About the Author
Douglas Gerlach is the Sr. Editor of The Armchair Millionaire (http://www.armchairmillionaire.com), co-developed by Intuit, Inc. and iVillage. He is also publisher of Invest-O-Rama (http://www.investorama.com) and author of the Investorama Web Guide published by Lycos Press in 1997. Gerlach is co-creator and Sr. Editor of the National Association of Investors Corporation (NAIC) web site (http://www.better-investing.org). NAIC is the leading national non-profit investment education organization, best known for its support of investment clubs (including the well-known Beardstown Ladies) and individual investors.
Read an Excerpt
Using Your Computer and the Internet as Investing Tools
In This Chapter
* The basics of the Internet
* How to get your computer connected to the Net
* The advantages of online investing
That fairly substantial piece of hardware on your desk probably cost quite a bit more than the refrigerator or air conditioner or stove or dishwasher or any other major appliance you've got in your home. So it's only natural to wonder whether it's possible to do something useful on your computer, besides using it as an expensive typewriter.
Or perhaps you haven't even taken the plunge yet, and don't even own a computer. Before you make such a big-ticket purchase, you will want to make sure that you're getting the equipment you need to accomplish what you would like to accomplish.
And after you have the right computer, how do you go about getting online? What's the difference between an "online service," "the Web," and "the Internet," anyway?
Turning On, Tuning In, and Dialing Up
Although people often mean the "Internet" when they talk about "going online," they're really two separate things. Any two computers can communicate using telephone lines, as long as they're properly equipped. You could set up your computer to dial up a friend's house and "talk" to the computer on the other end, or send files back and forth. You would be online!
But the online world is more than just two computers tallking to each other. Using the same sort of technology, computer systems were set up to enable a lot ofusers to communicate and share information. Known as "bulletin board systems" (BBSs), these computers acted as a central hub where users could dial up, log on, and communicate with each other. These networks were named after their capability for users to write and respond to messages in a public forum, similar to a cork bulletin board.
BBSs often featured libraries of files that users could "download" (transfer to their own computer from the main computer), and ranged from networks operated out of the basement of the sysop (system operator) to full-scale commercial operations. Although many BBSs were free, others required users to subscribe for a monthly fee. Although you can still find some BBSs around, these mini-networks really hit their heyday in the late 1980s and early 1990s.
Although BBSs were great ways for users to communicate, their reach was pretty much limited by geographyusers generally aren't willing to make long-distance calls to connect to a particular BBS. And so another type of online computer service became popular, the "commercial online service." You will probably recognize the names of America Online, CompuServe, and Prodigy, three of the best-known computer networks. These networks were built to offer access to users all across the countryno matter where you were in the country, there was a good chance that you could reach a network with a local or regional phone call.
After you connected to the network, however, you were routed to a main computer along with all the other users who were online at the same timelike a giant BBS! On the main computer, you could have your choice of topics that you could discuss, or vast libraries of files that you could download. No matter what your interests, you could find someone online who was also engaged by the same topics. One big disadvantage of the commercial online services was the cost. Users paid by the hour for the privilege of connecting to the network.
"Going online" took on a completely new meaning in the early 1990s, as Internet fever began to sweep the United States. The Internet is truly a phenomenon of the 1990s, although its roots go all the way back to the 1960s. Just how popular is the Internet? According to Relevant Knowledge, an estimated 57,037,000 people were using the World Wide Web in 1998, up from practically zero in 1993. In fact, the World Wide Web didn't really even exist before 1993!
Nowadays, you can't watch a television commercial, drive by a billboard on the highway, look at a magazine ad, or pay your telephone bill without seeing the addresses of Web sites! But what exactly is the Internet? And is the Internet the same thing as the World Wide Web? It's time for a primer on the Internet and how it works.
The Internet is a global communications network. No one "owns" the Internet, and no single authority governs the entire Internet. In fact, a number of private companies, government agencies, and other organizations all operate pieces of this giant, interconnected network. Standards have been established to make sure all the groups keep speaking the same computer language and to ensure that data can travel anywhere throughout the network.
So who pays for the Internet? The Internet has a main "backbone" maintained by a handful of companies (including some familiar names such as MCI Worldcom and Sprint). These backbone providers sell access to the rest of the Internet via their high-capacity network to other companies, who sell to other companies, who sell to other companies (and so on), until, eventually, a company offers access to individual users. When you want access to the Internet, you will need to arrange it through one of the last companies in this network food chain, called an Internet service provider (ISP).
When you want to get on the Web, you will tell your computer to dial up and connect to your ISP's computer, using a small dialer program. After you're connected, however, your ISP's computer isn't your final destination. Your ISP is really just your gateway to thousands of other computers, all over the world, attached to the Internet.
