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Post of the Day
October 12, 1999

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Discount Brokers

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Subject:  Re: A Foolish beginner
Author:  RheS

teachy7 asks the usual question "I am foolishly leaving for work..so this will be quick!! First, I am totally impressed with this site and all of the Fools that participate. I have read both Motley Fool books and am ready to begin!! I am a bit scared(Foolish??)...which discount broker is the best for Foolish beginners like myself????"

Welcome, teachy7. I'm sorry to be the first (but I won't be the last) to tell you that it isn't quite that easy.

There is a big range of brokers, with widely different facilities, and widely different costs. Unfortunately, if you read a bunch of posts here, you'll see lots of friendly (and some unfriendly!) disagreement about which one is best.

Here's my plan for anyone who wants to choose a broker:

(1) Decide what services you want from your broker. To do this, consider what kind of investor (or trader, or wild speculator) you intend to be. Think out into time a little... you don't want to change brokers in a few months, when you're ready to amke your second transaction.

(2) To get an idea of what other people consider important, take a look at several broker comparison charts. The FAQ (link above now... used to be below), and the Discount Brokerage Center (link still below) contain pointers to several. Notice that every chart picks a different broker as best; I think this happens not because the chartmakers have been bribed, but because each of them thinks that different things are most important. The solution is for you to make your own chart, ranking your priorities.

(3) Now try reading the back postings in this board. I suggest that you read a lot of them... say six or eight weeks worth... because you'll get some flavor for the kind of people who post here, and some of the usual questions. You're watching not only for answers you don't know, but also questions you haven't thought to ask yet.... As others will warn, there's some tendency for people who are happy with their brokers to go someplace else and argue about what to invest in, so this board gets a little slanted toward problems that people have had; you can figure this out with a broad enough sample, and decide accordingly.

(4) Use the tools the Fool gives you to help evaluate messages. You can see the profile of anybody who posts (that is, you can see whatever they are brave enough to admit) by clicking on their name, in the upper left. From there, you can also see their other posts. This might give you an idea if somebody is on a one-topic rampage, or has broader interests... and whether those interests might match up with yours or be totally different.

(5) As you narrow your list of brokers, you can use the search function to find posts which mention those brokers. This will get you a better sample than asking "Who likes XYZ?" and hoping that somebody who uses them is reading today.

(6) Don't forget to look at the broker web sites, and to talk to a telephone rep. If you're looking at someone who has a local office, telephone them, or stop in, and get a feel for whether their style matches yours, and if you think you'll get the support you need from them. As for the web sites, most have trading demos of some sort, as well as making all their commissions, fees, and "fine print" available to check out. The best way to judge web site performance is to judge it for yourself, since everyone's connection to the Internet is a little different.

(7) Don't be surprised if you find the final decision coming down to something pretty trivial like which broker sounded nicer on the telephone... this means you've done your work, and found two brokers which are very close. This is quite possible; there are a bunch of brokers, and they're very competitive, which means that they steal ideas from each other as fast as they can! When you've considered your decision, and it fits your well-thought-out needs, you're going to be a happy investor.

(8) Finally, remember to pay back this board for advice, by posting your results. You'll help the next newbie if you tell about how you made your decision, and whether it's worked for you. And, if your choice is a happy one, you'll help balance the board against those people who've had trouble.

(9) The market isn't going away. While there are good things to invest in today, there will also be good things to invest in tomorrow, and the day after that. So you don't need to feel pressed to decide too soon. Making sure you're comfortable with this decision is more important, in my mind. And then be patient through the paperwork of getting the account open; you'll be trading soon enough.

A couple of my ideas (which may or may not match yours -- make you own choices!) for what might be important to a Fool:

I don't think commission costs are too important, compared to other things. Sure, every dollar you save now is magnified into many after compounding. But you don't always save the most by buying the cheapest; sometimes, a higher priced product is better value, because it works better or faster, or saves you time or effort. This is true with canned tuna, and it's true with brokerages.

If you're opening an IRA, then you care about certain things (IRA fees, for instance), and don't care about others (like margin or checking, which IRAs can't use). I think that there are enough brokers which don't charge a fee for keeping an IRA that you don't need to pay them unless you have a really strong reason for liking one of the fee-charging brokers. My broker only charges for closing my IRA, which I plan to do only when I'm dead; I can deal with that fee. Note also that IRA accounts aren't allowed to get any airline points, or extra bonus signing-up money; it's the law... and too bad.

I like sweep accounts, which are money market accounts which automatically pay interest on the cash in your account. I especially like them for IRAs, wherer you can't take the extra cash out. The fact that cash in my account is earning money market rates means I feel less pressured to find someplace else to invest it, which I figure helps keep me from doing dumb things. Some of the lowest-cost brokers don't pay much on your cash, or require a large amount of it.

I don't think it's necessary to put too much value on the research information provided by your broker; there's a lot of free (and even more for pay) info available on the net, at sites like this one, as well as the SEC's EDGAR database, and many news sites. But it doesn't hurt to look at what the broker provides, too.

I use the Quicken download; there are several brokers which support this. If you already use Quicken to track other accounts, you might find it useful. On the other hand, you can manually enter your brokerage transactions into Quicken, if you don't trade too much, and have the same ability to update prices and generate reports. Some brokers support MSMoney, too.

I've written rather a long lump, here... and it's just enough to get you started. Come back with questions... we're friendly enough here.

Fool On!

Dick Smith