Online Trading and Financing

Point, click, trade. Is it really that easy? We bought and sold stock at eight popular online brokerages and discovered which ones were on the money.

From the February 1999 issue of PC World magazine

Point, click, trade--these three little words sum up the allure of online stockbrokers. Using nothing more than an Internet connection and an account with an online broker, you can buy and sell shares of stocks and mutual funds with mere keystrokes. No waiting to place an order with a brokerage house, no high commissions gobbling up big pieces of your nest egg.

Little wonder, then, that 6 million plucky investors have already exchanged the security of traditional brick-and-mortar brokerage houses for the promise of cheap, fast online transactions and reams of late-breaking information about the hottest properties on the market. But is the trade-off worth it? Undercover Traders

Posing as ordinary investors, we opened accounts with eight online brokers: market leaders Ameritrade, Charles Schwab, Datek, DLJdirect, E-Trade, and Waterhouse, as well as promising upstarts Discover Brokerage Direct and Suretrade. At each site, we tested how easy it is to open an account, place a stock trade, and get help. We pestered each firm's customer service department via e-mail and by telephone, both while the market was open and when it was closed. We also gauged the site's ease of navigation and the usefulness of its stock research tools.

We discovered that no broker has it all. Your choice will depend on what's important to you. If you need a little hand-holding, you'll want a firm that excels at customer service. If you want fast, no-nonsense stock trades, look for a broker that caters to frequent traders. And if you crave the cheapest trading, be prepared to wing it when it comes to getting answers to your questions. Check out "What Kind of Broker Is Right for You?" for our recommendations based on four different investment strategies--one of which is probably yours.

If you think you can start trading as soon as you finish this article, think again. While some brokers, like DLJdirect and Suretrade, don't require a minimum deposit to open an account, most want at least $2000, and they don't take plastic. Allow at least five business days for your check to arrive and clear before your account gets started. The only exception: DLJdirect lets new customers trade as soon as their accounts are approved, usually within seconds of applying.

You'll probably need an hour or two to find and decipher the brokerage's minimum deposit requirements, fees, commissions, and account terms. Discover and DLJdirect were the best at providing this information; at E-Trade and Suretrade, we couldn't find it easily. But once our deposits had landed, trading was easy. In most cases, our initial order to buy shares of stock was filled in mere seconds--before we could even move from the confirmation screen to the order-status screen.

Of course, the more you trade, the more you pay in commissions. That's why low-cost Web brokers are attractive to investors who trade a lot. Instead of the typical $100 to $175 fee a traditional broker charges, you can pay anywhere from $8 per trade (Ameritrade and Suretrade) to $30 (Schwab). A limit order, which designates the maximum price you're willing to pay for a stock, might cost a few dollars extra. And with most online brokerages, placing trades by phone--via an automated system or by talking to a flesh-and-blood broker--will run you a bit more.

One great advantage of online trading is easy access to more reports and charts than you'll find in any discount broker's office. Though this information is available elsewhere on the Web for free, the best brokers merge it directly into your portfolio display--offering links to quotes, charts, and news of your holdings, so you can keep tabs on your investments. Charles Schwab, Discover Brokerage Direct, and DLJdirect are the best at integrating research into customers' portfolio views.

And keep in mind that though we only rated brokerages on their stock trading capabilities, you might also want to consider how a firm stands up when it comes to mutual funds, bonds, options, and other investments. If you're looking for a place to park your retirement funds, all of these firms offer IRA, Roth IRA, and other retirement accounts--just watch out for the annual fees that are frequently charged for these plans.

When it comes to providing help, nearly all the firms could use a lesson in customer care. Few of the brokers responded to our e-mailed questions in what we considered a timely fashion. The best of the bunch was Charles Schwab, whose representatives even telephoned us in response to one of our e-mail inquiries. At the other end of the spectrum, Suretrade's software system sent back immediate responses to our questions, but they were nearly always wrong or incomplete.

We also spent an average of 5 minutes on hold waiting for customer service representatives, no matter what time of day or night we called. But once we were connected, most representatives were knowledgeable and helpful, if sometimes hurried--more than a couple rushed through our call.

If the thought of spending thousands of dollars trading stocks over the Web makes your stomach flutter, relax. All online brokers require that you use a secure browser to connect to their sites, so information flowing between the broker and your computer is encrypted, and thus protected from prying eyes on the Net. Since brokers send funds only to an account's address of record, the account can't be raided. "The worst thing any hacker could do is make malicious trades," according to Steve Hall, senior analyst with Gomez Advisors, a financial services research group.

