Chapter 7 - Do it Yourself! Online Investing

In this chapter, I will start by guiding you to sites that explain how online trading works.  You will even be able to try a few online trading simulations in order to get your feet wet.  We will explore what type of orders you can place when trading securities online.  Then, we will explore how to choose an online broker, given your particular needs and expectations.  Following that, we will look at some annual surveys that rank online brokers.  I will provide you with a thorough list of brokers so that you may shop around and find the best one for you.  And finally, we will look at some excellent investment portals and charting services that will complement your online endeavors.  But first, we need to revisit your financial goals, investment objectives and strategies.

Your Financial Goals, Investment Objectives, and Investment Strategy

Before taking the plunge into investing online, you need to revisit the financial goals and investment objectives you set for yourself in Chapter 1.  If you have not yet completed them, now is a good time to do so.  In addition, you should re-examine Chapter 4 to help pinpoint what your personal investment philosophy or style is.  This will help you define an investment strategy that you will feel comfortable with.  For instance, you may decide that buying stocks and/or ETFs for the long run is the way to go.  Furthermore, you will be able to assess the level of risk you are willing to take with your investments.  If you are uncertain about what your investment style and strategy consists of at this particular point in time, don’t worry, as you will feel more comfortable after you finish reading this book and getting your feet wet with your first investments.  The important thing is to get started on your investments by opening an online brokerage account and buying your first securities.

How Online Trading Works

In the old days, the trading of stocks or other securities was performed in person by individuals on the trading floors of various stock exchanges.  Only members with “seats” on these exchanges could swap securities.  In other words, these members were investment professionals, commonly referred to as brokers, who bought and sold securities on behalf of their clients.  This type of “on-the-floor” trading still takes place today.  But the Internet and electronic trading networks have greatly facilitated the process and have enabled a greater number of players to trade securities.  What’s more is that trades can now be quickly completed by anyone who has an online brokerage account.  Furthermore, trading costs for the average investor have significantly dropped in comparison with just a few years ago.

Whether trading takes place on the floor of a stock exchange or through computer networks, there is always a buyer looking to acquire a particular security and a seller who is willing to part with that same security.  If both parties are trading online through their online brokers, the buyer will place a “buy order” for the security, while the seller will place a “sell order”.  The Electronic Trading System will take care of organizing the trade for both parties.  Trades are usually completed in a matter of minutes; but this may depend on the limitations or constraints the buyers and/or sellers put on the order.  For instance, the buyer may place an order to buy a particular stock only if it drops to $50 (or below) during the day.  In this particular case, the electronic trading system will look (or wait) for a seller who is willing to sell at the buyer’s asking price of $50 (or below that price).  If, throughout the day, there is no seller willing to part with the stock at that price then no transaction will take place.  Most orders that are placed online include such constraints, as it gives traders more flexibility and precision when trading.  I will discuss the various types of trades that can take place in the section that follows.  Before we get to that, I need to mention one thing: when your broker completes a buy order on your behalf, you don’t officially own the stock (or security) just yet.  It commonly takes three to five days until the trade is “settled”.  In other words, it will take a few days before your broker will take possession of the actual stock.  The date on which you (and your account) officially take ownership of the stock is referred to as the settlement date.  This date is different from the trading date.  But don’t worry, as the price at which you buy a security is the one that occurs on the trading date.  I mention this because the first time you place a trade in your online brokerage account, it will take a few days before you see the stock you purchased listed in your account holdings.  So don’t worry if it takes a few days before you see it.

Types of Orders

When placing trades with your online broker, you can usually specify the precise manner in which you want the transaction to be performed.  In other words, you can specify the price range and timeframe in which you want your order to be carried out.  The following types of orders or trading options may be available from your online broker; so be sure to check in advance whether it is the case, as they are important.

Market Order

With a market order, you are telling your broker to execute the trade as quickly as possible and at the best possible price.  This price is referred to as the market price.  The market price is the current market price at which a security is trading.

Limit Order

With a limit order, you specify the price at which you want to buy or sell the security.  The order is executed only if the security reaches your target price (or better).  For example, if you want to buy a stock, you might set a price of $50 per share you are willing to pay.  Only if the stock price falls to $50 (or below) per share will your order be executed.  Conversely, you may wish to sell another stock should its price rise to $100.  If the stock reaches $100 (or more), your trade will go through. 

Stop Order

A stop order is a form of market order which instructs your broker to buy or sell once the stock hits your specified target price called the stop price.  A stop order will not guarantee that your exact price will be locked-in since only once the stock price reaches your target price or stop price, will your order actually be placed.  Then, the order will become a market order and the price you get may be below your target price.  This occurs because it will take a certain amount of time for your broker to complete the trade.  Nevertheless, stop orders are useful since they are designed to limit your losses (or protect your profits).

Investors commonly use stop orders before leaving for holidays, vacations, or when they are unable to monitor their investments for an extended period of time.  You never know when the stock market will take a plunge.  Therefore, it is better to be safe than sorry.  In this respect, stop orders offer you peace of mind.

