Richard Miner, co-founder of a high-tech startup, trades stocks online through Charles Schwab in his spare time. Gary Smith, a retired Army employee, manages his assets through online accounts at Waterhouse Securities and Datek Online. Hillel Rzepka, a frequent trader, does the bulk of his transactions at Web Street Securities, a deep-discount broker.
If you're not investing online, too, chances are you're at least thinking about doing so. The Internet is swiftly changing how we invest. Indeed, it's democratizing the investment world. No longer do you have to deal with a high-price middleman to gather information and help you purchase 100 shares of stock or a mutual fund. You can do it all yourself, cheaply and in record time. But dealing with the often-confusing world of online investments is a challenge. Before you click the "buy" button on your screen, you must learn how to use the cornucopia of information the Net has to offer. You need to know where--and where not--to go.
In this BUSINESS WEEK Investor Special Report, we give you the insights you need to sharpen your online investment skills. With so much data out there, it's easy to spend enormous amounts of unproductive time surfing. One site--investorama.com--offers links to 9,350 other sites. From this massive collection, we single out some of the best. We tell you the steps full-service brokers are taking to bring clients online and which brokers really offer bond trading over the Web. Among other things, we'll also advise you how to tune in to online conference calls that give you access to the companies you want to own. As the Web's No. 1 broker, Charles Schwab, says, "there is a high correlation between the well-informed investor and the successful investor."
But learning where to find the best info is not enough. Even if you're well versed in the market, you have to pick a broker. The fast-growing online brokerage industry now processes 25% of all trades made by individuals, and the top six account for 79% of the online investment market (chart, page 94). But size alone is no guarantee a broker will serve you best. Do you prize speed? Crave research? Want to trade via two-way pager? With more than 100 online brokers vying for your business, you need to match your investment needs with the right one.
To differentiate themselves, online brokers are specializing. That's great news for investors. In this Special Report, we'll show you how to find a broker that will best accommodate your investment style and objectives. That's not an easy task. Even professional ratings services can't agree on which online brokers are the best. Forrester Research, for example, ranks Fidelity Investments, Datek, and Suretrade as the top three, while Gomez Advisors favors DLJDirect, Discover Brokerage, and E*Trade Group.
Forrester's ratings are derived from a survey of 10,000 online investors, while Gomez analyzes each online broker's Web site. But you need to do your own research before you sign up. After selecting some broker candidates, review their Web sites to check for design and products. Keep in mind that noncustomers can rarely get access to every feature, even through "demos," so call firms with questions if you can't find what you need online. And check out the message boards at Gomez.com or TheStreet.com for other investors' takes on various brokers.
When picking a broker, it's also important to understand your investment goals and pick an outfit that can help you achieve them. Most people fall under one of four headings: hyperactive traders, serious investors, hobbyists, and long-distance runners. If you recognize yourself in any of these categories, we'll help point you in the right direction.
HYPERACTIVE TRADERS. You may be a day trader, or you log on two, three, and more times a day hoping to capture gains from the market's ups and downs. Investors in this group have a wide range of choices, since this is where many online brokers are targeting their services. The bulk of heavy traders gravitate toward the big-name online firms such as Datek and E*Trade. Suretrade and Ameritrade are also popular and highly rated by Gomez for their low-cost trades. But some smaller firms also appeal to active traders. Rzepka, 44, of Akron, Ohio, buys and sells stocks an average of 10 times a week. He has accounts at Schwab and Web Street Securities and likes Web Street because customers pay no commission on trades of more than 1,000 shares of NASDAQ stocks over $2. Web Street Chairman Joseph Fox says his firm makes its money by accepting payments from market makers for orders it routes to them. The market makers, in turn, earn their profit from the small gap between bid and asked prices.
For active traders, quality of execution is the No. 1 concern. This is a murky area. Sometimes, trading problems occur because of heavy market volume. Stock prices can move so fast that order executions lag badly behind price fluctuations. When this happens, limit orders are smart. Even though they typically cost extra, they let you set a limit for the price at which you wish to buy or sell a stock. Also, many brokers have had system problems that have left traders in the lurch. Securities regulators have received thousands of complaints about slow Web-site response times, inadequate phone support, and problems getting trades executed online.
Yet another issue is whether brokers are giving investors the best prices on trades. Some, like Web Street, send customers' orders to market makers who pay for the business. A cheaper way might be to route orders through electronic communications networks, which match buyers and sellers for a small commission. The Securities & Exchange Commission is investigating all these issues, and the result may change the playing field for active traders.
