If you're tempted to join the online investing craze, be sure to read the following advice provided by the California Society of CPAs.
All online brokerages are not alike
Trading on the Internet may be easy, but finding the right online brokerage firm can be a challenge. Before signing up, you'll want to shop around, compare features, and test customer service.
The best online brokerage firm for you depends on your investing style. An active trader might need fast Web site navigation, expeditious trade executions, and low commissions. A serious investor who enjoys researching stocks and the markets should look for firms that offer a wide range of analytical tools. Investors who are in it for the long term need an online brokerage firm that offers several investment options, including stocks, bonds, and mutual funds. Investors looking to consolidate their finances should seek firms that offer direct bill payment, online banking capabilities, and other financial management tools, in addition to online trading.
There are other considerations as well, such as understanding how much interest your uninvested money will earn. Some online brokers sweep this money into an interest-bearing account on a daily basis, while others pay no interest at all. In your search for an online broker, you might want to phone several of them as well as send e-mails to test their responsiveness. Also, ask some questions of the representatives to gain a better perspective of their knowledge. Finally, check online message boards to see what current and past customers have to say.
Don't expect hand-holding
When you work with a traditional stockbroker, he or she may provide you with news about stocks and markets, as well as general financial advice, in return for the commissions you pay on trades you make. On the other hand, if you plan to buy and sell online, it will be up to you to stay well informed. Don't expect online brokerages to contact you with a hot stock tip or advise you to sell a stock that may not be doing well. You can, however, take advantage of some free online services that provide automatic e-mail messages when there is news about your holdings.
Advertised commissions are not the whole story
Don't neglect the fine print -- read it carefully and thoroughly. Often the prices per trade advertised by online brokerages apply only to market orders -- those orders that are executed at the stock's current market price. When you submit a market order, you are telling the online brokerage firm to buy the stock at the current market price, which, by the time the order goes through may not be the quoted price. Many online brokers charge extra for a limit order ‹ an instruction to buy a security at a specific price. With a limit order, you are assured of the price at which you are buying. Some firms also charge extra for research, issuing a stock certificate, making large trades, using telephone features, or talking to a live broker.
Trading online os not foolproof
Keep in mind you are subject to the quirks of technology when it comes to online trading. The brokerage company's Internet connection could fail, there may be a software glitch, or the company's server may be overloaded as a result of heavy trading volume. For your part, you might be away from your computer when the market makes a major move or you may have a connection or computer problem of your own. To prepare for these potential occurrences, it's important to understand how to use the online broker's telephone feature and other alternative trading options.
Privacy and security are essential
Privacy is an important component of security. Check that the online company you select is using some form of 128-bit encryption technology as well as Secure Socket Layer (SSL) technology to ensure privacy and protect information as it travels between your browser and the brokerage's site.
Sensible investing is the key to success
Used prudently, online investing can be a great convenience and a money saver. But, unfortunately, for some investors, the ease of buying and selling stocks with just the click of a mouse invites impulsive and emotional investment behavior. CPAs urge online investors, particularly those who are new at it, to use care and caution when making important financial decisions.