Expert: Steve Hach - 3/9/2010

Question
QUESTION: I want to know how to buy stocks without using an internet website that charges fees, is this possible? What if the company doesn't offer a direct buy plan, is there other ways, maybe a free website where you can buy stocks? Also can you still by stocks in the form of a real certificate that will get mailed to you or something, instead of just holding a balance or whatever in some website, can you get physical shares? Lastly, if you have time for one more, what resource(s) can you use to find company information in order to speculate how well they're doing (merges, debt, ambitions?) to see if you should invest in them or not.  thank you

ANSWER: Hi Mike,

Thanks for the questions.

1.  I know of no "free" method of buying stocks.  Be advised that even with the direct buy plan you may have to pay a fee to the company as well as put in a deposit to be legible to buy direct--something like 10$ transaction fee, a $500 deposit to participate.  Many online brokers have very low fees now no matter how many shares you buy--like 7.95$ per trade. That is a price that is tough to beat.

2.  You can still get "real" stock shares, but typically you have to pay a broker to put them into that form.  This is known as getting them "certificated."  That can cost anywhere from 20-200$.  I am not sure why this is worth the money, unless you want to give the certificates as gifts or feel better with them in your own safe deposit box.

3.  There are lots of internet resources for investors.  Yahoo and google finance sites have tons of info on many companies.  I think that google and yahoo offer TONS of free info to include financials, dividend schedules, company news, etc.  You can also look in the library for publications like the Wall St Journal, Financial Times, New York Times, etc.  Any investor--and educated person, should be reading a paper like the NYT just to stay informed.  You might also consider the info available from AAII (American Association of Individual Investors).  Just beware of the internet chat rooms and such,  there are a lot of shady people there trying to pump their own stocks and create rumours to move share prices.

Hope this helps.

Best,

Steve

---------- FOLLOW-UP ----------

QUESTION: Cool, thanks, this helps a lot. I do have a follow-up or two though. I've seen those websites that charge $8 a trade or whatever, but shouldn't it be a percentage? What if I purchased one General Motors stock at .75 cents, do I get charged 8 bucks? Also what what trading like before the internet? Did an investor have to actually go to a trading floor somewhere, and were all these trading fees still charged? To me it makes it seem less encouraging to invest when everyone is trying to grab a fee from it. Lastly, which trading website would you recommend for an absolute beginner? (easy to understand, no minimum balance, small fees) Thanks for all your time!

Answer
Mike,

1.  "shouldn't it be a percentage? What if I purchased one General Motors stock at .75 cents, do I get charged 8 bucks?"

What if it was a percentage and you were buying $100,000 worth of GM?  Would you want to pay that?  Pricing is set by individual brokers.  Typically a huge hedge fund trading millions of dollars would get charged a penny a share.  But you are never going to get that price.  If you don't like the 7.95$ a trade, check out a site such as folio fn which charges @29/month for unlimited trades.

2.  "Did an investor have to actually go to a trading floor somewhere, and were all these trading fees still charged?"

Prior to the internet you had a stock broker on the phone to make trades for you.  Yes, fees were still charged.

3.  "it makes it seem less encouraging to invest when everyone is trying to grab a fee from it."

Welcome to the world of finance Mike!  The entire field is made up of people trying to get their cut off of other people's cash!  Can you name a business where people are NOT in it to make money?  Look at the current state of our economy, even the supposed "masters of the universe" were corrupt, greedy, and had no real idea about what was going on in their own investment banks.  However, even though they blew up the world economy they were rewarded with huge bonuses--bonuses which were provided via taxpayer largess!  Do they seem like the kind of people who are going to give you a break because you only want to buy one share of GM?

4.  which trading website would you recommend for an absolute beginner?

I would recommend any of the major websites as safe and secure, low fee, etc.  TD Ameritrade, scottrade, etrade, folio fn, etc.  However, If you are worried about paying $7.95 a trade or $29/month to run your own stocks, then you probably need to keep your money in something else.  I would look for an ETF that covered a major index such as the SP500 or something and just put your cash into that regularly over time.  If you wanted to diversify--which you should--then set up a mix of domestic and foreign index etfs along with some bond etfs and some very safe cash deposits.  

However, for the average person-- and especially the newbie, "trading" makes no sense whatsoever.  Every time you trade you get hit with a fee, and you end up losing money and impacting your overall returns.  Most people are far better off taking their money and making regular investments in an index fund over time.  Then, via the power of compound interest in 25-40 years they will have a huge amount of capital.  You just want to make sure that your capital is diversified so that you tend to smooth out the waves in the global economy over decades.  NEVER put all of your eggs in one basket--for example, think about people at Enron that had ALL of their cash in Enron stock or the people that thought their house was going to appreciate forever and fund their retirement.

Best,

Steve