Stop-Limit Order

A stop-limit order is like a stop order, but it is executed at your target price (limit price) rather than the market price.  But with today’s rapidly moving markets, your broker may or may not be able to execute your order at your set price in time.  In other words, you may run the risk of further loss should the price of the stock you own (and wish to sell) continue to fall in value.  So be careful with this type of order, as your order may or may not easily be filled. 

Stop-Loss Order

A stop-loss order is an order to sell a stock or security when its market price reaches or falls below your specified price, or stop price.  For example, suppose you bought a stock at $60 and you decide to protect yourself by placing a stop-loss order at $50 (stop price).  Should the stock decline to $50 or less, your shares will be sold.  Hopefully your loss will be limited to $10 a share.  But this is not guaranteed since your order will be a “market order” which means that your broker will try to get the best possible price at the time.

Day Order

A day order is one that expires at the end of the day if it has not been filled.

All or None

All or none is a condition on an order to buy or sell a security requiring the broker to fill the entire order, not only part of it.  For example, suppose you place an order to buy 120 shares of a particular stock at $50, and the broker can only get 100 shares at that price (and the other 20 shares at a higher price), then your order will be cancelled.  It is worthwhile to mention that shares are typically bought and sold in blocks of shares commonly referred to as lots.  A block of one hundred shares is referred to as a round lot while any other number is referred to as an odd lot.  Institutional investors typically buy and sell shares in round lots while individual investors buy them in odd lots, like forty-five or one hundred and twenty shares at a time.  Orders to buy or sell shares in round lots are more easily filled than those in odd lots.  So keep this in mind when placing orders to buy or sell shares.  Always use the all or none option when placing an order of odd lots.

Fill or Kill

This one is easy.  If the entire order cannot be filled immediately, then it is cancelled.

Good Till Cancelled

Here, the order remains in effect until you cancel it or until it is executed by your broker.  With this option, you must be vigilant because weeks can go by without your order being filled.  And once the order goes through, it may be to your surprise.  Just be careful when using this one.

Open Order

An open order is similar to a good till cancelled one in that it is active until it is executed or cancelled by you.  Often, the term “open order” is used to refer to any order that is currently pending.

Types of Accounts

Most online brokerage firms offer investors different types of accounts to choose from.  I will only cover the three most common types: cash, margin, and retirement.

Cash Account

This is the most common type.  A cash account is one in which you deposit cash, along with other securities you may already own such as stocks, bonds, mutual funds, ETFs, etc.  Once the account is open, you use the cash to buy other securities.  You can easily deposit more cash in the account or withdraw funds from it at any time.  But there may be service charges associated with withdrawals.  Be sure to carefully read the terms, conditions, and fee schedule associated with the account before opening it. 

Margin Account

A margin account allows you to buy securities on credit using the cash and securities currently held in your account as collateral.  When you buy a new security you will only need to pay part of the full price (the margin) at the time you make the trade.  The broker will lend you the remainder, but will charge you interest.  Therefore, you must be sure that the return on your new investment will be higher than the interest charged by the brokerage firm; otherwise you will be losing money.  Since there are no certainties, this poses some risk.  Furthermore, if your current securities (that act as collateral) significantly drop in value, your broker may ask you to advance more money.  This is known as a margin call.  If you don’t advance the money, they will sell enough securities in your account, at a possible loss to you, in order to settle the account.  So be very careful if you are considering opening this type of account.  In general, I would advise against opening a margin account until you gain more investment experience. 

Retirement Account

In Canada, an online retirement account is referred to as Registered Retirement Savings Plan (RRSP) or a LIRA (Locked-In Retirement Account) account, while in the United States the account is known as an IRA (Individual Retirement Account).  With these types of accounts, you cannot make cash withdrawals easily, at least without penalty.  This is a good thing, however, because their purpose is to secure wealth for your golden years.  The main difference between this type of account and the others is that your investment savings will be tax-sheltered.  I strongly encourage you to open this type of account, as your investments and earnings will grow in a tax-deferred, compounding environment.  Please refer back to the first chapter of this book for more on this subject.  Some online brokers don’t require a minimum amount of money to open a retirement account.  This is in contrast with the other types of accounts which typically require a minimum investment of $1,000 or more.

I am concluding this section by leaving you with some links to online trading simulators so that you can experiment with online trading before opening a real trading account.

How to Choose an Online Broker

In this section we will look at three things.  First, I need to describe the difference between a full-service broker and a discount broker.  Then, we will look at how to evaluate a broker’s background and reputation, as well as investor protection for account holders.  Finally, we will examine in detail ten key selection criteria for choosing the ideal online broker.

