Stock Investing Online: ShareBuilder vs. Discount Brokerage

By Julie Rains on 19 July 2007 (Updated 30 August 2013) 2 comments
Photo: Helico

Are you eager to get started in stock-market investing but want to take it slow and easy at first? A few of the simplest ways to get in are: open a DRIP (dividend reinvestment plan) account; open a ShareBuilder account; or open an account with an online discount brokerage firm.

Note: I’ve intentionally left out mutual fund investing for now because I am focusing on investing in individual stocks for this post. Just to let you know, though, I moved from DRIPs to mutual-fund investing, and then to mutual fund/stock investing via a TD Waterhouse account (now TD Ameritrade). Later, I opened an account with ShareBuilder on behalf of my oldest son with the goal of teaching him about stock-market investing.

As I mentioned earlier, DRIPs are great for making small, regular investments. When I opened my Duke Power DRIP, I loved being able to fund my account, randomly but steadily, by sending a check of $25 to $50 every month. Today, you can transfer funds electronically though it seems that the electronic set-up requires a regularly scheduled deposit. The biggest drawbacks to these plans are 1) you are limited to the companies that offer the plans and 2) shares are purchased and/or sold on your behalf at market, rather than specified or limit, prices.

I opened an account with TD Ameritrade when discount brokerage firms were just appearing as an inexpensive alternative to full-service brokerage firms (such as Merrill Lynch, which provide investing advice but charge dramatically steeper fees for transactions). My father-in-law, an active investor and a persnickety consumer, opened an account with TD so I figured he had done his homework and I signed up also.

When my oldest son was small but old enough to get the basic concept of investing, I opened a ShareBuilder account for him. My son wanted to invest in the largest retailer so I bought him a share or two of Wal-Mart. My idea was that I would help him invest his allowance and any earnings from doing chores, and, over time, build a portfolio.

Like his savings account, I never really expended the effort to grow this account. But unlike the bank, which slapped a dormant fee of $5 per month, notified me of the charges in a quarterly statement, and refused to waive the fee when I appeared in person at one of their branches, ShareBuilder did not charge me an inactivity (or activity) fee. When I hadn’t checked in lately, the company did send me a nice letter urging me to do something with the account or at least verify that I still existed and wanted to hang on to the money. The username and password long forgotten, I broke down and called customer service and reconnected with the account.

Prompted by my renewed desire to teach my sons about personal finance, I thought I would revisit and review online stock investing.

First, there are many online discount brokerage firms such as E*Trade and Fidelity (which only offered mutual funds when I opened my account there years ago) but since I have my account with TD Ameritrade and some knowledge of how the account works, my discussion will be limited to this company. I encourage you to check them all out and see what works best for you. There are many financial services offered through these accounts but I want to focus on stock trading (buying and selling individual stocks).

The key items that I would consider when evaluating a brokerage service are:

  • Minimum balance to open an account
  • Maintenance fees (costs to hold the account, which may be monthly, quarterly, or annual fees)
  • Transaction fees (cost to buy and sell stocks)

Though I won't discuss in detail right now, you might also consider:

  • Types of accounts you can open (regular or tax account, IRA, Roth IRA, Coverdell, etc.)
  • Research tools
  • Brick-and-mortar branch offices
  • Staff availability

ShareBuilder has a unique BASIC program that is very similar to most DRIPs in that:

  • Fees are minimal ($4 each) for “automatic investments” (using ShareBuilder terms; you can make one-time and sporadic investments by funding your account one time or sporadically or set up your account for regular investments)
  • For your $4, you can not place a limit order as the stock is purchased on your behalf. You do have the option of using the real-time trading feature but the cost is rather high ($15.95 for a market order; $19.95 for a limit order) compared to online brokers.
  • There is no minimum balance to open an account; you can fund the account by sending a check or scheduling electronic transfers from a checking or savings account.
  • For the BASIC program only, there are no subscription or maintenance fees for a regular account. There is, oddly, a $25 fee for the No-fee IRA (if you subscribe to the Standard program for another account, you can avoid the IRA account fee).
  • If you move up to the Standard program, you pay $12/month and for up to 6 automatic investments per month. You also receive a $1 off real-time trading.
  • All stock sales are executed via real-time trading and so are subject to the higher fee ($15.95 for a market order in the basic program).

Alternatively, you could open an account with TD Ameritrade but you will need $2,000 for a regular account and $1,000 for an IRA. Once you’ve got that amount, you will pay $9.99 for trades (market and limit orders are priced the same). Accounts can be funded with a check or electronic transfer from a checking or savings account. There are no regular maintenance fees although paper statements cost $2 per month so you might want to stick with electronic delivery.

The advantage that I see with ShareBuilder is that you can start accumulating stock sooner because there are no minimum balance requirements. And the fees can be lower. (Disclosure: I earn a referral if you sign up for an account from this post.)

For those of you interested in illustrations (tedious calculations), here's how you could gain if you used ShareBuilder rather than TD Ameritrade, given these not-necessarily-real-world assumptions:

  • Set aside $100 per month every month for 5 years ($1,200 per year; $6,000 total)
  • At the end of each year, purchase Stock A (if you can open an account; if not hold the money until the end of the next year)
  • Stock A is valued at $30 per share at the end of Year 1 and grows in value at precisely 10% per year for 5 years
  • All shares are sold at the end of 5 years

A ShareBuilder customer would have a profit of $1,285.75; TD Ameritrade, $1,110.05 according to my spreadsheet.

If you're still with me and want to understand market and limit orders: If you place a market order, you tell your broker that you want, for example, 10 shares of Stock XYZ; if you place a limit order, you tell your broker that you want 10 shares of XYZ and you don’t want to pay more than $35 per share. Let’s say XYZ is trading between $34 and $36 on a given day. With a market order, you may pay $37 per share but you’ll get all the shares you wanted; with a limit order, you may not get any shares but if you do get them, you will pay no more than $35. Okay, I'm not saying you should time the market, but many investors will determine a price that they will pay for a certain stock and place a limit order, a reasonable method of investing.

To me, the big variable is the price difference between a market order and limit order, and more specifically, an investor's ability to obtain the stock at a price less than what ShareBuilder might provide. If you were able to pay $1 per share less than the ShareBuilder purchase each year, your gain would be $1,311.60 with the TD Ameritrade account. Either way, in this sort-of-but-not-totally-real-world scenario, you've made some money.

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nprfreak

Nice treatment of 2 companies where I also happen to have accounts. An update on Sharebuilder, they were recently purchased by ING Direct and trading fees have been reduced to $9.95 market and limit orders in all accounts types. The automatic investment plans (Tuesday buys) remain as before, as does the no-fee IRA fee. As for that fee, a careful reading of the fee schedule reveals that one need only enroll in the Standard program (6 buys for $12) during the renewal month to avoid the IRA fee. Renewals are January or June depending on the opening date of the account.

Julie Rains's picture

Thanks for the updates. I have seen ads about Sharebuilder's lower real-time rates, which does make it attractive.