If you're concerned about getting online on a busy market day, don't worry. Most Web brokers provide online service guarantees, in which the online rate is honored if the network goes down and you have to make a phone call. (Sometimes, of course, the market is downright volatile. See "Can Your Web Broker Handle a Market Meltdown?")

Keeping these assurances in mind, we jumped feet first into the trading pit. Despite the occasional annoyance, we found online trading to be relatively painless. And while no online brokerage excels in all areas, we'd happily give up trading by touch-tone phone or talking with a live broker for the ease and speed of placing orders with an online outfit.

Ameritrade: A Square Deal

Ameritrade is a study in contrasts. Its opening pages are bold, colorful, and slow to download, but inside, the pages are sleek and stark. It offers one of the lowest minimum commissions around, but hidden fees quickly raise the ante. And though the site is festooned with testimonials from satisfied customers, its customer service policies are less than ideal.

The best part of Ameritrade is access to MarketGuide research, which includes a free stock screening tool and regular data updates. Unfortunately, there's no way to get information about a company from all of Ameritrade's research suppliers at once. And while the site features daily commentary from Andrew Tobias, one of the most knowledgeable financial writers around, you have to dig to find his daily gems.

Still, Ameritrade's $8 commission for online orders ties with Suretrade's for the cheapest of the bunch. When you use the touch-tone service, the commission is $12, and it jumps to $18 if you place your order with a broker directly. Limit orders cost $5 extra. Three of the firms in our survey charge extra for limit orders, and those little charges start to add up after a while. But because Ameritrade's fee schedule is buried, it's hard to know how much an account might cost you.

Ameritrade's customer service also seemed wanting: We're still waiting for a response to one of our e-mail queries. Phone service was better, but we were dismayed by some of what we heard. When we asked what would happen if Ameritrade's servers were down when we wanted to place a trade, the agent said we could use the brokerage's touch-tone system or talk with a broker directly. Fair enough, but Ameritrade doesn't honor the online rate in that case. All the other brokers we surveyed assured us they'd honor the lowest commission if their technical problems prevented us from trading. For cautious investors, the less-than-friendly "market meltdown" policy might tip the scales against this otherwise decent site.

Datek: Fast Company

If you want your hand held online, steer clear of high-powered Datek. You won't find much in the way of research tools here, and it can be costly to place a trade with a real person. But Datek's claim to fame isn't customer-friendly accoutrements, it's speed. Hard-core traders will appreciate the Express Server interface, which skips the standard "Are you really really sure you want to make this trade?" confirmation screen. For the less confident investor, Datek also offers the standard trading interface, as well as a "classic" interface free of fancy graphics.

If you place an order with Datek and it's not executed within 60 seconds, the commission fee is waived (assuming, of course, that the order is marketable). And Datek will honor the $10 online commission rate if the network goes down during trading hours and you're forced to place an order by phone. If your own ISP ever fails, Datek provides a dial-up number so you can connect directly to its servers.

Customer support was pretty peppy, too. We got answers to some--not all--of our e-mailed questions within two business days, and the customer service people picked up the phone promptly, rattling off answers as fast we could ask the questions. With this emphasis on getting down to business, the site won't win any design awards. But it is easy to navigate. And if you feel the need for speed, Datek can't be beat.

Last December Datek announced plans to operate its Island trading network as a stock exchange. If that happens, customers might be able to get even better prices on stock trades, an important consideration for frequent traders.

Discover Brokerage Direct is a site with big ambitions. An ad campaign last fall suggested that by trading with Discover, you could earn enough to buy an island. But we hit some choppy water.

For one thing, it took more than a week of e-mails, calls, and faxes to activate our account. Once it was open, we found some things to like. For instance, it's easy to customize your home page with specifics about your favorite stocks, market indexes, and account information: Just point and click the items you want to see when you log on. And news, charts, reports, and quotes are available from your portfolio view. You can also purchase stock reports.

The order-entry screen was logically arranged, and our order was filled within two minutes. But at the confirmation screen, we had to scroll down to get details on our trades, listed in hard-to-read rows.

Discover's online and touch-tone commissions start at $15 for a market order and $20 for a limit order. But if you place a trade by phone, the commission jumps to 1.5 to 2 cents per share (depending on whether the stock you trade is listed on NASDAQ or an exchange), with a minimum of $34.