Where does the World Wide Web fit into the Internet? The Web is actually nothing more than a way to send information across the global network of the Internet. In Internet-speak, the Web is a "protocol," just one of many ways that information can be delivered on the Net. If you have ever seen a Web site address, you've probably noticed that it begins with the letters http. This is an abbreviation for Hypertext Transfer Protocol, the exact name of the protocol for delivery of Web pages. Other protocols include email, for instance, and the File Transfer Protocol (FTP). The http protocol governs how text and images are sent from a Web server. This is a computer connected to the Internet that is devoted to delivering (or "serving") the pages of a particular Web site. These days, users think of the World Wide Web as being synonymous with the Internet, but they're not really the same.
Getting Online in Four Easy Steps
Although all this sounds complicated, you can get online in just four easy steps! And several of these steps couldn't be any easier. After you have taken care of these prerequisites, you can begin to explore the online world.
1. Get a telephone. You probably already have a phone that you can use to connect to the Internet, so this step is a cinch!
If a regular telephone connection isn't fast enough for you, your phone company might offer a special telephone line called Integrated Services Digital Network (ISDN)for a price, of course. An ISDN line can be many times faster than a regular connection, but can also carry hefty per-minute usage charges and requires some special equipment.
Another new technology called Asymmetric Digital Subscriber Line (ADSL) is also available from some telephone companies. ADSL works using your existing telephone lines, so you don't have to rewire your home!
For absolute beginners, WebTV is an option that can get you up and running in no timewithout a computer! You will need to spend $150 or so on a WebTV console, which will plug into your telephone at one end and your television at the other. After you sign up for a monthly account ($25), you can surf the Web just by pointing a remote control at your TV! You can buy the WebTV equipment at just about any electronics store.
Although the telephone will probably be your conduit to the network of the Internet, other new technologies just arriving on the scene promise to be faster ways of connecting to the Net. New cable modems can provide a super-fast connection to the Internet, and satellite and wireless systems are also becoming available in some parts of the United States. These are reliable alternatives to telephone-based connections.
2. Get a computer. This is another pretty easy step, right? At least if you already have a computer, that is! If you don't have a personal computer, you will probably be shopping for one, at least if you want to be a regular Internet visitor.
So what kind of computer should you look for? Basically, any new computer you purchase today comes with a pretty standard array of components that is sufficient to get you online, and many even include the software you will need to get connected.
When you shop for a new computer, you should follow this rule of thumb: Either buy the biggest, most powerful computer you can afford, or buy the absolute cheapest computer that will accomplish the tasks you want to accomplish. The rationale is that a well-equipped, state-of-the-art machine will last longer before it becomes obsolete, giving you years of service. The el cheapo version, on the other hand, will quickly become outdated; but what the heck, you didn't pay very much for it, and you can buy another!
When you shop for a computer, remember this: the bigger and faster, the better. The faster your computer's processor speed, the faster your computer will work. Having a lot of RAM can also help your computer work faster and let you do more tasks at the same time. While 14-inch and 15-inch monitors are standard, a 17-inch monitor might be easier on your eyes (if you find your eyesight isn't what it used to be).
3. Get a modem. A modem is a piece of equipment that translates the digital signals of your computer into analog signals that can be sent across a telephone line. At the other end of the line, a modem converts the signals back to digital so that the computer at that end can interpret them. The word modem actually comes from the description of how the equipment "modulates" the signal from one format to another; "modem" is a lot easier to say than "modulator/demodulator!"
Nearly all new computers come with a modem, in either an "internal" version that lives inside your computer or an "external" version that connects to your machine via a cable. Modems are available in several speeds, rated by kilobits per second (Kbps). Currently, the most common standards are 28.8Kbps, 33.6Kbps, and 56.6Kbps (also known as 56K). The same rule of thumb applies here as with the rest of your computer setup: the faster, the better!
4. Find an Internet service provider. Now that your equipment is set up, there's one more step before you get onlineset up an account with an online service provider. Companies that specialize in providing access to the Internet are known as Internet service providers (ISPs). Usually, you can set up an account that will provide you with unlimited access to the Internet for somewhere between $15 and $25 a month.
So, how do you find the right ISP for you? Finding an ISP can be tough if you don't know where to look! If you're already online, you can consult one of the directories of ISPs that are on the Web. The List (http://thelist.internet.com) and ISPs.com (http://www.isps.com) are two comprehensive databases of providers; just search by your telephone area code to find an ISP near you.
Of course, if you don't have already have an ISP, telling you to search for one on the Web is a bit like asking you to drive to the auto dealer before you own a car! In that case, check for ads in the business section of your local newspaper or listings in the yellow pages, or ask for referrals from friends or at the nearest computer store.