Full-Service versus Discount-Brokers

As you might expect, a full-service broker costs a lot more than a discount broker.  But this doesn’t mean that you should not consider using the services of a full-service broker, especially as a novice investor.  But just what is a full-service broker anyway?  A full-service broker is one who provides its clients with a variety of services.  Such services include, but are not limited to, providing advice for investment decisions, offering retirement and tax planning tips, placing trades for securities, and sharing investment research findings with clients of the firm.  In addition, full-service brokers usually have a greater selection of investment products and may have access to more markets around the globe.  The downside is that all this comes at a price – a hefty one for that matter.  Trading commissions can cost upwards of $100 per trade or more.  This is in stark contrast with discount brokers who typically offer trades for under $30, and some for even less than $10.  But with discount brokers, you are pretty much on your own with regard to your investment decisions.  With them, you will place your trades based on your own research, knowledge, and intuition.  The good news, however, is that there are some really interesting discount brokers to choose from in North America.  The bigger and more popular ones have access to many markets, provide research of their own to clients, and have really interesting portfolio management tools as well as other investment tools, such as downloadable spreadsheets.  Be sure to see what each discount broker is offering when shopping around.  The gap between full-service and discount brokers is tightening.  Discount brokers are now able to offer more products and services because of the sheer volume of new clients.  More and more investors are taking a hands-on approach with regard to their investments; they want more control when it comes to managing their wealth.

There are a few other things to keep in mind about full-service brokers.  The first one is that to open a full-service brokerage account requires a substantial amount of money as the minimum balance to hold is usually quite high, typically upwards of $50,000.  The next thing is that full-service brokers are usually compensated based on how often their clients trade, rather than on the performance of the portfolios they manage.  Thus, they may encourage you to trade more often than you should.  This hurts you in several ways: not only do you need to pay those hefty commission fees, but you may also incur other costs such as opportunity costs, increased tax liability on capital gains, and so on.  You should also keep in mind that brokers are also referred to as sales representatives of their respective firms.  As such, they may be inclined to push the company’s (or its affiliates’) products, which may be of inferior investment value, just to cash in on additional commissions.  So be careful if you are considering using the services of a full-service broker or brokerage firm.  Should you decide to go the full-service route, be sure to ask them lots of questions with regard to their affiliations and how their brokers or salespeople are compensated. 

Broker Background, Reputation, and Investor Protection

Before opening an account with any broker or brokerage firm you need to do your homework.  The first thing you should do is to perform a background check on the broker or firm you want to deal with.  Here, you want to see if the broker has faced disciplinary action and/or received complaints.  In addition, you want to make sure that your broker is licensed to sell securities and/or offer investment advice.  Regulatory agencies are in charge of granting licenses to brokers, as well as monitoring their activities.  Canada has a regulatory environment that is somewhat different than the one found in the United States.  Canada has an ensemble of self-regulating agencies ranging from stock exchanges to provincial securities commissions.  The Investment Dealers Association of Canada (IDA) is a national self-regulating agency.  The thing to keep in mind for Canadian investors is that there is no federally-regulated securities agency that overseas the activities of brokers and other professionals in the financial services industry, as is the case in the U.S. with the Securities and Exchange Commission (SEC).  Since the industry is self-regulated, Canadian investors need to be doubly cautious.  Investors in the U.S. have the luxury of having both state and federal securities regulators.  In addition, all investment brokers in the U.S. need to be licensed to practice and they are required by law to be registered with the Central Registration Depositary (CRD) which is an employment and disciplinary database of members who work in the field.  I encourage you to use the following links to check the credentials, backgrounds, and level of complaints for the individual broker or brokerage firm you have in mind.  Feel free to contact the various agencies with your questions and concerns.

The websites listed above are all useful in researching the reputation of the broker or firm you wish to deal with.  Furthermore, you should ask others who have dealt with the particular broker or firm in question.  If you don’t know any family members or friends who have utilized the services of the broker, you can always search the online message boards, forums, or blogs to see what others have to say.  Ask many questions about the quality and level of customer service of the firm.

Finally, you want to make sure that the broker firm (and the account) you are dealing with is registered with an investment protection program.  Please refer back to Chapter 4 for a description of these types of programs.  To recap, investor protection programs insure brokerage accounts for a limited amount of money should the broker go bankrupt or fail to carry through on their obligations.  I have provided an additional link box (to the one found in Chapter 4) below that contains links to databases of registered members.  So be sure to look it up and see whether your broker is listed.  If the broker is not listed, then find another one that is.

Ten Key Selection Criteria

I have compiled a list of ten key criteria you should be on the lookout for when selecting an online broker; so here they are:

1. Costs
2. Minimum initial deposit and account balance
3. Investment selection and available markets
4. Level of customer service
5. Alternative methods for placing trades
6. Information
7. Tools
8. Website design and functionality
9. Banking services
10. Interest rate on cash

Let’s begin with costs, as they are one of the most important considerations when opening a brokerage account.