Since Discover Brokerage Direct is owned by investment bank Morgan Stanley Dean Witter, we won't write off the site's chances for success. But it's hard to find many compelling reasons to fall in with Discover at this stage of the campaign.

Of the firms we looked at, DLJdirect would have been "Most Likely to Succeed" in high school. Lean, good-looking, and a little aloof, the site took home mostly Bs on its report card, an occasional A, and only a few low grades.

The site's design made it easy to log on, move around, and place an order. But attractiveness comes at a cost: The site's reliance on graphic buttons and menus can slow things down--not a strong point for the active trader.

The application form, however, is good for those who want instant gratification. Upon completion, your account can be approved for trading, with no minimum opening balance. If your credit is good, you can buy and sell stocks in seconds. Within a few days, you'll receive a form to sign and return with a check.

Our trade order was filled almost at once. The minimum commission is $20, whether you trade by modem or phone. DLJ's telephone representatives, all licensed by the National Association of Securities Dealers, were helpful, and wait times were average--around 5 minutes--no matter when we called. But we never got a response to questions we sent by e-mail.

DLJdirect's selection of research tools, midrange commission rates, and 24-hour weekday phone access might be just the right mix for slower-paced investors. And if you have $100,000 or more in an account, you could get in on the ground floor of an IPO offered by DLJdirect's parent company, the investment bank Donaldson, Lufkin & Jenrette.

E-Trade wants to be all things to all people. In addition to trading, the site offers a range of investment ideas, message boards, and other freebies to anyone looking to improve their financial well-being. But all these extras also make trading on the site a much more complicated affair than it needs to be.

E-Trade tossed a surprising number of obstacles in our path. Casual visitors must register as "members" to access some of the financial research tools. But if you decide to become a "customer," then you might have to memorize a cryptic new user name and password (as we did). And anytime we moved from a customer area to a member area, we had to log in. Worse: We also had to enter a password every time we wanted to buy or sell a holding. (Suretrade is the only other broker in the bunch that requires a separate trading password.) Still, minimum commissions are a flat $15 for online or phone transactions, and the trading screens are intuitively organized.

Once we had all our passwords and user names straight, we were able to access E-Trade's research tools. By entering a stock's ticker symbol into a search field, we tapped into nearly 20 pages of detailed reports and charts, mostly provided by Disclosure's Baseline service. But to get real-time stock quotes, we had to fill out another registration form. E-Trade does provide unlimited stock quotes once you do register--a bonus most other firms don't offer.

We spent more time on hold when calling its customer support line during the market day than at any other firm--over 10 minutes. Even so, the reps were knowledgeable and helpful, and e-mail support was better than most brokers'.

With practice, a user could get used to E-Trade's registration levels and multiple passwords. But in the competitive Net broker business, we wonder how many will want to.

Suretrade: Not a Sure Bet

Suretrade emphasizes no-frills services at a minimum commission of $8. And no frills is what it delivers.

Opening an account at Suretrade is tedious work. You can do it on the site, but you have to fill out a long form, and then print, sign, and return an online service agreement along with your check. Suretrade then requires five business days for your personal check to clear. So while you can open your account right away, expect to wait another week or two before you can make your first purchase.

We also found it hard to navigate the site. Each area uses its own navigational buttons, links, and menus. And the research tools--a mix of resources from Thomson, Zack's, Reuters, BigCharts, Briefing.com, and Baseline--are delivered in frames, each with its own menu of options and system of navigation. While there's a lot to choose from, it's a mix of the same free information you can find elsewhere on the Web, with some premium services tossed in. A centralized ticker lookup page would allow better access to these materials.

Once we started trading, a couple of minutes passed before our stock purchase was confirmed--one of the slowest responses in our survey. We also found the site to be a bit sluggish even during a normal trading day, which made us wonder about its performance on days when the market is hectic.

Suretrade's bare-bones approach means it doesn't stand on ceremony when it comes to customer service. The brokerage's e-mail support is based on a software program called "the Brain," which sends automated responses to questions. The answers we got from this "smart" software were laughably bad and consistently unreliable.

On a positive note, Suretrade charges no fees for extra services, including the issuance of stock certificates. But that's unlikely to convince most investors that Suretrade is a sure thing.

Waterhouse: Research Engine

For customer service, it's hard to beat Waterhouse WebBroker. When you sign up, you get an account officer who provides personal attention when needed. This privilege costs, though. Waterhouse's $12 minimum commission jumps to $45 when you place an order with an account officer.

