Some full-service brokers have Web sites and offer information online but are reluctant to undercut their staff brokers by offering online trading.

To help you choose a broker, see our Which Online Broker is Best for Me. You can also access online broker sites directly, using a Web browser such as Netscape or Microsoft Internet Explorer, or through commercial services such as America Online and CompuServe.

Opening an online account. It is simple enough to open an account with any broker by walking into the office, calling for an application, or submitting one online.

Before you sign up on the basis of commissions alone, ask about annual service charges. Some firms, wishing to limit their business to well-heeled investors, levy an annual fee to keep the small ones away. It’s important to shop around. A trade of one size may be cheaper at, say, Fidelity than at Siebert, while another transaction will cost less at Siebert than at Fidelity. A firm whose commission is calculated on the basis of the number of shares traded rather than the price of the shares should be cheaper for trading big blocks of higher-priced stocks.

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