1. Costs

Minimizing costs and fees related to operating your online brokerage account should be an essential component of your overall investment strategy.  By doing so, you will not only save money along the way, but you will also increase the performance and return of your investment portfolio.  This is especially true over the long term.  Just as banks “get you” with all kinds of account-related costs and hidden fees, the same applies to brokerages.  So you really need to shop around and be very demanding with this particular selection criteria.  In general, there are two categories of costs and fees you should know about:

a. Trading Commissions
b. Hidden fees

a. Trading Commissions

Even though you are looking at minimizing your costs, choosing an online broker who charges the lowest in trading commissions isn’t necessarily your best option.  You can find brokers who will charge you less than $10 per trade.  But keep in mind the old adage: you get what you pay for.  The price a broker charges for trades is usually indicative of the quality and level of service you get with the account.  So cheaper isn’t always better.  If you can place a $10 trade but cannot reach a representative of the firm on the telephone when you need one, then you will encounter frustration.  Sometimes, it is better to pay a little bit more but have peace of mind in knowing that you can get help from a expert when you need it.

Trading commissions are higher for Canadian account holders than they are for those who live south of the border.  In Canada, trading commissions lie in the $25 to $35 range while they are much lower, usually in the $7 to $20 range, in the United States.  Full-service brokers will charge anywhere from $100 to $200 in trading commissions.  If you believe that you will do a lot of buying and selling of stocks and ETFs, then you should definitely get an account with a brokerage that offers cheap commissions.  Personally, though, and for reasons discussed in this book, I encourage you to be more moderate in your trading activities.  The main reasons are that the money you spend on commissions is lost and, in general, holding securities for the long term is usually more profitable.

b. Hidden fees

Now we are looking at fees related to opening, maintaining, and closing an account.  Here, you need to be extra careful and vigilant, as many online brokers will “get you” with these hidden fees.  So you really need to do your homework in this area and read the fine print associated with your account application.  Be sure to ask for and get a copy of the broker’s fee schedule.  Most brokers post their schedule of fees on their websites.  Read it carefully and try to determine in advance what type of activities you will do with your account and how much it will cost you to perform them.  Without getting into the details of the various fees, I will simply ask you to be on the lookout for the following:

• transferring cash or other securities in (or out of) the account
• wire-transfer fees
• annual fees
• account maintenance fees
• account inactivity fees
• fees for not maintaining a minimum balance
• fees for closing the account
• interest charges (on margin accounts)
• sales charges (i.e.,: sales loads on mutual funds)
• retirement account custodial fees

2. Minimum initial deposit and account balance

As a new investor, you may not have that much money to begin with when getting started with your investments.  Thus, you may need to find a broker who will offer a cash account with a low initial deposit and account balance requirement.  Cash accounts usually start in the $500 to $2,500 range for most online discount brokers.  The good news is that many online brokers have no minimum requirements for opening a retirement account.  So, if you are just starting out, I strongly encourage you to open a retirement account, not only because of the minimal requirements, but also due to the significant tax savings that are associated with these types of accounts.  Once your account is open, you will need to make sure that your account holdings (i.e., cash and securities) are in line with the minimum account balance stipulated in your account agreement.  If you drop below the minimum, you may incur additional service charges.  So always keep an eye on your account balance.  Like certain banks, some brokers will waive annual fees when account holders maintain a certain amount in the account, such as $15,000 for instance.  The actual amount really depends on the broker you are dealing with.  So, ask your broker if they do this and what the minimum balance required is.

3. Investment selection and available markets

Most online brokers offer stocks that are listed on the major North American exchanges as well as various mutual funds.  But try to determine if the online broker has access to foreign stock markets and other smaller exchanges where small-cap and penny stocks are offered.  As a diversified investor, you may seek to hold securities from these two categories.  Access to stock markets from Europe, Asia, or elsewhere opens doors to interesting investment opportunities.  As for the risky small-cap and penny stocks, you need to see if the broker trades on the OTCBB exchange or the Canadian Venture Exchange (for new and up-and-coming Canadian companies).  Does the online broker have first dibs on new Initial Public Offerings (IPOs)?  Do they have an interesting selection of domestic and international mutual funds?  Some brokers offer their own family of mutual funds, many of which can be purchased without sales charges.  And for these types of funds, you can often swap one mutual fund for another, without charge.  This is a very interesting option, as it saves you a lot of money on commission charges.  You also need to determine if your broker offers government and corporate bonds as well as CDs/GICs, and gold and silver certificates.  Not all online brokers offer these types of investments, so it is better to ask first.

4. Level of customer service

This is a big one, folks, as there is nothing worse than not being able to reach a customer service representative over the phone when you desperately need one.  When it comes to financial and money matters, you want to be able to get help quickly when you need it.  The first thing you should do before opening an account with any online broker is to see if they have a toll-free telephone service with knowledgeable, friendly, and courteous customer service representatives on the other end of the line, and not those automated tele-response systems that we get so angry and frustrated with.  Test the level of customer service by placing a call inquiring about the details of the account you wish to open.  This will give you an initial indication of the quality of service you may get from the firm and its representatives.  Are they fast, knowledgeable, and helpful?  Do this exercise for several online brokers you are considering. 