In other ways Waterhouse has a way to go to catch up with its online brethren, particularly when it comes to opening an account. You can't apply for an account online, and once your account is open, you still have to call to get a password before you can trade on the Web.

We also had problems with the site itself. We often got stuck trying to use the JavaScript drop-down menus, in which you select an item from a drop-down box and the appropriate page loads automatically before you can click on "Go."

When you enter the site's Research section, be sure to type in a ticker symbol in the box at the top of the screen before selecting a report from S&P, Briefing.com, or MarketGuide. If you don't, you'll get an obscure error message. Navigation style also varied by page, from a text menu of choices on the side of the browser window to graphic buttons at the bottom of the page.

Despite the frustrating interface, it was easy to place an order. The site's stock trading screen stepped us through the process, and the confirmation screen linked us right to the order-status area. Our order to buy was filled within 60 seconds.

Waterhouse's Standard & Poor's Stock Reports were the best research tools we saw. Other sites charge a dollar or two for each report, so having the library for free can save money. One thing we couldn't find was a copy of the account agreement, and it wasn't for lack of trying. Guess we could have used that pricey personal account officer after all.

Trading Site

Minimum equity to open account

Online trade commission1

Phone trade commission2

Maximum number of shares at minimum commission

Extras for large accounts or frequent traders?

Access to IPOs

Online account application process

Account agreement on site

Trade done in less than a minute

Online service guarantee3

Toll-free support hours

Site navigation

Trading interface

Access to stock information

Quality of research tools

Access to account

Account customization

Telephone promptness

Telephone helpfulness

E-mail promptness

E-mail helpfulness

Ameritrade 800/454-9272 www.ameritrade.com

$2000

$8

$12-$18

none

N

N

Y

Y

Y

N

M-F 6 a.m. - 10 p.m. EST

very good

good

good

good

good

very good

very good

good

poor

fair

Charles Schwab 800/435-4000 www.schwab.com

$2500

$30

$39

1000

Y

Y 5

N

N

Y

Y

24 hours daily

good

very good

very good

excellent

very good

excellent

good

excellent

excellent

excellent

Datek Online 888/463-2835 www.datek.com

$2000

$10

$25

5000

N

N

Y

Y

Y

Y

M-F 8 a.m. - 7 p.m. EST

very good

excellent

very good

good

very good

good

excellent

very good

poor

good

Discover Brokerage Direct 800/688-6896 www.discoverbrokerage.com

$2000

$15

$15-$34

5000

Y

N

N

Y

N

Y

M-F 9 a.m. - 7:30 p.m. EST

good

good

very good

good

very good

very good

excellent

fair

fair

fair

DLJdirect 800/825-5723 www.dljdirect.com

$0

$20

$20

1000

Y

Y 6

Y

Y

Y

Y

24 hours M - F 7

very good

very good

excellent

very good

very good

poor

very good

excellent

poor

poor

E-Trade Securities 800/786-2571 www.etrade.com

$1000

$15

$15-$25

5000

Y

Y 8

Y

Y

Y

Y

M-F 8 a.m. - 9 p.m. EST

good

good

very good

very good

good

good

fair

good

fair

very good

Suretrade 800/909-6827 www.suretrade.com

$0

$8

$12-$35

5000

N

Y 9

Y

Y

N

Y

M-F 7 a.m. - 6 p.m. EST

very good

good

good

very good

fair

poor

good

good

poor

poor

Waterhouse WebBroker 800/934-4410 www.waterhouse.com

$2000

$12

$35-$45

5000

N

N

N

N

Y

Y

24 hours daily

fair

excellent

good

excellent

very good

poor

good

excellent

good

good

The first question you should ask yourself before taking the online stock trading plunge is, "What kind of investor am I?" Once you determine what your personal investment style is, you can choose a brokerage firm that best complements your trading habits. Here are four types of investor and the road we think each should travel.

If you're new to the Web or new to investing, a brokerage site's overall service is the most important factor. A firm with highly rated customer service can help ease your nerves as you get started: Charles Schwab and Waterhouse might be good bets in this area. And if the Web still throws you for a loop, look for a site that offers telephone trading at no additional charge. The tops in this category are E-Trade and DLJdirect.

