Online Investing—Is it for you?

Online investing a.k.a. Do It Yourself investing has been gaining in popularity. You might even feel left out if you're not into it. But is it for you? This week we'll explore the basics of online investing.

So you’ve had a tiny glance at online investing. Are you ready to take the plunge? Consider the following from Investopedia:

Studies have demonstrated that the track record for individual investors is not encouraging. One famous study released in 2003 by DALBAR, a leading financial services marketing research firm, revealed that over the preceding 19 years the unmanaged S&P 500 Index earned an average of 12.22% annually. Over that same period, the average equity mutual fund investor earned a paltry 2.57% annually!

But don’t get discouraged. Take this quiz to see if you’re ready.

What About a Traditional Broker?

There is a reason that traditional brokers are still popular. Yes, the person-to-person exchange is part of it, but a seasoned broker can also help you learn the whole game. Plus, a good broker gets to know their clients and can make recommendations specific to your risk tolerance.
By working with a traditional broker you can also learn about choosing a type of buy, navigating fast-moving markets, buying and selling strategies and terminology.

Easing Into It

Another strategy for entering online trading is to supplement your traditional broker investments with a few stocks traded online. Instead of selecting an entire portfolio you can pick a couple of stocks that interest you, research them and throw a little money into them. As you learn the ropes you add some more stocks. Eventually, you could even break away from traditional investing.

Self directed online trading does have a steep learning curve, but if the idea of researching and choosing your own investments sounds exciting you should probably give it a try. There so much to learn and that in itself can either be overwhelming or enticing.

Online Trading-Comparing Brokers

Online investing a.k.a. Do It Yourself investing has been gaining in popularity. You might even feel left out if you're not into it. But is it for you? This week we'll explore the basics of online investing.

There are many, many online brokers out their in webland. Before choosing a broker it's good to take a look at several, compare their features and search for reviews from trusted sources.

The top broker sites as rated by Smart Money's recent comparison are:
E*Trade
Fidelity
TradeKing
Ameritrade (TD Pricewaterhouse)
Schwab
FirstTrade
OptionsXpress
Muriel Siebert
Scott Trade
Interactive Brokers


Click to enlarge the chart below for a feature comparison of Fidelity, E*Trade and AmeriTrade. You can further use this chart as a checklist for any online broker you might be considering.

The list above is not a good vs. bad. For example whether a company offers virtual tours or online chat should not be the main determinant of choosing them. Look at the fees, types of trades and features that may be personally important to you. I like a fast guarantee.

Beyond this list I usually look at the user interface. Interface preferences can be different for everyone, but it's got to be easy to discern and navigate. Many sites tend to be overwhelmingly complicated. When you're new to do-it-yourself trading the last thing you need is visual pollution to make the process intimidating.

As with anything else you've got to do the homework. A big company may offer more security, sophistication and wide fund selection. But you might think their fees are too steep. Know what you are getting into before you sign-up.

Online Investing—Dabbling

Online investing a.k.a. Do It Yourself investing has been gaining in popularity. You might even feel left out if you're not into it. But is it for you? This week we'll explore the basics of online investing.

Yesterday I pointed out that online investing isn’t for beginners. That doesn’t mean that you should steer clear. If you’re the type who would rather brave the water by jumping in you can learn a lot while still playing it somewhat safe in the shallow end. But remember people can drown in just a few inches of water. Nothing is a safe bet. To be more direct—you can lose money.

Before you dive in make sure you’ve got the basics down. Investing is full of specific terminology and keeping it all straight can make your head spin in the beginning. Two great online resources are The Motley Fool and Investipedia.

But knowing the terminology won’t make you an expert. That’s when you’ll learn more by doing. Like I mentioned yesterday there are several free online trading playgrounds. Personally, I think this is a good way to learn, but some may prefer to do it for real.

First Step: Pick a Broker.

Yes, you need a broker. Online trading is often thought of as “do-it-yourself” trading—and it is, however, you need a broker to transact the sales. Just like you don’t walk in to Hewlett Packard and buy a computer, you have to use a sales outlet to purchase stocks. Tomorrow we’ll take a look at the various online brokerage firms.

Next: Research

Fortunately most brokerages have tools to help investors research stocks. For example, Fidelity provides free third party analysis. They also have a nice knowledge base to help you brush up and get beyond basic understanding. It’s important to know more about the company than just name and product.

Then: Place an Order

Here’s where it really is as easy as the Etrade baby makes it look. Buy a stock that you like, hold onto it, if it’s really tanking sell. Simple, right? Maybe. Again there is a lot of terminology regarding different types of buys. But don’t worry this part is fairly easy to catch and not only will your brokerage have info, you can always access other sources.

And wait: Watching Your Portfolio

Now you’ve place an order or orders and you’ve got a portfolio. As a beginner, you want to let it ride for a bit. The nice thing about online investing is that you can watch your portfolio anytime and signup for alerts. Once you get past this you’ll be listening to analysts, watching trends and trying to out-think the market—but that comes later. Right now we’re just getting started.

The beautiful thing about online investing is that you can dabble and learn. Sure you can do this with a live broker as well. But online investing gives you a little more hands on feeling.