I was thinking the other day about how horrible the banks are for putting your money right now, especially if you’re in your 20’s, 30’s or 40’s. With the interest rates below 1%, it’s damn near impossible to grow your money. Going back to 2008, you could sign up for savings accounts that would offer 6% interest or more. Now in 2011/2012, the only way to achieve that is through buying stocks with dividends. But, you need to be careful in how you choose your dividend paying stocks, because if you put all your eggs in one basket (for example NLY, which provides a 14% dividend, which is great!) you take on the risk that the stock and/or the dividend plummets to ‘0’ because there is never any guarantee that the rate will stay the same – and this also applies to the banks and other institutions; The APY is never fixed, it’s changing all the time. I remember when I signed up for my first online savings account after searching on www.bankrate.com (it was with FNBO Direct). I literally saw the APY fall from 6% to 1% overnight! Back then, I was really naive; I had no idea the rates could change like that.
Stocks seem like the way to go, but there’s always ‘tomorrow’ to get started. It’s really easy to get caught up in thinking you can begin investing ‘tomorrow’, and it’s easy to fall into the trap of making excuses, too. A lot of people think they need to have everything perfect before they can begin investing – in other words – they think they need to do a bunch of research to find the best mutual fund(s), or the best variety of stocks. As I pointed out in my first post, that is the wrong approach. Once you can make the decision to invest “X” amount of money, the second step is to move quickly and get signed up with an online broker. But, how do you choose from all the options out there?! Well, it’s not exactly an easy task, but it’s also not as difficult as you might think.
When looking at the options, you’ll need to consider what’s important to you. I’d suggest doing a quick search for the ‘best online broker’ on Google. You’ll find a lot of great information there, including websites with comparison charts, etc. There are even sites that will ask you a series of questions to determine what broker is best for you, such as Kiplinger’s site: http://www.kiplinger.com/tools/online_brokers/. But don’t settle with results from just one site. Make sure to look around on multiple sites, and keep in mind your own investment strategy (how aggressive, etc.). When I first got signed up, I had no idea what my investment strategy would be; I was just interested in buying into the Visa IPO and some of the more exciting stocks to me at the time like Starbucks, IMAX, and Palm. Your strategy doesn’t need to be complicated though, in fact, you don’t even need a strategy if you don’t have one right away. (Again – don’t let this hold you back from finding a broker.)
Now if you’re looking at the stock market as an investment tool to replace the horrible interest rates at the banks, you’re going to want to invest in dividend stocks, which I’ll write about in more detail later. I used to think these types of stocks were boring, and they actually are if you watch them every day or month. But if you let them sit in your portfolio for years, I can guarantee you’ll thank yourself later.
The beauty of dividend stocks is that you can combine them with what is called a DRIP, or a Dividend ReInvestment Plan. A DRIP is something an online broker offers to reinvest a dividend back into a stock. But, what if the dividend payout doesn’t equal 1 share of the stock? Well, most DRIP programs will automatically reinvest the money into partial shares, but not all of them. Also, most DRIP programs are free; In fact, I haven’t come across one that’s not. Ultimately, the #1 advantage to all this is compound interest. Compound interest works like pure magic, and it’s a really exciting topic for me. The only downside to a DRIP program is tracking the dividends when you do your taxes, but even with 20+ dividend stocks in a DRIP, that type of work is minimal.
So, let’s cut to the chase. When it comes to selecting an online broker, here are the Top 3 Things to Check:
1) Fees/Commissions
For this, I would seriously avoid E-Trade, because it’s very expensive. Also, the more services a broker provides, the more they’ll charge. If you don’t need all the extras, don’t pay for them.
2) Account Minimums
Some accounts require a minimum amount of money to invest. For example, TD Ameritrade requires at least $2,000 for a cash account. (A cash account is the place you hold your money before investing.)
3) Broker Features – (DRIP or No DRIP)
For some people, 24/7 live phone support is really important. For others, it’s important to have global trading on foreign exchanges. I think having extra research tools can really help when you’re new to investing, but most importantly, make sure the broker you choose has a free DRIP program that invests back into fractional shares. Here is a great chart to further investigate the DRIP offerings out there: http://www.onlinebrokerrev.com/other_articles/dividend-reinvestment-plans.php
To further help in your selection, you may want to look at the perks you get when you sign up with a broker by going to their website. Some brokers will offer 30 days of free trading (no commission fees), or they’ll give you a cashback bonus for signing up. But, don’t let these ‘bonuses’ trap you into making the decision. Just assume that your interest level and involvement with investing will increase over time. Also, make sure you assume the broker will be a long-term choice.
Two good resources for comparing brokers include:
http://www.fool.com/how-to-invest/broker/index.aspx (not everything is on this list, so be sure to look around Google to see what else is out there!)
http://online-stock-trading-review.toptenreviews.com/ (not everything is on this list, and it’s also biased toward optionsXpress, so this is not the best place to look)
Ultimately, the decision is up to you. There are a lot of newer sites popping up for online brokers, which means they’re new to the game and may be making some mistakes along the way (ie – tracking all of the data that goes along with everyone’s individual accounts can be challenging, and sometimes there are ‘hiccups’ along the way where your history can get deleted). I would stick with something that has a proven track record. Personally, I’ve had good experiences with TD Ameritrade and Sharebuilder, but I use these accounts for completely different purposes. Some of my friends really like Scottrade, but Scottrade doesn’t have a DRIP program. Fidelity and Vanguard look like solid choices, and Trade King looks interesting as well. Thinkorswim is another one, but its DRIP program doesn’t invest in partial shares, which can lead to a lot of lost money over time.
When you start to hone in on a few brokers that meet your style, make sure you also look at their options for IRAs. Can you invest in a Roth IRA using that broker? Can you also use a DRIP program specifically within your IRA?? The answers to these questions could help you make the final decision.
Good luck!