ETF Investing en-US A Guide to Online Brokers for Investing Newbies (and Beyond) <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/a-guide-to-online-brokers-for-investing-newbies-and-beyond" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="online brokers" title="online brokers" class="imagecache imagecache-250w" width="250" height="141" /></a> </div> </div> </div> <p>Online brokers are known for cheap commissions on stock trades, along with low-cost account management services. These firms provide a place to start, grow, and maintain financial investments through regular brokerage accounts, retirement accounts, and more. Investment products available to fund these accounts may include stocks, ETFs (exchange-traded funds), and mutual funds.</p> <p>Although online brokerage services were originally started as DIY alternatives to pricey traditional brokers (think Merrill Lynch in &quot;Mad Men&quot; days), they now offer a full range of services. Most have educational resources on investing along with tools for selecting and evaluating specific stocks. Many provide financial advisory and portfolio management services. (See also: <a href="">5 Killer Free Investment Tools</a>)</p> <h2>Background</h2> <p>To understand and appreciate the services offered by online brokers, knowing the background of brokerage houses can be helpful.</p> <p>In the 1980s and earlier, investors typically had few choices when purchasing publicly-traded stocks and mutual funds. They could:</p> <ul type="disc"> <li>Buy and sell stocks using a full-service brokerage firm, paying commissions that typically exceeded $100 per transaction<br /> &nbsp;</li> <li>Invest in a specific company that offered a <a target="_blank" href="">DRIP (dividend reinvestment plan)</a> by purchasing shares on a monthly or quarterly basis<br /> &nbsp;</li> <li>Purchase shares of mutual funds directly from the fund family, which involved paying sales and redemption charges on load funds while avoiding commissions on no-load funds</li> </ul> <p>Trading fees at full-service firms were steep, as they covered sales commissions of stockbrokers. Ideally, the stockbroker recommended trades that were suitable for and benefited the growth of your investment portfolio based on proprietary market research of the brokerage firm.</p> <p>But even if you didn&rsquo;t need or want advice from the stockbroker, you still had to pay a sales commission. Discounted brokerage services were made possible when the SEC mandated negotiated rates in 1975, eliminating fixed commissions. In the 1990s, these discount brokers introduced web-based services so that customers could make online trades rather than giving orders to a phone representative.</p> <p>Online brokers have continued to evolve. Product offerings now include options and foreign stocks. Just as significantly, many serve more than the DIY market through financial advisory and money management services.</p> <h2>Ways to Evaluate Brokers</h2> <p>There are many ways that you can evaluate and choose an online broker. The cost of a standard online stock trade, account minimums, and account maintenance fees are the features most often touted. (See downloadable spreadsheet: <a href=" Guide to Online Brokers.xls">Basic Guide to Online Brokers</a>, comparing various brokers.)</p> <p>Those factors are relevant, but there are also additional elements to consider in selecting a broker (or brokers).</p> <p><strong>Stock and ETF Trading Costs</strong></p> <p>The most prominent measure of an online broker is the cost of an online stock and ETF trade. Typically, these are flat fees regardless of the number of shares bought or sold.</p> <p>Note the standard fees for online trades (as of December 2012):</p> <ul> <li><a target="_blank" href="">Charles Schwab</a>: $8.95</li> <li><a target="_blank" href="">E*Trade</a>: $9.99</li> <li><a target="_blank" href="">Fidelity</a>: $7.95</li> <li><a target="_blank" href="">Merrill Edge</a>: $6.95</li> <li><a target="_blank" href="">Scottrade</a>: $7.00</li> <li><a target="_blank" href="">TD Ameritrade</a>: $9.99</li> <li><a target="_blank" href="">TradeKing</a>: $4.95</li> <li><a target="_blank" href="">T. Rowe Price</a>: $19.95</li> <li><a target="_blank" href="">Vanguard</a>: $20.00</li> <li><a target="_blank" href="">WellsTrade</a>: $8.95</li> </ul> <p>Some brokers trade certain <a target="_blank" href="">ETFs commission-free</a>. On the other hand, fees for trading penny stocks (generally defined as equities with share values of $2 or less) may be higher and include charges related to the number of shares in the transaction.