Some national-based ISPs serve customers all across the country. Earthlink, Netcom, Mindspring, AT&T Worldnet, GTE.net, and MCI Worldcom are some of the best-known national and regional ISPs. You might notice a number of telecommunications companies in this list, and your local phone company might also be in the ISP business.
You might also consider one of the commercial online services, such as America Online, Prodigy, CompuServe, or MSN. Besides offering their own proprietary information, these services also provide access for their customers to the complete Internet. These services have local dial-up numbers all over the country, and even all over the world. If you travel outside the country frequently, an account with AOL or CompuServe can let you dial up from your laptop and check your email from thousands of places on the globe!
So after you've found a couple of ISPs in your area, how do you evaluate them? Here are a few things to consider.
Does the ISP have an access number that's a local telephone call for you? You might find an ISP advertising in your area, only to learn that it's a toll call every time you dial up.
Does the ISP offer flat rate monthly pricing for access to Internet? Is there a limit on how many hours you can use in a month?
Does the ISP offer a free trial? Many will let you try out their service for a week or two, or even a month. If they do, take advantage of this opportunity to test them! See whether you have any trouble connecting to their network, or if you constantly get busy signals when you try dialing up. If so, you might want to look elsewhere.
Remember, you can always change providers if you need to; so don't give out your email address to hundreds of friends, relatives, and adoring fans until you're sure that you will be sticking with that provider!
Your ISP will probably provide you with all the software you need to get online, but here's a short list of what you might expect.
A dialer program does just what it sounds like: It dials your ISP and establishes a connection with your computer. Windows 95 and 98 include dialer programs, and that's all you will probably need. You will need a Web browser, probably Microsoft Internet Explorer or Netscape Navigator. Both can be freely downloaded from the Web from the Microsoft Web site (http://www.microsoft.com/ie) or Netscape site (http://www.netscape.com/computing/download).
Internet Explorer and Navigator Aren't the Only Browsers in Town
Although Internet Explorer from Microsoft and Navigator from Netscape Communications are the most popular Web browsers, you do have other options for surfing the Web. A Norwegian firm named Opera Software makes a Web browser (called "Opera") that is small and fast. The installation file is about 1 megabyte in size (compared to more than 10 megabytes for the full packages of the other browsers), and Opera can run well on slower computers (such as older 386 and 486 PCs). In nearly all respects, you will get the same features as you will find in other Web browsers-and some you won't find anywhere but in Opera. You can download the browser to try it out at http://www.operasoftware.com; if you like it, there is a nominal fee to register the program.
An email program is essential, and both Microsoft and Netscape include free email software with their full suite of Internet tools. Eudora is another popular email program, and a free version is available on the Web (http://www.eudora.com). A full-featured version of the program, Eudora Pro, can be purchased if you find yourself using email a lot and might be able to use some of the software's advanced capabilities.
Those are the essentials! You might also occasionally find a use for FTP (File Transfer Protocol) software, to upload and download files, or Telnet software, to connect directly to a remote computer, so those programs might be included in the software you get from your ISP.
All these new programs can take some time to really master, but the best way to learn them is to practice! Don't forget to make use of the Help file that comes with the program, too (and reading the manual is a good start!). Many developers of online software include their user manuals on their Web sites, so drop by there if you have unanswered questions.
Six Reasons Why Investing Online Is Goodand Good for You
Now that you're online, what about this investing business? One of the primary reasons that individuals are flocking to the Internet is because they want to use the many tools and sites related to personal finance and investing. And it's certainly true, as you will learn throughout this book, that there are some really terrific advantages to online investing. Here are a some advantages of the Internet when it comes to building a portfolio.
* The Internet can save you time. Before the Web, if you wanted to read the filings a company made with the SEC, you had to call the company and request that they send you a package of information. A couple of weeks later, an envelope would arrive. Today, you can go to the SEC's Web site and get the information in minutes.
* The Internet is very convenient. It's hard to beat the convenience of downloading a stock report from the Web, compared to driving to the public library to make a photocopy of that same report. And, the Internet never closes, so feel free to do your investment research in your bathrobe!
* The Internet provides access to more information than you could get at your local library. With tens of millions of pages on the Web, there's no way any library can stack up. And there's more information being published online every day! Much of the information that's online is only available in that mediumyou won't find it anywhere else.
* The Internet can save you money. Brokerage commissions are at an all-time low, something that's made possible only by the low costs to firms of servicing customers on the Internet. It can cost less than $8 in commissions to buy or sell up to 5,000 shares of stock, if you're willing to place your orders online.
* The Internet can offer you access to other investors who share your approach. There are countless communities of investors on the Web, each one focused on a particular style or method of investing. Without the Web, you might never have the chance to meet and discuss potential investments with people who share your approach to the markets.
