Save Money With Electronic Trading


The brokerage business ain't what it used to be. Gone are the days when investors were forced to pay commissions of 2 percent on their stock, bond and other securities investments. Such a hefty commission eats away at otherwise stellar gains. If you buy 100 shares of company X at $10, you'd pay $20 to buy the shares. If your shares gain 20 percent in value over the course of a year, you'd pay $24 when selling. The bottom line is that by paying your broker 2 percent, you'd be up by $1,156 instead of $1,200 without commissions.

Instead of high, uniform commissions, a three-tiered industry has developed. For investors that want hand holding, plush offices and a "free lunch," there are the full service brokers, such as Merrill Lynch, PaineWebber and Dean Witter. These firms still charge up to 2 percent commissions when buying or selling securities but even they are willing to lower their schedules if you are a good customer and bargain well.

Next come the discount brokers, such as Fidelity, Charles Schwab and Quick & Reilly. These firms have offices nationwide and offer a limited amount of services. Their commission schedules are substantially lower than full service brokers.

Finally come deep discount brokers, such as Ceres Securities, Jack White and Brown. They charge as little as $19 a trade but forget about service.

In the last year or so, however, another tier has been added-electronic brokers. Upstarts, such as E*Trade and PC Financial Network have decided to challenge the deep discounters by allowing people to buy and sell securities through their PCs. After you set up an account, you can access real or delayed quotes, fundamental information and actually place orders.

The advantage of trading on line is that it's faster and often cheaper than using the phone. You also don't need to re-enter the information into your personal finance software package as you would by using the phone.

By allowing customers to enter the trade themselves, online brokers can save money and pass the savings onto clients. A trade of 100 shares on either the New York Stock Exchange or the American Stock Exchange through the PC Financial Network, for example, costs $40 while on E*Trade, it only costs $14.95.

Fearing a loss of market share, the discount brokers have created their own online versions. The same trade using Fidelity's On-Line Express product costs $48.60 while using e.Schwab it costs $39.

E*Trade clearly has the lowest commission schedule but there are other factors to consider. The software e.Schwab gives for free allows investors to create charts, graphs, access the Reuters Money Network and stock databases at a discount.

Also consider the ability of the firm to get you the best price. Although all brokers say they give you the lowest price possible, prices can vary considerably as a recent examination of over-the-counter stock trading shows. Schwab argues that it has developed software that can, in some cases, actually get investors a better price.

Undoubtedly competition in electronic trading will heat up and brokers in this segment of the market may drop prices further.

Bottom line: electronic trading is for you only if you know are highly knowledgeable about investing. For investors just dipping their feet into the water, a full service broker or discount broker can provide more services and advice. Once you've learned, gradually start executing your trades through electronic brokers.

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