Dip Your Toe In Online Trading
Sharebuilder
MEMO TO ONLINE TRADING COMPANIES - You will not achieve critical mass without first attracting small investors. And those small investors won't be able to meet your minimum balance requirements at first.
Luckily, Sharebuilder was listening during the lessons and came up with something for the little guy. The buy-and-hold outfit brought dollar cost averaging to the masses (for around $12/month to maintain a regular plan with no fees for weekly micro-trades). Sharebuilder did well enough to be gobbled up by ING Direct, a financial company that never met good marketing it didn't like.
What Sharebuilder Does
Sharebuilder allows consumers to purchase buys any of two thousand stocks or funds on dollar-basis. That means you can regulary buy fractional shares or portions of a stock. Sharebuilder takes money from your account (which is funded by you automatically through bank transfers or other means) and buys blocks of stock once each week. If you have set up a plan to purchase $25 worth of Microsoft stock each week, you would receive less than a share that week Actually, you would get around one-third of one share at today's prices.
But that is the beauty of Sharebuilder. Let's pretend for a minute that Microsoft's price stays relatively stable this year. Every week, Sharebuilder/ING will purchase that one-third of a share for you. At the end of the year, you've purchased 17 shares of Microsoft.
Here is the kick in the teeth — you've spent $104 in commissions for those 17 shares. Had you used one of the big brokers and bought everything at once, your commission charge would have been maybe $20. Had you already been a big account, the trades would have likely been free. You also would have had to fund your account with $1,300 to buy those 17 shares and get the $20 rate. And the micro-investor we defined does not have $1,300 to drop on a single trade. But they can probably squeeze out $25 or so each week.
So what Sharebuilder really does is provide training wheels for the new investor. Paying slightly more in brokerage fees for the privilege of buying stock in these small, fractional amounts is part of the equation as you dabble. (Yes, you can beat the system with an excessively large weekly investment, but we're talking really big, so let's ignore that for now).
Congratulations. You own 17 shares of Microsoft. Another year or so and you will probably be able to qualify for some of the accounts that the big boys offer.
The Good Things About Sharebuilder
1) Every financial expert screams, "Pay yourself first" to the working middle class. With no account minimums and an easy-to-set up EFT system to fund your purchases, Sharebuilder removes most of the major obstacles for micro-investors.
2) Dollar-cost investing is easier for the non-trader to grasp. Promising yourself that you will invest $20 every week in Wal-Mart stock, and budgeting that amount, is much easier than agreeing to buy X number of shares each week. You will find that doing things this ways actually makes budgeting easier, to say nothing of making the investment itself more real.
3) Forbes magazine named Sharebuildr a Top 10 broker service.
Things To Remember
A) Again, if you are purchasing small amounts, you are going to pay a higher commission rate than you would at the competition. But, if you are buying big lots, you'll be paying a lower rate. Surprise, surprise, the middle class just got squeezed again.
B) There is little research on the site. What Sharebuilder calls research is nothing more than price, market cap and other quick calculations and milestones. Use Yahoo, Motley Fool, Zack's or even Microsoft's Money Central one of the other zillion places to research companies
C) Inconsistent EFT timing. Huh? What this simply means is that if you're funding your account through their electronic funds transfer option, the funds are sometimes taken on a Saturday, sometimes on a Friday, and sometimes on a Monday. The site claims Monday, but EFT timing in the consumer market still has a long way to go. I get around this by setting up Quicken to automatically show a month's worth of future trades in the check register. Then, when I am reconciling my account or paying bills, the money is already spoken for. Remember — pay yourself first.
D) Regular trades are $9.95. A regular trade is the traditional type of trade and outside your normal investment schedule. Sorry, but for someone who is investing regularly through the firm, that price is a lot more than it should be.
The Bottom Line, Loose Change and All
If you are just starting out and can't fund or qualify an account at one of the big companies, start with Sharebuilder. Educate yourself through books and business magazines and move away when you have built up a sufficiently large portfolio. Do not open an account if you plan on selling your shares any time soon (there's that $9.95 again) or if you are not sure why you are buying stock. Have an investment plan ready and then let Sharebuilder help you execute that plan.