</p> <p>Also, if you need to make the trade via an automated phone line or with the assistance of a broker, then you&rsquo;ll typically pay either a higher flat fee or an added service charge. These fees may run up to $44.99, cheaper than traditional brokers but not nearly as inexpensive as standard online rates. However, you should be able to engage a phone rep in walking you through the mechanics of a trade that you initiate and complete online without an extra charge.</p> <p><strong>Account Minimums</strong></p> <p>If you are just getting started in investing, the minimum amount to open an account is of particular importance. This number often varies on the type of account. A regular brokerage account generally has a higher minimum than a retirement account, such as a traditional, Roth, or SEP-IRA.</p> <p>Minimums to open a regular account are:</p> <ul> <li>Charles Schwab: $1,000</li> <li>E*Trade: $500</li> <li>Fidelity: $2,500</li> <li>Merrill Edge: $0</li> <li>Scottrade: $500</li> <li>TD Ameritrade: $0</li> <li>TradeKing: $0</li> <li>T. Rowe Price: $2,500</li> <li>Vanguard: $3,000</li> <li>WellsTrade: $1,000</li> </ul> <p>When talking with broker representatives, I learned that account minimums can be flexible. For example, a phone rep at Schwab said that the account minimums on its website are &quot;suggested&quot; rather than required. Similarly, a Fidelity rep told me that there is no minimum to open a brokerage account, but mutual funds generally have $2,500 minimums. E*Trade accounts can be opened for $0 and then funded over a period of two months. Some minimums can be waived if you opt to make automated monthly contributions.</p> <p><strong>Account Fees</strong></p> <p>Many online brokers boast the absence of annual maintenance fees. And, thankfully, the majority of firms do not charge to hold your account.</p> <p>Still, it&rsquo;s a good idea to ask about fees. These could include account opening fees, account closing fees, or quirky fees such as TradeKing&rsquo;s inactivity charge or low-balance fees charged by Fidelity and T. Rowe Price. Some fees can be waived by meeting certain conditions that could include choosing paperless delivery of monthly statements or maintaining a certain dollar value of assets.</p> <p><strong>Mutual Funds</strong></p> <p>Online brokers vary greatly in their scope of mutual fund offerings and associated fees.</p> <p>However, nearly all distinguish between no-transaction-fee (NTF) mutual funds and transaction-fee mutual funds. Put simply, you pay no fee for an NTF purchase or redemption but pay a flat fee for buying or selling transaction-fee funds. (Note that an NTF fund may or may not be a <a href="">no-load fund</a>. For example, some brokers charge no commission for load funds, presumably earning a sales commission from the fund company rather than charging the individual investor. Some charge a commission for no-load funds.)</p> <p>A few brokers have designed mutual fund networks or programs allowing commission-free purchases and redemptions. These programs may contain proprietary funds (created and sold by the brokerage firm) and/or selected mutual funds from outside fund families. For example, you can purchase Fidelity funds for free at Fidelity but pay a $75 commission for non-Fidelity funds. Similarly, an investment in one of the funds associated with the Schwab OneSource Program is free; purchases outside of this program are $76.</p> <p>In addition to the commissions and fees charged by brokers, a mutual fund company may have fees distinct from the purchase or sales transaction; discussion of these fees can be found in the fund prospectus. Further, many brokers charge an early redemption fee for funds sold within a designated time frame after a purchase (generally 90 days or less).</p> <p>Some investors favor online brokerage services with historical roots as mutual fund companies. For example, Mike Piper, a CPA who writes about low-maintenance investing at the <a target="_blank" href="">Oblivious Investor</a>, likes Vanguard and Fidelity because of the breadth of mutual fund offerings available commission-free, particularly for tax-advantaged accounts such as Traditional IRAs, <a href="">Roth IRAs</a>, and SEP-IRAs.