One option active traders should consider is a NASDAQ Level 2 screen. This advanced tool can cost more than $50 a month. It displays actual buy and sell orders being placed by market makers for NASDAQ stocks, letting you judge whether a stock's price is being pushed up or down. It also lets you decide exactly what price you want to pay or receive. David Nassar, president of Market Wise Trading, a Denver day-trading firm, says Level 2 quotes let "investors trade right with the big guys and know they're getting the best possible price." But you had better be a devoted investor: Besides its cost, Level 2 trading takes a long time to learn.
SERIOUS INVESTORS. Does investing occupy a large part of your day? Do you make at least 10 stock trades a year? If so, you fit the profile of a serious investor. These people typically have multiple accounts. They may keep their core holdings at a full-service broker and establish one or two online accounts to execute low-cost trades.
Extra accounts also serve as backup in case your primary broker experiences technical problems. And they give you access to a wider range of products, from options to bonds to initial public offerings. Indeed, at least six online brokers offer limited access to IPOs: Schwab, E*Trade, Fidelity, Wit Capital, Discover, and DLJDirect. Most major online brokers offer options, but some require you to trade through a human being. Interested investors may want to consider specialists such as Lind-Waldock (www.lind-waldock.com) or Jack Carl Futures (www.jackcarl.com).
In a survey of 10,000 investors earlier this year, Forrester Research found serious investors (it calls them the "affluent aggressive") favor firms with low transaction costs and reliable trading. Its top rankings for this class went to Suretrade and Datek. Fidelity, which has higher commissions than the others, placed third for its high-quality execution. The mutual-fund giant's brokerage unit has avoided service problems that have plagued many online brokers as trading volume soared recently.
Gary Smith was strictly a buy-and-hold mutual-fund investor until he discovered the Internet two years ago. Now, he spends four hours a day tracking his portfolio and looking for trading opportunities. Like most serious online investors, Smith does virtually all his research via financial Web sites, including msn.com and Morningstar.Net. Since he relies on his brokers primarily for executing trades, he can eschew the high fees of full-service firms. In the first four months of 1999, the 55-year-old retiree moved in and out of funds 22 times, using two online accounts. One is at Waterhouse to take advantage of its fund selection, the other at Datek because it charges low fees.
HOBBYISTS. This category includes a wide range of investors with different goals. You may like to tinker with portfolios that are kept separate from retirement assets or college savings. Or you may be investing for near-term events, such as buying a house or a car or putting a kid through college.
Richard Miner, 34, is typical of this diverse group. As chief technology officer and a co-founder of Wildfire Communications, a Lexington (Mass.) high-tech startup, he works 12-hour days. Still, he carves out a few minutes daily to check his portfolio of 15 tech stocks at Schwab.com. In what spare moments he has, he surfs the Web to research his stocks through such sites as Yahoo! Finance and Quicken. Every few weeks, he'll trade a stock online based on a news event or article or a conversation "that causes me to think about something I am holding," he says. Over the past two years, Miner claims his holdings have quadrupled in value.
For executives like Miner with little spare time, big online brokers such as Schwab, Fidelity, and Waterhouse are the way to go. Their trading costs are higher than average, but they are safe and reliable. True, Schwab has had a lot of service problems in the past six months. But Miner hasn't encountered any problems.
A different type of investor in this crowd is Jeffrey Bolden, a 28-year-old PhD candidate in math at the University of California at Los Angeles. He and his wife, Galina, have an online portfolio they hope will pay for a house in three years. Last year, he consolidated his mutual funds into one account at Waterhouse, which he likes because the firm makes it easy to move assets between checking and brokerage accounts. Bolden primarily invests in mutual funds, specializing in everything from emerging markets to gold. He makes a purchase about once every five weeks, "when cash builds up in the account." Although most of his investments have paid off, Bolden says his portfolio is "mildly negative" because of his bearish bets on large-cap U.S. stocks via the Prudent Bear fund, among others.
Investors who like to tinker with their portfolios might also consider DLJDirect. Gomez gave it top ranking because its Web site offers a broad array of tools and access to Morgan Stanley Dean Witter research.
LONG-DISTANCE RUNNERS. Like Roberta Meyer, the 56-year-old Florida high school teacher profiled on page 94, you want your money to be around for a long time. So you need a broker that will be around tomorrow, and the next day, and the next. Of the big six online brokers, three fit the bill. Schwab, Waterhouse, and Fidelity have the breadth of products and staying power for investors concerned more about stability than low-cost trading. E*Trade is making a bid for this group by adding mutual funds and research tools, but its best services are designed for trading. Datek and Ameritrade offer more limited product lines and focus their attention primarily on active stock traders. Some smaller brokers are also making a push for long-distance runners. Gomez Advisors says these investors should consider DLJDirect and Discover because of their long-term planning tools.
In barely four years, the online brokerage industry has exploded. However you do your online investing--at a frantic pace or only when you need to rebalance your assets--the Net is opening new vistas for you.