Online trading is growing with all the speed of the Internet, boosted even more by tried-and-true inducements such as signing rewards, frequent flier miles and telephone service discounts.
While it may be a modern bandwagon you should seriously consider jumping on, only do so if you're confident that the firm you're interested in has the services you require and the capacity to keep up with the demands of a gyrating, high-volume stock market.You may still find yourself complaining loudly on record trading days about just how low-tech a high-tech industry can seem as you wait and wait to make a trade or obtain necessary information.
Still a fledgling business just a year ago, there are now around 100 online brokers engaged in a spirited competition for your trading dollar. There's a total of 6.8 million online accounts, expected to grow to 10 million accounts by year's end.
"Online transactions now make up 27 percent of all retail investments these days and are up dramatically from even a year ago, meaning this is no longer just for thrill seekers," said Lisa Nash, vice president of customer management with the E+Trade Group online brokerage firm in Palo Alto, Calif. "The Internet has leveled the playing field between the individual investor and the institutional investor."
This online fray includes biggies such as Charles Schwab and Fidelity, with about 2.2 million and 1.5 million online customer accounts respectively, notching all the way down to ambitious small firms with high hopes for success.
"Sixty-one percent of all of our trades were online trades in the fourth quarter," said Craig Prickett, director of electronic brokerage marketing for discount brokerage Charles Schwab in San Francisco. "With a lot of our customers quite mobile and not only going online but also doing phone transactions and going to our branches, we've found a specific benefit of the Internet to be its ability to deliver information, research and interactive tools more effectively."
Promotion and pricing savvy is important. E+Trade, with around 700,000 customer accounts, has offered $50 to anyone opening an account with a $1,000 balance, as well as special savings on items such as airline tickets and Internet provider memberships. National Discount Brokers Group, whose NDB online service has about 120,000 accounts, is offering $50 to new customers who also sign up for a credit card with First USA.
Beyond basic pricing, common inducements in the battle to gain market share include some amount of free trading, commission discounts, real time quotes and free research.
But don't somehow think online brokers are all alike. The fees they charge typically range from $5 to $30 and you must always carefully check the stipulations on the lowest-priced trades. The services vary from basic trading to multiple features and each firm has its own particular business targets.
"Some online brokers such as E+Trade, Charles Schwab and Ameritrade want to be a personal finance destination site with personal finance products and tools readily available to customers," explained John Robb, principle and co-founder of the Gomez Advisors research firm in Concord, Mass. "Most online brokers, however, are purely brokerage through and through, not so much an e-commerce destination."
All online brokers have received complaints about lack of efficiency on recent record trading days, Robb said, though some have fared much better than others. Only one online broker, Datek Online, which has 165,000 accounts, guarantees trades will be executed in 60 seconds or less.
New accounts have simply been coming in too fast and it will probably take another two years for the online industry to expand its capacity enough to solve most of its service problems, Robb believes. To slow down a pace they can't keep up with, some online brokers have temporarily cut back on advertising.
Despite the undeniable growth of online brokerage accounts, not all investors take them totally seriously just yet.
"For a lot of people, online brokerages remain the place where they put their 'play' money," noted Robert Sterling, analyst with the Jupiter Communications research firm in New York, which has done a number of studies on online trading. "We found that less than 15 percent of online users regularly visit a financial site one or more times a month and about 62 percent never use financial sites."
Investors find the biggest selling points of online trading to be convenience, lower prices and increased access to accounts, Sterling said. Full-service brokers have positioned themselves well to face this ominous low-commission challenge, he believes, by moving their business from the execution of trades toward more sophisticated fee-based services for financial planning, money management and asset management accounts.
Here are the 20 best on-line brokers ranked in order by Gomez Advisors, based on 140 different criteria that include customer confidence, cost, ease of use, technology and service:
E+Trade at http://www.etrade.com
DLJdirect at http://www.dljdirect.com
Datek Online at http://www.datek.com
Discover Brokerage at http://www.discoverbrokerage.com
Waterhouse at http://www.waterhouse.com
SURETRADE at http://www.suretrade.com
National Discount Brokers at http://www.ndb.com
Charles Schwab at http://www.schwab.com
Web Street at http://webstreetsecurities.com
Quick & Reilly at http://www.quick-reilly.com
Fidelity at http://www.fidelity.com
Firstrade.com at http://www.firstrade.com
Mr. Stock at http://www.mrstock.com
Trading Direct at http://www.tradingdirect.com
Sovereign at http://www.mydiscountbroker.com
Bull & Bear at http://www.bullbear.com
Scottrade at http://www.scottrade.com
AMEX at http://www.americanexpress.com
CompuTEL at http://www.computel.com
Wang Investments at http://www.wangvest.com.
Andrew Leckey, a financial news anchor on the CNBC cable television network, answers questions only through the column. Address questions to Andrew Leckey, "Successful Investing," 98 Henry St., Dept. 183, Brooklyn, NY 11201 or by email at successinv@aol.com.