</p> <p><strong>Customer Service</strong></p> <p><a href="">Customer service</a> is delivered through toll-free phone calls, live chats, email, secure messaging systems requiring account log-in, and face-to-face consultations at branch offices. The responsiveness, availability, and expertise of service representatives will depend on your choice of online broker.</p> <p>Even if you expect to handle transactions exclusively online, you may occasionally need help in these areas:</p> <ul> <li>Responses to general inquiries about fees, opening an account, etc.</li> <li>Assistance with account-specific concerns relating to trades, account balances, etc.</li> <li>Financial advice pertinent to your goals and risk tolerance.</li> </ul> <p>General guidance is typically free, but more expert direction can cost you.</p> <p><strong>Investing Resources</strong></p> <p>Most online brokers offer investor education for DIY investors that is particularly useful for newbies. Some provide more sophisticated tools and expanded services to advanced investors and those with large investment portfolios.</p> <p>The types of resources:</p> <ul> <li>Market news, insights, and commentary</li> <li>Education on products and types of investment accounts</li> <li>Investment planning tools</li> <li>Trading and analysis tools (including real-time, streaming quotes)</li> <li>Financial planning services</li> <li>Portfolio management services</li> </ul> <p>Certain services are ideal for those who enjoy the value-consciousness of an online brokerage firm but are willing to pay for expert financial advice. This group of investors can tap the knowledge of a financial advisor for specific concerns, locate and fund a pre-fab investment portfolio that matches their risk tolerance, or enlist the services of a money manager.</p> <p><strong>Deals</strong></p> <p>Most brokers have deals for new or active customers. These generally include:</p> <ul> <li>Cash bonuses for opening an account or adding to its balance</li> <li>Free trades for referring a friend or maintaining a high account balance</li> </ul> <p>Note that qualifying amounts for bonuses can be very high though the average investor can typically qualify for free trades.</p> <h2>How to Choose an Online Broker</h2> <p>When reviewing the price structures and services of online brokers, notice the strengths that are most closely aligned with your needs. Start with identifying your needs now and those you anticipate having in the future. Ask yourself questions like these:</p> <ul> <li>What type of account do I want to open?</li> <li>What types of investments do I prefer?</li> <li>How much do I have to invest now?</li> <li>What is my level of comfort with independent investing?</li> <li>Would I like to have assistance in managing my money?</li> </ul> <p>Also, determine if you have special needs. Your responses will guide your decision as you choose an online broker.</p> <p>For example, if you are most interested in investing in mutual funds, then a firm with a wide variety of no-transaction fee funds is ideal.</p> <p>If you hope to grow your account balances to a level that will qualify you for specialized services, then the firms with full-service features at a relatively low cost may be perfect for you.</p> <p>If you want to invest in IPOs, <a target="_blank" href="">Kiplinger mentions that Schwab, Fidelity, and TD Ameritrade can provide client access to initial public offerings</a>.</p> <p>If you want to open a Roth IRA for your child, Doug Nordman, a military veteran who writes about early retirement and financial independence, tells me that <a target="_blank" href="">certain brokers will allow minors to have a Roth IRA while others don't provide such services</a>.</p> <p>If you have a variety of needs, you may want to open more than one account. Using this approach, you'll forgo some benefits associated with high-dollar balances but may be able to save on fees for certain types of investments and transactions. Whatever you decide, don't be afraid to ask for specialized services at no cost or a reduced fee.