Also consider opening an account with a broker who has a local branch office.  This is more common if you live in a big city.  Being able to meet a customer service representative face-to-face can be very helpful.  Finally, you want to see whether they provide a lot of online help via their website.   Send an e-mail inquiry and see how long it takes to get a response.  Once you receive a response, examine the quality and quantity of information provided.  Check their website for Frequently Asked Questions (FAQs), Live Chat, or other customer-oriented features.  Later in this section I will talk more about the website design aspect of an online broker.

If you can, talk with other customers of the firm about their experiences with customer service.  If you don’t know any, look online for related message boards, discussion forums, or blogs that may pertain to the online broker in question.  It is your duty to ensure that you choose a good online broker, as it costs a lot of money to switch to another one should you be dissatisfied. 

5. Alternative methods for placing trades

Just like your car, your computer or Internet access can break down at any time.  And Murphy’s Law has it that this will occur exactly when you need to place a very important trade.  In today’s fast and volatile market, you sometimes need to act quickly either to capitalize on a golden buying opportunity, or sell a security that is spiraling-downward.  So what happens if you cannot place that trade online?  You should check in advance to see whether your online broker offers other alternatives for completing trades.  Many online brokers offer touch-tone phone trading or even trading through a live person.  These methods may be more expensive, but sometimes you just may need to go that route.  So make sure that these trading alternatives are available, and find out how to trade using these methods ahead of time so that when the need arises, you will be ready.

6. Information

Another important criterion to consider when selecting an online broker has to do with the breadth and depth of information they provide for their clients.  Do not underestimate this particular criterion, as information is paramount when it comes to making clear and enlightened investment decisions.  The quantity and quality of information that is available concerning the securities you wish to buy or sell will complement your own research and will help you make the right choices.  Some online brokers provide very little information about investments, while others provide a lot.  You really need to think about what types of securities you are likely to buy and what kind of information you would like to have that will complement your own research.  The investment game is an information one.  Sometimes, there will be too much information and you will need to break it down and simplify it so that it will become more understandable.  Fortunately, many online brokers as well as online investment portals (see Investment Portals section later in this chapter) will do much of the work for you.

Now let’s take a look at what kind of information you can obtain from some of the better online brokers.  Here is a list of some of the information sources that may be offered by your online broker:

a. financial planning

Financial planning information and tools provide users with general advice on how to best plan their personal finances.  Investing is only part of financial planning.  Financial planning encompasses many other aspects regarding how to manage your money such as how to plan on paying the least amount of taxes, how to control your expenses, how to save for your education or to buy a house, and so on.  Should the online broker provide this kind of information through articles, columns, calculators, or other resources, I strongly encourage you to read as much as possible on the subject, as it will have a direct impact on the amount of money you save and, by extension, can further invest.

b. investor training resources

Good online brokers provide their clients with different means by which they can become more knowledgeable about investing.  This can come by means of investment glossaries, how-to’s, discussion forums or blogs, and videos.  The more information a broker provides in this regard, the better it is for both the firm and its customers.  Not only may it reduce the number of inquiries to the broker’s customer service department, but it also helps clients become more sharp and wise investors.

c. company and mutual fund information, quotes, and other investment data

At the very least, most online brokers should provide real-time quotes for stocks and ETFs.  Real-time quotes are essential, as they give you the current market price at which a particular security is trading.  Delayed quotes are usually at least fifteen minutes late and are not as reliable and accurate as real-time quotes.  Be absolutely sure that your online broker provides quotes in real time, as you will want to know the current market price of the security at the moment you buy or sell it. If the broker in question does not provide real-time quotes, then find another one.  Quotes are very useful because they indicate whether the security is currently rising or falling in value or price.  Quotes usually come with a trading volume indicator which indicates the number of shares that have been traded to that point during the trading day.  High volume indicates that there is a lot of trading activity going on for the security.  Some brokers provide you with access to historical quotes and charts.  These are practical, as you can sometimes go back as far as ten years ago to see how the security has evolved over time, how many times it has issued dividends (including the dividend payment amount), and how many times the stock split.  A stock split occurs when the price of a stock gets pretty high (making it less attractive) and the company wishes to reduce its price to one that is more “affordable” for new investors.  With a stock split, the company simply increases the number of shares while reducing its price.  For example, a single share of XYZ company stock is trading at $250 and the company decides to split it into five smaller units, or $50 a share.  Now, the stock would become more attractive and “affordable” to new investors.  Even though the number of shares increases, the market capitalization of the firm remains the same.  When looking at historical quotes, it is often useful to compare a stock or other security with a market index such as the S&P 500 overall U.S. market index.  This way, you can see whether the stock or security in question has over or underperformed the overall market (or other index).  This is a helpful means by which you can gauge if the security is a worthwhile investment and whether you should hold on to it or not.  Be sure to experiment with historical quotes.