* The Internet hosts a growing amount of educational investment resources. If you don't know how to invest, you can learn from the many tutorials, glossaries, lessons, workshops, and seminars available online. You can learn how to start investing, how build a portfolio, or learn the lingo of Wall Street, all on the Web. And The Complete Idiot's Guide to Online Investing will show you how!
The Least You Need to Know
* The Internet is a vast network that connects users from all over the world. There are other online services as well, but the Internet and the World Wide Web have become synonymous with "getting online."
* All you need to get online is a telephone, computer, modem, and an Internet service provider. You will need to find the right provider for you, but you can often try out a company for a couple of weeks to get some firsthand experience.
* After you're online, you can look forward to enjoying the advantages of using the available tools to complete many of the tasks of investing.
Table of Contents
I. GETTING STARTED ON THE ROAD TO SUCCESSFUL ONLINE INVESTING.
1. Using Your Computer and the Internet as Investing Tools.
Turning On, Tuning In, and Dialing Up. Getting Online in Four Easy Steps. Six Reasons Why Investing Online Is Good-And Good for You.
2. Understanding the Basics of Personal Finance.
You Gotta Learn to Swim Before You Surf. It All Starts with Saving. Do You Appreciate Compound Interest? Setting Goals and Meeting Them. Building Your Plan.
3. “Debt Is Saving in Reverse”.
They Don't Call It “Debt Burden” for Nothing. Spend Not, Save Lot. Finding Great Credit Card Rates on the Web. If You Need More Help Climbing Out of Debt.
4. How the Stock Market Works.
Understanding the Stock Market. Why Do Companies Go Public? Inside a Stock Exchange. How a Trade Is Made. A Tour of Stock Exchanges on the Web.
5. Principles of Investing for the Mathematically Challenged.
The Riddle of Risk and Return. Not Putting All Your Eggs in One Basket (a.k.a. “Diversification”).
6. Learning More About Investing.
Educational Web Sites. Investment Clubs-Online and Off.
II. INVESTING IN MUTUAL FUNDS.
7. The ABCs of Mutual Funds.
What Mutual Funds Are. What Funds Are Not. Index Funds-Guaranteed to Match the Market. Strategies for Getting Started in Mutual Funds.
8. Finding and Researching Mutual Funds on the Web.
It's a Family Affair.
9. Getting Cyber-Advice About Funds.
Mutual Fund Reports. Online Guides Through the Fund Forest. Yakking About Funds. Searching for Funds in All the Right Places.
III. INVESTING IN STOCKS.
10. Strategies for Investing in Stocks.
Fundamentally Speaking. Getting Technical. What a Difference a Day Makes. Common Cents or Nonsense. Investing on Autopilot.
11. Building a Portfolio of Stocks.
Diversify, Diversify, Diversify. Finding the Right Balance.
12. Finding the Right Stocks on the Web.
Getting Tips from the Pros. Hot Tips and Chilly Dogs. Separating the Wheat from the Chaff-Online Stock Screening. Hard, Cold Analysis Tools. Getting Social About Stocks.
13. Researching Stocks on the Web.
The Data, Just the Data, and Nothing But the Data.
14. Buy, Sell, or Hold Begins with Buy.
Cost Versus Service-The Battle Between “Full-Service” and “Discount Commissions”. Cheap, Easy, Convenient-Online Brokerage Firms. How to Make an Online Trade.
15. Skipping the Broker Altogether.
Successful Investing, DRIP by DRIP. Online Services with a Flair for DRIPs. Directory of DRIPs and Direct Purchase Stocks.
IV. MANAGING A PORTFOLIO.
16. Recordkeeping Versus Portfolio Management.
Good Recordkeeping Is a Good Thing.
17. Keeping Tabs on Your Portfolio.
Maintaining the Right Balance. Tracking Your Portfolio Online.
18. Getting Price Quotes Online.
Serving Up a Slew of Quotes. Where to Find Historical and Daily Data. Now Available Live!-Real-Time Quote Servers.
V. THE DARK SIDE OF THE WEB.
19. Hazards and Pitfalls of the Online World.
Security on the Internet. Protecting Your Privacy. Dealing with the Cookie Monster. Warning: The Internet Can Be Contagious!
20. Online Schemes and Ploys to Get Your Money.
The “Pump and Dump”. Hot Tips and Sad Stories. “Newsletters” Aren't Always What They Seem. Watching Your Step: How to Protect Yourself and Your Money. Check Before You Send That Check.
VI. PUTTING IT TOGETHER.
21. How to Retire a Millionaire.
Understanding the Alphabet Soup of Retirement Plans. Building Your Retirement Plan Online.
22. Paying for a College Education.
Understanding Available Options. Figuring Out How You Are Going to Pay for College.
23. Planning to Take Care of the “I Wants”.
Planning for a Home, Boat, or Dream Vacation. Where to Save and Invest for Your Short-Term Goals.