</p> <p><em>What fees, account features, and services do you consider most important when evaluating an online broker? </em></p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="">Julie Rains</a> of <a href="">Wise Bread</a>, an award-winning personal finance and <a href="">credit card comparison</a> website. Read more great articles from Wise Bread:</div><div class="view view-similarterms view-id-similarterms view-display-id-block_2 view-dom-id-1"> <div class="view-content"> <div class="item-list"> <ul> <li class="views-row views-row-1 views-row-odd views-row-first"> <div class="views-field-title"> <span class="field-content"><a href="">How to refill an ink cartridge with a small piece of tape</a></span> </div> </li> <li class="views-row views-row-2 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="">Make Your Computer Last (Almost) Forever With Some Simple Tricks</a></span> </div> </li> <li class="views-row views-row-3 views-row-odd"> <div class="views-field-title"> <span class="field-content"><a href="">Make Your Computer Faster Instead of Buying a New One</a></span> </div> </li> <li class="views-row views-row-4 views-row-even"> <div class="views-field-title"> <span class="field-content"><a href="">3 Steps to Getting Started in the Stock Market With Index Funds</a></span> </div> </li> <li class="views-row views-row-5 views-row-odd views-row-last"> <div class="views-field-title"> <span class="field-content"><a href="">What Is a Lipper Average, and Why Should We Care?</a></span> </div> </li> </ul> </div> </div> </div> </div><br/></br> DIY Investment Technology ETF Investing IRAs mutual funds online brokers stock investing Thu, 03 Jan 2013 11:36:31 +0000 Julie Rains 959885 at ETFs Offer Incredible Benefits...with a Dark Side <div class="field field-type-filefield field-field-blog-image"> <div class="field-items"> <div class="field-item odd"> <a href="/etfs-offer-incredible-benefitswith-a-dark-side" class="imagecache imagecache-250w imagecache-linked imagecache-250w_linked"><img src="" alt="Cow" title="Cow" class="imagecache imagecache-250w" width="240" height="180" /></a> </div> </div> </div> <p>Exchange-traded funds (ETFs) are simultaneously one of the best financial innovations retail investors have seen in decades, while at the same time misunderstood on a grand scale. While I've enjoyed the benefits of investing with ETFs and consider myself to be at least a moderately sophisticated investor, I've also fallen prey to faulty assumptions and expectations for certain ETFs. Rather than paint the whole ETF category with a single brush, I want to highlight some of the specific misunderstandings I and others have had so that you can be more confident and informed about what you're looking for in an ETF. Some of these examples may save you from a regretful mistake down the road.</p> <h3>Don't Buy the Name (or the Ticker)</h3> <p>Something people don't often think about is the notion that the names and ticker symbols of ETFs are kind of like giant billboards saying &quot;Buy Me!&quot; As someone who follows the industry relatively closely, I often see new ETFs launch based on sensational headlines. For instance, shortly after the story broke that China was restricting export of rare earth metals needed for everything from GPS systems to military applications, there was a mad rush into any name tied to the mining of rare earth minerals. For example, while the launch of this <a href="">Rare Earth Metals ETF</a> was timed perfectly with headlines invoking panic, the makeup of the ETF isn't exactly a pure play on these metals at all (hence, the name also includes &quot;Strategic Metals,&quot; whatever that means). Many of the companies in the top holdings also mine other materials that <em>aren't</em> rare earth metals. Surely, thousands of investors jumped into that investment thinking they could exploit the news that China was blocking exports of these critical materials, only to find later that the ETF wasn't very representative of that asset class.</p> <p>ETFs are often given memorable ticker symbols as well. Consider the Market Vectors Agribusiness ETF (MOO) and Claymore/MAC Global Solar Energy (TAN). While the catchy ticker symbols may be cute, perhaps the makeup of the ETF, the expense ratio, or the strategy isn't actually your best option in that space &mdash; but you'll sure remember that ticker symbol!&nbsp; And that keeps investors coming back, it gets the ETF mentioned on CNBC, and it makes it tough to get out of your mind. The reason I share those examples is to illustrate that aside from being a basket of stocks, commodities, debt instruments, or any asset class for that matter, these ETFs generate income for the custodian or parent company by way of shares transacted. When they're competing against three other ETFs with essentially the same investment strategy, they need to be innovative in how they market their product. So be careful, be selective, and do a simple search in Google Finance or Yahoo Finance to see if there are other ETFs in the same sector that are a better fit for you.