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Choosing an Online Broker

Reprint from

The allure of online trading is one of the biggest reasons that investors have flocked to the Web in the past few years. And why not? Now you can buy shares in any company in less than 60 seconds, and at a fraction of the cost of a full-commission firm.

You can buy and sell stocks right over the Internet at any of the more than 100 discount brokerage firms that offer online trading. Some of them are well-established discount firms, like Charles Schwab, Waterhouse, and Quick & Reilly, that have launched o nline trading services. Others, like Ameritrade, Datek, and Web Street Securities, are companies that have been launched as Internet brokers. And some online brokers are subsidiaries of well-known investment banks, such as Discover Brokerage (owned by Mor gan Stanley Dean Witter) and DLJ Direct (owned by Donaldson, Lufkin & Jenrette).

All online brokers are not created equal. There are brokers that cater to frequent traders, and brokers that offer a wide array of mutual funds that you can purchase with no transaction fees. There are brokers that provide research, and brokers that offer customers the chance to get in on the ground floor of hot IPOs (initial public offerings). No matter what your approach to investing, there's a broker out there who can provide services that can save you money. The first thing you need to do is figure ou t what's important to you. All online brokers can let you buy and sell shares of stock, but here's where the similarity ends.

Here are some points to consider:

1. How much do you have to open an account?
Some firms have no minimum requirement to open an account. Others can require a deposit of $1,000 or more before they will let you open an account. If you don't have enough to meet the minimum requirement, y ou can strike that firm off your list.

Most firms offer a smaller minimum for IRA accounts or custodial accounts. Transfer your IRA to the firm, and open a regular brokerage account at other firm, and you can avail yourself of services that you might otherwise have access to.

2. Do you want to include mutual funds in your portfolio?
Many online brokerages offer mutual fund "supermarkets," where you can buy and sell funds from many different fund families. The selection of funds varies from firm to firm, so make sure that a company offers the funds that you're interested in before you sign up. If you're not interested in funds, then you don't need a brokerage that offers a large selection.

3. Do you want to buy or sell options, Canadian or foreign stocks, or penny stocks?
Not all online brokers offer options trading, stocks that trade on the OTC Bulletin Board or "pink sheets," or stocks that are listed on foreign exchanges.

4. Is it important to be able to talk to an actual person on the phone?
Some brokerages charge a higher commission if you place an order by telephone rather than using their Web site. If you think you might need some help, or don't always have access to your computer when you might like to make a trade, make sure you won't be penalized for it.

5. Can your broker handle days when the market is very busy?
In the past, when the market has experienced very heavy trading volume, the customers at some online brokerage firms found that they were unable to log on to place orders. The online firms w ere simply unprepared for the number of customers who were trying to place orders! Some online brokerage firms will automatically give you their online commission rate (when it's lower) anytime you are prevented from logging on to their site. Check out a firm's policies, or you might be left out in the cold on the market's hottest days.

6. Will you be able to make use of the research that the company provides?
Many online brokerages advertise the "research" that's available for their customers, but the truth is that much of this information is already available elsewhere for free. It may be more convenient to access research, quotes, and your account balance all in one place, but you shouldn't have to pay for the convenience.

7. Are you interested in bonds?
Only a handful of online brokers offer bonds, and those that do usually only offer U.S. Treasury bonds. For instance, Discover Direct offers orders to be placed online for Treasury Bills, Notes, Bonds, and Zeros. Charle s Schwab offers these as well as corporate bonds.

8. Do you want to buy IPOs?
Some online brokers have begun to hook up with investment banks to offer customers the chance to buy shares in current IPOs. Wit Capital, DLJ Direct, and Trade-Well are among the first to team with the IPO underwriters (the banks that are financing the offering of stock) to provide this service. With IPOs formally available only to the privileged clients of full-service firms, many investors are interested in having access to the same opportunity.

9. Do you want the ability to write checks from your account?
Would you like a free credit, ATM, or debit card? Brokerage firms are beginning to act more and more like banks, and many now provide free check writing or credit cards linked to your accou nt.

10. Would you like to buy stocks on margin?
Margin accounts allow you to buy stocks on credit, borrowing against the value of the securities already in your account. Of course, you'll have to pay interest on the money you borrow, and you'll find big di fferences in the interest rates that different firms charge. Also, some firms require a higher minimum to establish a margin account than a cash account.

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