Selected brokers will provide their own (or another party’s such as Morningstar’s) stock and mutual fund ratings.  Such ratings usually use a four or five-star point system with which they rank stocks or bonds from best to worst based on a series of data about the companies, their respective industries, and the market and economy as a whole.  Although these ratings can seem useful and informative, I would generally advise you to consult them with great caution.  Firstly, past performance is not a reliable indicator of future performance.  And second, such ratings are often the result of a few individual analysts or firms that may or may not be biased.  In other words, some would argue that they can be used to influence potential investors in buying less worthy investment products.

d. currency exchange information

A final information source that is useful for investors is real-time quotes for major currencies.  As some of your investments may be directly or indirectly affected by the price or value of foreign currencies, you will want to keep abreast of major currency shifts as they can have an impact on the net value of some of your investments.  This is especially true if you own foreign stocks or mutual funds, ADRs, or currency-related ETFs.  Keeping an eye on price movements is a must for the investor who diversifies geographically.  If the online broker doesn’t provide real-time quotes for currencies, don’t worry, as I have already given you some links to related resources in Chapter 2, and I will provide you with links to investment portals that include them later in this chapter.

7. Tools

Tools are very useful for the online investor.  Not all brokers provide the same tools but, at the very least, they should provide two which I find to be essential: the asset allocation tool and the portfolio management tool.  Several other tools may be available but I will only briefly describe a few of them.

a. asset allocation tool

This tool gives you a visual representation, typically through a pie chart accompanied with percentages, of the different asset classes that make up the composition of your investment portfolio.  Remember that asset classes are typically divided into equities (stocks and stock funds), bonds, mutual funds, and cash instruments (cash, CDs/GICs, and money market funds), etc.  It is very helpful for any investor to have an overall view of the ensemble of different securities found in his or her investment basket.  It represents a good way by which you can see if you are overexposed or underexposed in a particular asset class.  For instance, owning 80% stocks and 20% bonds for a person reaching retirement age represents a risky and unhealthy balance.  At any age, you want to make sure that you have a well-diversified portfolio containing different types of securities.  Likewise, you do not want to be overexposed in certain sectors or industries, such as oil or real estate.  Looking at a visual representation (such as a pie chart) can help you spot potential problem areas and give you a chance to readjust the holdings in your investment portfolio to a more reasonable and healthy balance.

b. portfolio management and performance tool

The portfolio management tool is similar to the asset allocation tool in that it divides your different assets into separate groups of holdings.  In addition, you can usually subdivide your overall portfolio into smaller sections in order to get a more accurate assessment of the performance of certain elements of your portfolio.  For instance, you may decide to create additional portfolios for your oil stocks, real estate stocks, ADRs, ETFs, mutual funds, and so on.  You can further subdivide or group your securities by asset class, industry, or whatever you see fit.  Then the online performance tool will automatically calculate the gains or losses (along with related percentages) of each one of your securities, along with subtotals for each group, and an overall investment portfolio performance dollar amount and percentage gain/loss.  This is an extremely powerful and useful tool, as it permits you to see what is going well with your investments and where your difficulties lie.  Some online brokers have a “Portfolio Analyzer” tool that scrutinizes your investment portfolio and provides you with a detailed report.  Overall, these tools will help you make more enlightened decisions with regard to managing the securities that make up your investment portfolio.

c. downloadable spreadsheets

Some online brokers and investment portals (see later section) permit you to download a spreadsheet of your account holdings.  This is quite practical, as you do not need to re-enter all your portfolio data – which can be quite time consuming.  You can later customize the spreadsheet by adding color and graphics to make it visually more appealing and informative.  Graphing the performance of your individual holdings and overall portfolio is an interesting means by which you can see the performance of your investments.  Furthermore, you can compare performance over time and with the goals you have personally set for yourself.  It’s good to do this exercise a few times a year.

d. alerts

Alerts represent a very interesting feature for online traders.  With today’s fast-paced society and rapidly moving markets, you don’t always have the time to keep an eye on your investments on a daily basis.  Alerts can do that job for you.  With some brokerage accounts and investment portals, you can set alerts which instantly notify you when the price (or trading volume) of a stock or security reaches a certain level.  The securities you wish to track need not necessarily be the ones that you own, but also other ones that you simply wish to follow.  For example, you may wish to buy a certain stock only when it drops to a certain, more affordable, price level.  Other alerts can notify you about breaking news for a company, as such events can have an impact on a stock’s price.  And we all know that news events have a significant influence on the movement of markets and the price of securities.  Other alerts can send you a daily summary of prices for the stocks that you own in your portfolio.

Alerts can be delivered in one of three ways depending on the capabilities of their provider: by e-mail, cell phone or mobile device, or by text messaging (SMS).  All you need to do to receive alerts is to specify the means of delivery you wish to employ, along with the alert criteria for your stocks and securities (i.e., price/volume targets in dollars or percentages).  Most providers offer the alert service for free to their customers; but just make sure this is the case ahead of time.  If your online broker doesn’t offer this service, don’t worry, as I will describe some investment portals later that do offer them.

