Expert: Gina Boykin - 11/15/2007

Question
Hello, how are you doing? I have a friend that uses a stock broker to buy his stocks. He puts a lot of money in the stocks, at least as far as the amount that I would invest. I want to invest but I want to do it online. What is the best websites to use? What hidden charges should I be looking for before I sign up? Any additional information will greatly be appreciated.

Thank you


Answer
The best place to invest is with a discount online broker.  The major ones are Vanguard, Fidelity, Charles Schwabb, TD Ameritrade, E-Trade, and Scottrade.

If you want to invest regularly, I would suggest starting with a mutual fund or exchange traded fund (ETF).

Before investing, the best place to start is in your education.  Take some time to read a little bit about the stock market and learn some of the terms.  You want to be confident when you invest, not relying on the salesperson on the phone when you call with questions.  Try www.investopedia.com or www.fool.com to start.

Now, back to investing.  Here are some steps you can take to get started:

Look at each broker's website to see how much is required to open an account.  They each have different minimums for a brokerage account, a retirement account, a child's college fund account, etc.  If you can't meet the minimum of a particular broker, you may want to try another one, or just wait and save up.  
**Note: Each broker should have an automatic savings plan.  Look at the details.  This allows you to start with less money, as long as you agree to invest more money each month/quarter.

You also need to find out what amount is required to avoid any maintenance fees. For example, if you open an account with the automatic savings plan, investing $100 a month, you may be charged an annual fee until your account balance reaches $2,000.  It's usually a very small fee, but is something to keep in mind.

Determine if you want to invest in stocks/bonds, mutual funds, or ETFs.  The fees are different.

If you invest in stocks, the commissions will be an important fee to compare among the brokers.  Don't assume you'll get the great rate on the homepage. Read the details.  The rate is usually different based on what type of trader you'll be.  It may say "as low as $9.99", but this is only if you trade 20 times a month, and could be $30 if you plan to trade less often.

Buying ETFs are just like buying stocks.  They also have commissions.  If you plan this route, check them out.

Mutual funds have a very different fee structure.  Mutual funds have a fund manager, who selects the stocks to buy and sell from the fund.  This person is paid out of the fund, as a percent of the fund's assets.  So the main way to compare mutual fund fees is by the expense ratio.  This ratio will vary by the type of mutual fund you are interested in.  For example, aggressive growth funds and international funds usually have the highest expense ratio, but they also have the highest returns (and are high risk).  Index funds usually have the lowest expense ratio.  (Index funds are a type of mutual fund that follows an index, like the S&P 500.)

If you do a search for mutual funds, look for no-load funds. The websites should allow you to select this option in your search.  A load is a fee that is basically a commission like stocks.  The only difference is that you may pay it either when you buy or when you sell, but usually not both.  (You have to pay commissions when you buy stocks and then again when you sell them - each time you make a trade.)

Also avoid 12-b fees. (These are really junk fees).

If you read the overview for each fund you are interested in, read the fees section.  It will list all fees related to the fund.  There are sometimes fees for short-term trading (for example, you may have to pay a fee if you sell the fund within the first 90 days).

I hope this answers your question.  To understand more about mutual funds and ETFs and the different types, go to the websites I mentioned above.  If you still have questions, just ask!