24. For Every Investment You Might Consider, There's a Web Site (or 50) to Confuse You.
How to Lose a Bundle Fast in Commodities. Are Options a Choice for You? Blessed Be the Bonds That Yield. Ten Things to Consider Before You Invest in Anything!.
Glossary. An Online Investor's Glossary.
On Friday, March 5th, barnesandnoble.com welcomed Douglas Gerlach to discuss THE COMPLETE IDIOT'S GUIDE TO ONLINE INVESTING.
Moderator: Good afternoon, Douglas Gerlach, and thank you for joining us to chat about THE COMPLETE IDIOT'S GUIDE TO ONLINE INVESTING! How are you today?
Douglas Gerlach: Thanks, I'm happy to be here! I'd like to welcome everyone to barnesandnoble.com, and let you know that I'm looking forward to your questions.
Andrew Sartin from Cos Cob: What makes your book different from all the other online trading books that are out there now?
Douglas Gerlach: THE COMPLETE IDIOT'S GUIDE TO ONLINE INVESTING was written with three types of people in mind -- those who are new to investing, those who are new to the Internet, and those who are new to both! I really aimed to write a book that would help "average" people understand how to use the Internet to become better investors, not to explain some exotic strategy that requires you to become an Internet junkie in order to build a profitable portfolio. You don't need to be a day trader in order to use the Internet and its many financial tools and resources.
sammynyc from New York: Hi, Doug. What is the best way to get started with online investing? How can you pick a good online service?
Douglas Gerlach: Well, I suppose you know that the first thing I'm going to suggest is that you read my book. But seriously, I think that "online investing" isn't much different than investing the "old-fashioned" way. The first thing you need to do in any case is to figure out the best investing strategy for your particular personality and goals. Are you a long-term investor who doesn't want to spend hours every day and week on your portfolio? Are you a "hyperactive" trader who wants to make maximum profits and can handle maximum risks? Are you looking for income right now or are you looking for a portfolio to pay for college bills down the road? There are resources, tools, and web sites on the Internet to help you accomplish all these goals. But an investor who's trading stocks frequently might not be interested in the same sites as a buy-and-hold mutual fund investor. As for choosing an online broker, there's probably no single best firm for everyone. Your choice of an online broker will depend on your own investing style and needs. There are brokers with dirt-cheap commissions, brokers with great service, brokers that also have bricks-and-mortar offices, brokers with toll-free phone numbers and those without. There are brokers who service options trades, penny stocks, and mutual funds, and those who don't. My advice is to check out all the firms, evaluate your own needs, and then take a firm for a "test drive." If you don't like them, switch! And remember, you don't have to commit to keeping all your accounts at the same firm, so you may be able to take advantage of the services from several brokers by opening an IRA at one and a regular brokerage account at another.
Martin Blonger from Chicago: What protections exist for someone who does an online trade? What if a mistake is made? What do you recommend as an insurance policy?
Douglas Gerlach: When you trade online, you're taking your portfolio into your own hands. Any mistakes you make are yours and yours alone. You need to read the brokerage firm's customer manual and understand the types of orders that you can and can't place, and any time restrictions that may be in place. For instance, one firm won't let you place market orders for the next day in the hour following the close of the market. Their system just can't handle those. Now, they expressly state this policy, so if you place a market order during this time, you can't complain if it didn't go through the next day. One way to protect yourself when using online brokers is to establish accounts at multiple firms, then you'll always have a better chance of logging on during heavy market activity.
Kyle from Nebraska: Does your book have a directory of URLs to other investment sites?
Douglas Gerlach: THE COMPLETE IDIOT'S GUIDE TO ONLINE INVESTING includes descriptions of a couple dozen web sites, and how to use the tools they offer. My first book, INVESTOR'S WEB GUIDE, is much more of a directory, and includes about 1,500 web sites with descriptions.
Faye Finch from Washington, DC: How much capital do I need for an initial investment?
Douglas Gerlach: Some online brokerage firms require an initial minimum investment of $0 (that's zero dollars). Others require $1,000 or $2,500 or $10,000. You can also invest in some mutual funds with as little as $50 a month, and I also devote a chapter of the book to web sites that teach you about DRIP investing -- dividend reinvestment plans -- where you can invest as little as $50 or $100 in stock of blue chip companies.
Bob from Boston: How safe do you think it is to trade online given all the outages of the past weeks?
Douglas Gerlach: If your investing strategy requires immediate access to your brokerage account, then there are two things you could do. You could set up accounts at multiple firms, ensuring that you'll probably be able to access at least one account at all times. You could also choose a broker that offers telephone trading at no additional cost. Some brokers charge $35 or $45 for a telephone trade, while an online trade at the same firm might be $12 or less -- and other firms charge the same for telephone trades, broker trades, and online trades. Remember, it's not just the brokerage firm's computers you have to worry about. If your ISP crashes, where would you be then? And it's not unprecedented for a major leg of the Internet to crash, either, which could also make your brokerage firm unreachable on the net. The best protection is a good backup plan.