Overall, the alerts service represents a terrific means by which you can stay on top of your investments at all times.  Moreover, they give you time to react to key buying and selling opportunities.  And last but not least, they facilitate the implementation of your investment strategy helping you reach your investment goals.

e. stock and fund screeners and filters

Our final tool has to do with helping you choose new investments.  Sometimes you just aren’t sure what to buy.  You may have a general idea of what you may want but aren’t sure which specific security is the right one to choose.  For example, you may wish to buy an oil stock or a mutual fund that has holdings in European securities.  The screeners and filters will help you narrow your choices by means of numerous selection criteria.  Depending on the tool used, the following represent a sampling of the kind of criteria you can select from when searching through a database of stocks or funds:

• sector/industry
• market capitalization
• price change
• sales loads and management fees (for mutual funds)
• performance (over past months or years)
• ratings
• ratios (e.g., dividend yield, P/E ratio, etc.)
• etc.

There are three important things to keep in mind when using screeners and filters.  The first one relates to the number of securities included in the broker’s database.  They may not be listing all available securities but only those they are trying to promote and sell.  So be sure to also use screeners and filters found in the investment portal sites (see section below).  Secondly, past performance of a security is not indicative of future performance; so be careful.  Actually, the securities that have the best performance ratings are often the ones that are most likely to fall since they may have already reached their peak.  Finally, if you are shopping around for mutual funds, you definitely want to minimize sales charges and management fees.  Therefore, you should select funds that do not carry loads (i.e., no load funds).  Management fees, however, are inevitable.

8. Website design and functionality

How intuitive is the broker’s website?  Is the information found therein clearly presented?  Are you able to get to the section you want quickly and find the information you are seeking?  These are some preliminary questions you should be asking about the broker’s website.  In addition, you should take a look at the trading interface.  The trading interface is probably the most important part of the website since it is the area from which you will buy and sell your securities.  At the very least, this page should be very clear and not confusing in any respect.  Make sure there is a “symbol lookup” option that lets you find the correct ticker symbol representing the security you wish to trade.  A Ticker Symbol is an abbreviation that is used to represent a given security on a particular exchange; for example, the ticker symbol for Apple Computer is “AAPL”.  There is nothing worse than finding out you bought the wrong security because the incorrect ticker symbol was entered during the order.  You also want to make sure that the trading web page provides you with many trading options (see Type of Orders section above).  Furthermore, make sure that they provide you with a page to verify trade confirmations so that you know exactly what is happening with your orders at all times.

There should also be a section that shows your account summary and another one that lists your account holdings in detail.  A good design for the account holdings page usually includes the book value and market value of your securities.  Hopefully, they will provide you with both dollar and percentage increase/decrease indicators for each of your holdings as well as for the account as a whole.  This lets you know how your investments are performing.

Finally, you should be able to view your monthly statements online.  Of course, they are usually sent to you by regular mail.  But, it is always nice to be able to view them online.

In short, you should pick a broker who has a well-designed website with which you will feel confident and comfortable managing your investments.

9. Banking services

Although banking services may not be at the top of your list when selecting an online broker, you should still consider them for the long term.  Sometime in the future, especially when you have accumulated a significant amount of cash, you may want an account that offers check-writing capabilities, bill payment services, direct deposits, ATM cards, Visa cards, and money market sweeps.  A Money Market Sweep is an option whereby a bank or broker automatically transfers available cash (at specified levels) from your account into either a higher interest-bearing account or into a money market fund.  The idea is to get your money working for you instead of it just being inactive.  Be careful with sweeps, as they can be placed into a poorly-performing money market fund that may even entail commission fees; read the account agreement or prospectus carefully. 

The more options and flexibility you have in moving money in and out of your account, the better.  However, as much as possible, you want to refrain from taking money out of your account – for obvious reasons.  But knowing you can (for life’s emergencies) will offer you peace of mind.  What you really want is an easy means by which you can add money to your account.  Direct deposits from your employer or local bank as well as with an ATM card can do the trick.  Make it a habit to add more cash to your investment account regularly, as it will make a huge difference in the long run. 

10. Interest rate on cash

Most investors hold a portion of cash in their investment portfolios.  Whether it is to have funds available for future buying opportunities or to have a more liquid asset class in one’s portfolio, cash is important.  But cash, in and of itself, is not a very fruitful asset.  Unless you invest it, it will not bring you additional wealth.  Hopefully, your online broker will offer a reasonable rate of interest.  Be sure to compare rates between brokers because in the long run it really makes a difference.  If your broker does not offer you a decent return on your cash, then consider moving it into a high-interest savings account, or buying a money market fund or a CD/GIC.  You want to make your cash work for you at all times.

So these are the ten key selection criteria for choosing your ideal online broker.  Shop around and be very demanding, as you are dealing with your wealth, hopes, and dreams.