You buy stocks for the long term? A $30 commission on a stock you own for ten years won't dent your overall returns much. Since you'll want to do extensive studies of stocks or mutual funds before buying them, a site's research tools should be the most important factor in your choice. Charles Schwab and Waterhouse are great places to get the lowdown on potential purchases.

Do you buy and sell stocks at least once a week? If so, low commissions could save you big. Just remember that frequent trading can be costly in other ways. Investors typically lose a few cents on each trade due to the "spread" (the difference between the selling and purchase prices of a stock), which is pocketed by the brokerage. Look for a broker that offers "price improvement," in which the firm executes trades in alternative markets to get the best share prices. For the frequent trader, we like Datek for its near rock-bottom commissions and trader-friendly practices.

If you don't think you've got what it takes to manage your own portfolio, a full-service bricks-and-mortar brokerage firm might be your best option. Though well-established firms like Salomon Smith Barney and Merrill Lynch don't broker trades online, they do offer online access to account information and background research. Still, most of your interactions will be face-to-face or on the phone with a personal account executive who can help with any financial questions you might have--from managing your portfolio to planning for your estate.

Keep these tips in mind as you plan your online investment strategy:

Lower your costs. A good rule of thumb is to keep the cost of trading below 3 percent of your total investment amount.

Watch for Y2K bugs. Because the online brokerage industry is so new, it doesn't make much use of older systems, which can be riddled with millennium (year 2000) bugs. But these sites do interact with other computer networks that could have problems. Protect your investments by making sure your broker is Y2K compliant. Some firms, like Charles Schwab, publish a statement of their Y2K readiness on their sites. If they don't, then find out what their policy is.

Be redundant. Open brokerage accounts with two or more companies and have a backup ISP available in case you can't dial up your usual provider. (Many ISPs offer limited-access accounts for $5 to $10 a month.) That way, you will always have solid backups in the event your online broker or ISP fails you.

Plan for Armageddon. For days when the market goes haywire, choose a broker with a "market meltdown policy" that offers telephone trading at the same price as online trading, or will waive the difference if you can't log on to the site.

Stay on top. For updates on Web-based investing houses, visit Gomez Advisors, a research company that reviews and ranks online brokers. You can find the Gomez scorecard at www.gomez.com. And while you're surfing the Web, check out the site managed by Don Johnson, an independent investor. You can find his "Discount Stock Brokers Ranked" report at www. sonic.net/donaldj.

How reliable is online investing? Ask any trader, or Web brokerage for that matter, who was around in October 1997 when the market fell 7 percent in one day and swung back dramatically the next. Online brokers were pummeled with as many as five times the orders they usually process. The huge increase slowed many sites to a crawl, preventing frantic customers from accessing their accounts and making trades. Some lost money they wouldn't have if they'd been working with a traditional brokerage firm.

Web brokerage executives lost some sleep during those days, but they learned their lesson. They have since embarked on massive system upgrades, beefed up capacity, and streamlined performance. "The online brokers spent tens of millions of dollars in 1998 with the singular objective of upgrading their ability to handle peak market days," says Steve Hall, a senior analyst at Gomez Advisors, a financial services research firm. "It appears that, overall, they've doubled their capacity."

Those efforts have paid off for their customers. In the volatile markets of August and September 1998, the New York Stock Exchange saw nine of its ten busiest days on record. Online brokers barely winced, even as many of them set new daily trading records. A few firms reported outages, but overall, investors were able to log on and place orders.

But online trading is not completely out of danger. Web brokers gain new customers at a rapid clip, and are launching multimillion-dollar marketing campaigns to boot. As more investors log on to do their trading, and as the volume of shares traded each day grows, the occasional equipment meltdown or software failure still occurs.

That's assuming you can get online in the first place. On heavy volume days, lots of other investors will be trying to get online, including other customers of your Internet service provider. Anyone who's ever encountered repeated busy signals knows how frustrating that can be. Many online brokerages guarantee that in such an instance you won't be charged the often more expensive commission rate for trading by phone.

With more people getting online, the Internet itself may be more of a problem than the brokers' computer networks. "The consumer should recognize that this shared system is not foolproof," explains Hall. "You need to accept that Web access may go down for short periods, and those who care should look for a broker with telephone back-up." Hall notes that brokers buy access through multiple, geographically diverse ISPs to avoid glitches, but he still cautions investors to have reasonable expectations about their online brokers.

"The industry has done a great job preparing for the future," he says, "but you should be prepared for times when you won't be able to get online to trade."

Other Online Trade