Adam T. from New York: What kind of portfolio do you recommend for someone who is just starting investing -- who is in their 20s?
Douglas Gerlach: Adam, you've got 45 years or more until you start getting close to retirement. And in 2040, who knows what the average retirement age will be? So most experts would say that you can afford to invest rather aggressively, 100% in stocks and stock mutual funds. But you should remember that the key to long-term investing over such a very long period isn't how well you invest, but how regularly you contribute money to your investing plan. Your savings will compound and grow incredibly over 45 years, even if you just keep pace with the stock market's average return. An S&P 500 index fund makes a great core portfolio for just about anyone, and then you can invest in growth stocks if you enjoy stock-picking. I recommend the National Association of Investors Corp. (NAIC) and their long-term growth stock selection guide as a place to start. They're on the Web at www.better-investing.org.
Gordon Lundene from Los Angeles: Are there any online investment clubs where members research companies but don't make any purchases as a club? And how do they control the membership so it doesn't include stock promoters pumping up their penny stocks?
Douglas Gerlach: I'm a member of an online investment club, but we invest real money (at least $20 each a month). The problem I've seen with formal clubs where members don't invest real money is that there is no motivation for members to contribute research! Sure, there's excitement at the beginning, but it eventually fades, and then the whole club tends to fall apart. You might try NAIC's I-Club-List, www.better-investing.org/iclub/iclub.html, for a discussion forum for growth stocks. Each month they discuss a particular company, with members contributing research and opinions.
Brian from New Jersey: What is your recourse if you think you've made a trade online, but then it turns out you didnt?
Douglas Gerlach: The online brokerage firms vary considerably when it comes to providing trade confirmations. They all do in some form, though it may be an email message, fax, phone call, or "order status" page on their site. It's your responsibility to monitor your trades and make sure that you get the confirmations. One problem with the online medium is that no "paper trail" exists. If you called in a trade to a live broker, most firms record those calls, so you have a backup if something goes wrong. But on the Internet, there's no way to verify trades if something goes wrong, so it's up to you. Your brokerage firm should provide the procedures for formally filing a complaint, and you should go up through the organization, following their procedures. If you can't go any higher or get satisfaction, get in touch with NASD (www.nasdr.com).
Jason Hesseling from Madison, WI: Good afternoon, Doug. I don't know much about online investing, but I was wondering what the benefits are with online investing over a local stockbroker. How much lower will the commissions be if I invest online?
Douglas Gerlach: Minimum commissions at an online broker range from $7 to $29 for stock trades, compared to what you might pay $75 or $150 for at a full-commission firm. But I can't just recommend that you dump your broker! If your broker is providing services beyond simply making trades for you (such as financial planning or tax assistance), then that's part of what you're paying for when you make a trade with your broker. An interim step might be for you to open an account at an online firm to test the waters. Most full-service brokers realize that their customers are also using online discount brokers, so it's not an act of infidelity! Just don't cut off your broker entirely, taking his or her tips and then not buying them in your full-service account.
Don Johnson from Washington, DC: Doug, I have just started a mutual fund last year, and I recently received the "Armchair Millionaire" which suggest that one diversify ones portfolio to reflect the S&P 500, Large Caps, and Small Caps. What's your feeling on this, and do you recommend a model starter stock portfolio such as GE, IBM, Lucent Tech, Wal-Mart, and McDonalds?
Douglas Gerlach: As a matter of disclosure, I'm the Senior Editor at ArmchairMillionaire.com! I believe that the Model Portfolio that's been developed there is a great portfolio for people who want to be able to sleep at night knowing that they've achieved a portfolio with the maximum possible reward at the least risk. It's a great starter portfolio, or a core portfolio, that uses index funds and can be replicated in a 401(k) or IRA account pretty easily. From there, you can explore stocks like those mentioned -- a bunch of solid, blue-chip companies who aren't likely to go out of business anytime soon. Of course, many of those companies are at all-time-high prices, so it can be hard to find bargains in stocks like these. Let me just add that ArmchairMillionaire.com is a good example of a site that caters to those who want to learn about investing, but who don't want to be hyperactive Internet stock traders.
Ed Meehan from Brick, NJ: Were a husband and wife, both retired, with no pension, only Social Security. In an effort to increase income, we have been looking into closed-end bond funds, around 8 or 9%. Whats your advice? Thanks in advance.