</p> <h3>Understand How ETFs Work</h3> <p>One of the biggest complaints about ETFs is that they didn't perform the way the investor expected them to. This isn't just a retail investor complaint, but even professional money managers are routinely involved in litigation accusing ETF companies of deceptive practices and improper disclosure. The most prominent complaint today is the performance of leveraged ETFs. People erroneously assume that three-times-daily leveraged (3X) ETFs will have returned about triple the underlying index over time. They don't. Aside from the fact that it's three times as painful on the way down, even if the underlying index is flat or slightly up, over long periods of time, leveraged ETFs experience value decay due to daily resets. This is a mathematical certainty that I learned too late as an early investor in leveraged ETFs. To demonstrate the point, just match up any two opposing (long/short) ETF pairs in Google Finance and over a year or longer period, they'll almost always <em>both</em> be negative. If you're wondering how both a long 3X and a short 3X ETF could both lose money at the same time, it's due to this daily reset value decay.</p> <h3>Don't Overpay</h3> <p>There are a few ways you could end up paying more for an ETF than you thought. First off, make sure you know what the expense ratio is for your ETF. For a basic broad-market ETF, you can often get below 0.15%, especially with Vanguard ETFs. For something a little more sophisticated, expenses are typically in the 0.4% to 0.8% range. Paying over 1% in fees is probably unnecessary as there are often competing ETFs with lower fees or the strategy may not be worth the additional costs in the long run. Since most ETFs aren't actively managed, it's tough to justify commissions in the 1.5% and higher range, but they are out there.</p> <h3>Beware of Low-Volume ETFs</h3> <p>Another problem with many ETFs arises when they are relatively obscure and thinly traded.&nbsp; In this case, there's a very wide bid-ask spread. This means there's a gap of several cents between what you pay for an ETF and what you can sell it for. If there's a 30 cent gap between the bid and the ask price, and you bought 1,000 shares in a typical market order, you basically just lost $300 the moment you bought the ETF. To avoid this problem, check out the bid-ask spread when trading and focus on higher-volume ETFs. High-volume ETFs often have a bid-ask spread of a single penny, very much like a typical high volume stock.</p> <h3>Watch Out for Tax Demons</h3> <p>Many investors buy first and research later. This is especially troublesome from a tax standpoint for certain classes of ETFs. For instance, an ETF holding <a href="">Master Limited Partnerships</a> (MLP) might be appealing due to its high yield. But because of the MLP tax structure, investors need to file an additional tax form called a K-1. Not only is this an added level of complexity at tax time, but it also comes very late in the spring, forcing you to file your taxes in March or even as late as April, as opposed to earlier in the year when you would have everything else in order had you steered clear of this asset class. Another example of a tax demon is that if you buy the gold ETF (GLD), you have to pay the higher ordinary income tax rate instead of the capital gains rate when you sell because gold is taxed as a &quot;collectible&quot; under IRS rules. These are just a few problems investors encounter with exotic ETF classes. If you're unsure of tax implications, do some research, read the fact sheet on the ETF homepage, and make sure you won't be surprised come tax time.</p> <p>In summary, I think ETFs are great instruments for retail investors, and they open the door to many new asset classes, strategies, and ways to diversify portfolios. They are also generally less expensive than mutual funds, trading stocks, and other asset classes individually. However, without reading the fine print, investors are often disappointed with the results, which is why ETFs are starting to get a bad rap. Since one of the best benefits of an ETF is the low fee structure, you can take that a step further with <a href="">Commission-Free ETF Investing</a> to get the best of both worlds.</p> <br /><div id="custom_wisebread_footer"><div id="rss_tagline">This article is from <a href="">Darwins Money</a> of <a href="">Wise Bread</a>, an award-winning personal finance and <a href="">credit card comparison</a> website. 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