The Motley Fool: The Foolish Four, January 11, 1999

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by Ann Coleman (TMF [email protected])

Reston, VA (January 11, 1999) -- How do you trade? I was surprised at how many people have mentioned Foolish Four trades at commissions of $30 to $40 each. Ouch! I guess I forgot that not everyone is plugged into Internet trading.

Now, how one makes one's trades is, of course, a matter of personal preference. Shoot, you can use He-Man, Master of the Universe, if you like, or a full service broker, or Day Traders Express. ("Trades Just Fifty Cents, Executed in Less than 2.5 Nanoseconds or Your Trade is FREE!") So if you have a beloved broker who has done right by you and your family for generations, or if you really like the research reports you get from Swab ("The Sailor's Broker"), this column's not for you.

BUT, if you are wondering about online trading, don't let inertia keep you locked into a service that charges you for something you are not receiving. Don't be fooled by the term "discount broker," by the way. Long ago, when a typical stock trade commission was in the hundreds of dollars, a group of brokers including Fidelity and Schwab began to offer discount stock trading. They also offered some investment advice, or at least research tools that were valuable then and still are if you have no other source.

However, if you are already online, you have access to a wealth of information, far more than a broker could ever provide -- and most of it is free and instantly accessible. (Once you figure out where it is, of course! But that's what the Motley Fool is here for.)

The brokerages I am talking about are sometimes called Deep Discount Brokers. They offer little or no information, no stock picking advice, and not much in the way of handholding. But if you are reading this, you have the tools to make those things unnecessary. The Deep Discount Brokers are the ones with commissions under $25, some under $10 for do-it-yourself trades.

Now, I am the first admit that trading online can be scary -- even dangerous if you are not careful, but most online websites are well-designed and many are considerably better than they were just a year ago. It's hard to screw things up too badly, although if you really try, it can be done.

Hey, you learned how to drive a car, right? That's far more dangerous. You've learned how to navigate the great World Wide Web (at least well enough to get this far!). Don't let fear hold you back from something that can be potentially very beneficial.

Here's how beneficial: Say you are using a discount broker who charges $40 a trade and you plan to do nothing but the Foolish Four for the next twenty years. Since you are following the Foolish Four, you really don't need much in the way of company information. All you need is the current stock list once a year that you can get online (Today's Stock Lists).

Over the next 20 years, you make 8 trades a year -- you sell four stocks and you buy four stocks (we're simplifying here). That means your trading costs are $320 per year -- $240 a year more than you would pay with an online broker who charged $10 per trade. That "discount" broker could be costing you over $53,000.00! That's what investing just $240 a year at a 20% compounded annual return would amount to after 20 years.

I am often asked to recommend a broker. Well, we don't make recommendations -- and that's not for crass commercial reasons. (Like all our other advertisers would go somewhere else and we would be reduced to an email newsletter and have to fire most of the staff who would then starve rather than sell out to Merry Lunch's new website.) No, it's because they are all pretty good. Or equally bad if you are of a critical turn of mind.

I think that they are all reasonably good, especially for the kind of trades Foolish investors are likely to make. Much of the criticism I've seen is from people who are incensed because a trade took 3 minutes to execute and cost them $0.25 per share more than they expected.

This doesn't mean that they are all alike, however. Some are better for IRAs (the ones that don't charge a yearly maintenance fee); some have lower or no minimums, which is good for smaller accounts; some offer phone orders while others are strictly online; some don't offer Education IRAs (I don't understand that one!), etc. We have a guide to selecting an online broker that's chock full of information and advice:

Discount Brokerage Center

Also, there are several places online that rate the brokers and compare services and fees. They might also help you select one from among the many:

http://www.gomezadvisors.com/
http://www.astro.lsa.umich.edu/users/philf/www/discount.html

Figure out what is most important to you and do a bit of investigating. For example, if you are mostly an IRA investor, yearly IRA fees, or lack thereof, may be the most important thing. If you have a taxable account, the account statements or the margin interest rate may be more important. Of course, good customer service is always important.

While you are investigating, check out what your current broker may charge to close the account. You won't need to sell your stocks to transfer them, by the way. They can transfer as securities, not cash. Some mutual funds need to be liquidated, but not stocks.

One bit of advice I will offer is that unless you trade frequently, the commission probably isn't the most important thing, although for small accounts, you do want to be sure that the commission is less than 2% of your average trade size. (Math hint: Multiply your average trade size by .02 to get your maximum commission rate.)

It may take a bit of reading and effort to investigate these brokers -- that's why now is the time to get started, if you are so inclined. A week before you want to trade is not the optimal time.

Fool on and prosper!

Today's Stock Lists | 1998 Dow Returns

01/11/99 Close

Stock Change Last -------------------- CAT +2 53.00 JPM + 1/4 114.44 MMM +1 3/16 78.56 IP + 3/16 45.94

Day Month Year History FOOL-4 +1.62% 9.39% 9.39% 11.02% DJIA -0.24% 4.78% 4.78% 4.36% S&P 500 -0.89% 2.81% 2.81% 4.21% NASDAQ +1.71% 8.75% 8.75% 10.24% Rec'd # Security In At Now Change 12/24/98 24 Caterpillar 43.08 53.00 23.03% 12/24/98 9 JP Morgan 105.51 114.44 8.46% 12/24/98 14 3M 73.57 78.56 6.79% 12/24/98 22 Int'l Paper 43.55 45.94 5.48% Rec'd # Security In At Value Change 12/24/98 24 Caterpillar 1034.00 1272.00 $238.00 12/24/98 9 JP Morgan 949.62 1029.94 $80.32 12/24/98 14 3M 1030.00 1099.88 $69.88 12/24/98 22 Int'l Paper 958.12 1010.63 $52.51 Cash $28.26 TOTAL $4440.70

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