Douglas Gerlach: It's important to remember that bonds have risks too. Many people think bonds and bond funds are "safe" or "conservative" investments, and that may not be the case. Another point I'll make is that if you're a fixed-income investor, it doesn't save you much money to try to "do it yourself" as an investor. With stocks, you can trade much more cheaply online, cutting out the full-service broker entirely, as long as you're willing to do your homework. With bonds, the commissions to buy them are so cheap, even at a full-service firm, that I think it's tough to make a case that you should try to figure this out yourself. You can talk to a broker and see if he or she will help you set up a laddered portfolio that might increase your return a bit while minimizing the overall risk in your portfolio. (Just remember that I'm not a financial expert! Online, you can try the Bond Market Association at www.bondmarketassociation.org.)
Andrew from Boise: Hi, Doug, thanks for helping us all out. This may be touchy, but&. What is your opinion as to the quality of the advice in the Motley Fool Investment Guide (assuming you've seen it)?
Douglas Gerlach: I have nothing nice to say about the Fools in public (and in private!). Some of my best friends are Fools, too! Their books and their web site are terrific resources for investors who are interested in investing sensibly.
Stan from Calgary, Canada: Doug, what would be your top 5 DRIP companies that don't charge any service fees?
Douglas Gerlach: You can search for DRIP stocks that meet any criteria at www.netstockdirect.com, including those that don't charge service fees. A couple of stocks that come to mind (which may or may not be reasonable investment ideas and may or may not have fees, depending on my memory!) are RPM, Clayton Homes, Invacare, and Intel.
Mary from Atlanta: I have joined the 401(k) at work and I have recently joined an investment club. What is the next investment idea I need to be looking towards?
Douglas Gerlach: Mary, max out that 401(k)! Make it your goal to contribute the maximum to your 401(k). Start a Roth IRA if you're eligible; you have until April 15th to do it for last year. Keep investing in your club, and then start a few DRIPs or open a brokerage account. The idea is to keep putting money into your investment accounts, and to continue through the next market downturn (whenever that may be) and no matter how long the bear market may last. Investing regularly is really key -- but congratulations on taking the first steps toward long-term financial success!
Louise from Jacksonville, FL: Can I buy municipal bonds on the Internet? If so, are they offered by discount brokers?
Douglas Gerlach: Louise, Discover Direct has announced that they are going to be the first major discount online broker to offer online municipal bond trading. Expect that later this year.
Jill from Portland: Hi Doug, do you think Y2K will affect the investment landscape? Do you agree that the entire economy is going to plummet?
Douglas Gerlach: Jill, I don't think the US economy will plummet. I worry more about other countries (like Russia or Japan or China) and how their computers may handle the problem. It will be interesting to see what happens to those companies who are big into the Y2K business right now, once Y2K is over! But I don't plan on doing anything differently in my personal accounts.
Ray from New York: Do I pay capital gains tax even if I sell a stock but leave the money in the online brokerage firm or reinvest it in another stock via the same online brokerage firm?
Douglas Gerlach: Ray, yes, you pay capital gains whenever you sell a stock at a gain, even if you reinvest the proceeds or leave it in your account.
Krys from New York: Hi -- I have a question about splits: If I buy in between the record date and the split date, what happens? Am I better off buying before, in the middle, or after? Thanks.
Douglas Gerlach: It doesn't matter -- when you buy shares after the record date, they include a "due bill" for the new split shares that are delivered to your account by the previous owner (the owner on the record date) on the day of the split. This is all transparent to the investor; your brokerage firm handles it for you.
Joan from New York: In choosing an online trader, what should we look for and what should we look to avoid? Can you tell us the names of the most reliable companies?
Douglas Gerlach: There are over 100 companies that offer online stock trading right now, though the market is dominated by 20 or so firms. I don't want to go into names of firms, but I describe ways that you can evaluate a brokerage firm in my book, including the web sites at www.gomez.com, www.nasdr.com, and www.sonic.net/donaldj/.
Laurie from Hoboken, NJ: General question: Where would you put money for a child's college education, if the child is two? And should it be in your name or the child's name?
Douglas Gerlach: Hi, Laurie. This is more than a hypothetical question since I have a four-year-old myself! The rule of thumb when investing for college is that you should take advantage of any tax-advantaged accounts (like an Education IRA) first, if you're eligible. Then you can put some money in the child's name, since the gains on this money will be taxed at the child's rate (up to a point) instead of the parents' rate -- but you don't want to put too much money in the child's name, since ultimately that can reduce your financial aid package. And kids can take control of money that's in their name when they turn 18 or 21, depending on the state -- and how they use it may not be what you had in mind! With 16 years until you need the first of the savings for college expenses, you can invest fairly aggressively in the stock market for at least the next 10 years. An S&P 500 index fund works great for this. There's an entire chapter in my book that covers saving and investing for college using online tools -- you'll probably find it helpful!