Broker Surveys

Because there are so many online brokers to choose from, finding the ideal one to fulfill your needs can be a daunting task, to say the least.  Thankfully, we can get a little help from some independent information providers.  I have been able to find some, seemingly well-crafted, broker surveys that can help you cut through some of the clutter, help you get some unbiased opinions, and assist you in selecting an online broker who fits your particular investment needs and cost constraints.  Moreover, I have been able to find surveys that will serve the interests of both Canadian and American investors.  A few online brokers operate both in Canada and the United States, and their operations are quite similar.

Three surveys in particular seem to stand out from the crowd.  And all three providers are making their surveys an annual ritual.  That tells me something about the quality of their surveys, as each year they seem to improve their survey methods.  The first two evaluate online brokers in the United States and they are, respectively, SmartMoney’s Finding the Best Broker and J.D. Power and Associate’s Online Investment Firm Ratings.  Both surveys rate online brokers on several key attributes – most of which were discussed in the 10 Key Criteria section above.  In Canada, The Globe and Mail (daily newspaper) has its own annual On-Line Broker Rankings survey.  This one provides Canadians with a report card, a summary lowdown, and a cost schedule for placing trades for each broker in the survey.  In addition to these three surveys, there is a website called BrokerAdviser.com (owned by a company called Business Financial Publishing) from which we can find another very detailed survey entitled Top 12 Online Brokers for Individual Investors (2006 Edition).  I like this one too because it contains more detailed information than do the previous surveys mentioned above.  I have included a link to this survey in the link box below; be sure to check it out.

Results appear to vary from one survey to another due to a number of factors.  This is quite normal, however, as each party surveys different individuals and they each have their own methodologies.  Nevertheless, they can be extremely useful information sources.

Online Brokers

Since it would take much too long to describe each online broker in detail, I will simply provide you with a list of the most popular ones who operate in North America.  I encourage you to take a look at several brokers based on the selection criteria and broker surveys from above before making your selection.  Of course you also need to keep your investment objectives, goals, and strategies in mind when doing so.  The idea is to get it right the first time.  Should you become dissatisfied with the broker you chose, you can always switch to another one.  You can even open accounts with two different brokers to ensure more flexibility and investment options in managing your wealth.  So let your fingers do the clicking and shop around!

Investment Portals

When it comes to providing investors with investor-related data, information, news, and tools, investment portals are hard to beat.  Moreover, online investment portals provide stock quotes, company news, market data, industry insights, research reports, analysts’ ratings, company financials, financial ratios, and so on.  The amount, breadth, and scope of information they provide is sometimes mind-boggling.  This is not to mention all the tools they provide for investors.  Online financial calculators, currency converters, portfolio tracking and management tools, alerts, stock and mutual fund screeners/filters, interactive charting, represent just a sample of what is available to investors.  And the good news is that access to all of these cool tools and investor-related information is, for the most part, free.  There has never been a better time to be an investor.

In terms of quantity and quality of tools and information provided, some investment portals even outshine the best of online brokers.  Therefore, I shall introduce you to some of these online gems.  Once more, it would take much too long for me to list and describe what each has to offer.  Therefore, I will only showcase the best investment portals along with a sampling of the best each has to offer.  Using these investment portals will undoubtedly make you a more knowledgeable, skilled, and savvy investor.

Charting Services

Charts are very powerful tools for investors because they give you a visual representation of how securities, commodities, and markets are performing over a given period of time.  Numbers and quotes alone are sometimes difficult to assimilate. But charts can provide additional meaning to the numbers; they can make them speak.  As a savvy investor, you will want to use charts not only to track the performance of the securities that you own, but also for the ones you wish to follow.

Many online brokers and investment portals offer terrific charting services.  Most of them are geared towards producing stock-related charts; but some offer the possibility of producing charts for mutual funds and even stock indices.  Most charts display a security’s price in a given currency over a given period of time.  They can also display a security in terms of a percentage increase or decrease.  Trading volume is another common option that is included in charts.  There are many other charting options with which investors can produce very detailed charts for a given stock, fund, or index.  Many charting services offer the possibility of comparing a stock or security with other securities or indices; this is practical, as it can give you additional information when evaluating securities.  Furthermore, some charting services include options that can display important information such as stock splits, dividend payments, and so on.  Depending on the charting service, some offer data going back ten years or even more.  This is practical as, you can take a look at the historical performance of securities and indices.  In other words, it shows you how securities have evolved over time. 

In short, charts are extremely powerful and useful tools that you can use to keep track of the performance of your securities while also exploring other investment opportunities or simply following the evolution of different markets.  I am leaving you with some of the better charting services that are currently available on the Web.

In conclusion, investing online has become a very exciting way in which you can manage your investments and learn more about investing, business in general, and global markets.  For additional online resources and tools, I encourage you to take a look at Appendix A- Investment Resources as there are many more investment goodies available not only online, but also offline.

© Dan Fournier, 2007-2011