LarryP from Montana: Doug, congratulations on your new book! I've ordered it but haven't gotten it yet, and am looking forward to reading it. As you know, I really like accumulating DRIP stocks to build an investment portfolio. Do you cover this in your new book and do you have specific sites to recommend? Also, how long did it take you to research and write the book? I'm sure that you are pretty busy with your duties at the ivillage, investorama and AM web sites, and that it was hard to squeeze out the time for your research and writing.
Douglas Gerlach: Yes, Larry, I cover DRIPs in one of the chapters, but more from a beginners perspective -- sites like my own DRIPCentral.com, DRIPAdvisor.com, NetStockDirect.com, and DRIPInvestor.com -- probably all sites that you know about! Thanks for dropping by!
Tim from Indianapolis: Can I get a better price on a stock if I go through a full-service broker rather than online? For example I've heard that you can usually get 1/8 of a point better with a full-service broker.
Douglas Gerlach: Yes, it's possible that your full-service broker may get you a better execution price, but you have to consider whether this is still cheaper than trading online -- 1/8 of a point on 100 shares is a savings of $12.50, which may or may not make a discounter cheaper. There are some online brokers who offer "price improvement," and you might look to these as a way of getting better executions. ECNs (Electronic Clearing Networks) are also becoming more popular, and these offer better executions in most cases. In general, you give up some execution for the cheap commissions when you go the online discount broker route.
Tim from Indianapolis: On a day like today, I heard it's also very difficult to get orders placed due to heavy volume. Would you agree with that?
Douglas Gerlach: All of the online brokers are working frantically at upgrading their capacity, but the problem isn't just theirs. For instance, when millions of people are downloading the Starr Report at one time, the entire Internet can slow down -- and you might have trouble getting through to your broker, but it's not necessarily their fault.
Karen M. from Hillsboro, OR: Do you think it is possible to make money day trading over any length of time? What do you think about Wade Cook?
Douglas Gerlach: Day trading is to investing as climbing Mount Everest is to backpacking -- it's the extreme version of the sport. Evidence so far shows that some people can make a lot of money in day trading, but there are many more who end up losing their shirts. Wade Cook has a good marketing machine. Beyond that, I'd just recommend that you do your homework before you invest thousands of dollars in any investing course or workshop or materials.
Karen Keleman from E. Wenatchee, WA: Doug, as a member of a newly formed investment club and of NAIC, I am happy to be able to have the opportunity to "chat" with you. Your website is the most comprehensive and helpful site that I've found to accumulate research on a stock. I'm sure that your book will help us, too. Could you give me some insight into how and what tools you use to analyze the newer technology stocks, since many don't have the history yet to be analyzed with a Stock Selection Guide? Thank you, and I wish you success with your book!
Douglas Gerlach: Unfortunately, NAIC's Stock Selection Guide doesn't work well in evaluating emerging companies. My personal solution to that is to avoid companies that don't have good operating histories! You might be surprised that my personal portfolio is rather boring, but I've had my share of technology stocks that have gone up 500% or 700% in a few years, stocks that I evaluated using NAIC's SSG. So I'd say its more important to stick with your investing methodology -- there will always be some stocks that you miss, but you'll be avoiding many more of the losers if you stick with the tool.
Harold from Georgia: What is a typical day like for Douglas Gerlach?
Douglas Gerlach: Besides the fact that I spend way too much time on the Internet, my day isn't too different from that of most New Yorkers -- I go to work, come home to my family, sleep, and do it all over again! I wish I had more time to read books (non-financial books, that is!) and I could use a good long vacation someplace warm!
Amy from New York, NY: Are there one or two web sites or magazines that you think a serious investor must read?
Douglas Gerlach: Hi, Amy -- well, I read Online Investor cover to cover each month, but I guess that's to be expected! Otherwise, I like the financial coverage in BusinessWeek -- they do a good job of covering online resources for investors, and personal finance topics too. I also like Barron's, both online and in print, and the Microsoft Investor web site's editorial content. There are other research sources that I use, too, but for reading, these are my top picks (at the moment and subject to change).
Moderator: Thank you so much for joining us this afternoon, Douglas Gerlach, and for fielding all our questions about online investing, and offering some of the tips found in THE COMPLETE IDIOT'S GUIDE TO ONLINE INVESTING. Before you go, do you have any last words of advice for your online audience?
Douglas Gerlach: Thanks. Here in New York, there's a chain of discount department stores called Syms, whose founder, Sy Syms, has a motto: "An educated consumer is our best customer." I always think of that slogan when I'm asked how investors can protect themselves when they go online. And so I'll say: "An educated investor is the best investor." If you understand the basics, and are grounded in a solid investment approach, then you won't be thwarted by the Internet -- either by listening to tips that turn out to be rotten, or by sending money to invest in an eel farm. Do your homework and stick to the basics, and you can find financial success for a lifetime.