How to compare online share trading platforms?

There are a lot of options available to someone looking for an online stock broker. Most of these brokers are cost – competitive and there are a lot of things you have to keep in mind. Here are some key things that you need to think about when evaluating an online broker.

Cost: This is the most important factor and you need to compare the cost of transactions across certain categories such as:

  • Market or Limit Trade
  • Options Trade
  • Automatic Investing
  • Buying No Load Mutual Funds
  • ETFs

Price of Assisted Trades: Some brokers charge you extra if you call up and place an order. If you intend to call up and trade, then make sure you find out what they charge on phone trades.

Promotional Offers: Some brokers give you cash – back if you switch to them from some other broker. If you already have an account and are looking to move to another broker, then be sure to check out the rewards for moving out.

Inactivity Fee: Some brokers charge you inactivity fee if you don’t trade for a quarter or sometimes even a month. If you are not a regular trader – watch out for the inactivity fee.

Account Minimums and Differential Pricing: Some brokers require you to keep a minimum balance and then still others would charge you a lower price if you maintain a certain balance or trade above a certain number

Automatic Investments: If you are not a market timer and are happy to invest a certain amount in fixed securities recursively, then you need to find out whether the broker offers you the convenience of automatic investment. You can select a schedule and the broker will automatically execute your trade according to that schedule.

Special Rebates: Sharebuilder has certain special rebates for Costco Members and so if you have a certain membership already and a broker gives you some special offers on that – be sure to compare the brokers in this new light.

Availability of Certain ETFs: For a long time, I assumed that you can buy any ETF through any broker. I was surprised to see that there were certain ETFs that weren’t available through my broker. If you like to research and buy stocks and funds of a slightly exotic nature – like something that replicates the Australian Dollar or Gold funds, then you will need to find whether your broker offers such funds or not.

Customer Service: Read reviews about the brokers you are screening and read about people’s experiences in dealing with them. Reading reviews on forums sometimes gives valuable insight about how a broker really acts, when you need them.

These are some factors that I think are important to consider while selecting a broker. Different users will have different needs and based on what is important to you – evaluate the various brokerages that offer their services.

A slightly modified version of this post appeared on Cash Money Life earlier.

Beware of the convenience of online share trading

Generally speaking, the more convenient a product is, the better it is for the customer. However, in the case of stock trading platforms, — this is not always true.

I was reminded of this when I was talking to a friend about the good old days of calling up a broker and buying stock, or sometimes even heading over to the brokerage to conduct a trade.

That’s because there is a slight conflict between a convenient share trading platform, which makes it easier to buy and sell, and long term investing philosophies.

The conflict is as follows: Most investors are better off being long term investors who hold stocks for a long period of time and let their investments grow. So for most people, the lesser they trade, the better it is.

However, the goal of any good online and offline stock brokers should be to make trading as easy and cheap for their customers as they possibly can. Convenience and cost – effectiveness will drive people to buy and sell stocks frequently and that goes against the goal of profitable long term investing.

An online stock trading platform is a lot easier to use than a traditional broker, and that is both a positive and a negative.

Anyone with an internet connection can get used to an online stock broker, and start trading in minutes. It makes it easier for you to deal in derivatives, commodities and currencies.

The problem is that just because it is easy to use, — it becomes easy to abuse as well. Online brokerages are great because they make it easier to buy and sell stocks, and they are cheaper than traditional brokerages. But just because you can buy and sell easily, doesn’t mean you do that.

For an average investor being a long term investor is much better than being a trader, and frequently getting in and out of stocks. Trading frequently increases costs and eats into your profits.

The objective of investing is to make steady money in the market, and that is best done when you leave your investments alone for a long period of time.

Realizing that this subtle conflict exists is a great thing because it increases awareness, and helps you avoid easy but foolish trades.

If you are going to buy or sell something, which you are not sure about, — take some time to think how likely you would have been to do this trade if it weren’t so easy. That should tell you how much of a part ease of use is playing in influencing your decision, and if that is a big part of it, then you should rethink your decision.

Macroshares housing ETF UMM and DMM close down

Last July I wrote a longish post about two exotic ETPs – Macroshares UMM and DMM, which were a 3X leveraged ETP, for the housing market. These were similar to an oil ETP (UOY), which terminated early, and I am not surprised to hear that Macroshares UMM and DMM have also been terminated early.

A commenter – Bob Shreve had a clever comment on the last post:

I think these micro-niche products should have been called UMM and DMMER.

And it looks like his observation was right on the money.

A few people thought that this complex instrument can hedge their exposure to their houses, but in the end, it wasn’t much help.

I am always wary of complicated financial products and this will further push me away from them.

The Reformed Broker had a very good post about these in July, and another excellent post today. Here is what he said today:

In a screed back in July of 2009, I let loose on this misguided attempt to attract casino capital to an investment product that made absolutely no sense structurally or thematically.  These products, as created, were not a hedge against a homeowner’s own house, nor were they particularly robust enough to work as trading vehicles.

Here’s what I said at the time:

Why am I so angered by the fact that these Frankenstein creations were permitted to slither out of the freakshow tent they belong under?

How about these factors for a start:

Lack of serious price discovery?  Check.

Lack of actual underlying real estate holdings?  Check.

1.25% expense ratio?  Check.

Disclaimers in the prospectus that absolve these instruments of any responsibility for not being able to perform the way they are supposed to?  Check.

The good news is that both UMM and DMM (aka Up and Down) were quietly shut down at the end of last year.  I would congratulate MacroMarkets (the funds’ creator) for doing the right thing, but upon further investigation, it turns out that there was a clause that required the funds to manage a minimum amount of capital to continue trading, which they could not raise.

The entire post is worth checking out, and just for the heck of it, if you didn’t read my earlier post, check that out to get a sense of how this product was supposed to work.

Interesting things on this blog in the past year

I thought I’d write a post describing some interesting things that happened in the blog last year. All of these except the first one were totally unexpected and I have dwelled long hours thinking about them. Whenever I talk to someone I know about OneMint, one of these stories come up, so I thought I’d share it with readers.

I hope you enjoy these little stories too.

1. Naming my carnival: OneMint – Economy and Your Finances Carnival – Regular readers know that every other Sunday there is a carnival on this site. You will see that this is called: Economy and Your Finances Carnival. However, that’s not the name it started off with.

In the beginning, I prefixed the carnival with “OneMint”, and there is a little story behind that. When I started off my blog, and searched for “onemint” on Google, it would return results and say: “Did you mean OneMind?”

That really annoyed me.

I had planned to start a new carnival with the hopes that some bloggers would link back to it. I knew a little about search engine optimization (SEO), and it seemed to me that if people link back to the carnival with “OneMint” in the title – Google would at least stop asking people if they meant “onemind”, when they typed “onemint” in their search bar. I have no idea whether Google really works like this, but I am happy to report that if you search for “onemint” on Google, it no longer thinks you made a typo.

2. Chinese Visitors: According to me, this is by far the strangest thing that happened here. I use Google Analytics to measure traffic on this site, and one day I noticed a relatively large flow of traffic from China. Normally, there are a few visitors from China, but this day, the number was huge. When I looked at it in a bit more detail, I saw that a Chinese website had translated my post on Google China – G.Cn, and put it up on their website. All that traffic was from that link. Now that is something I could have never dreamed of, and much to my surprise, even after the initial flow of traffic, some visitors stuck around, and I can still see Chinese visitors. Thank you very much!

3. Helpful Readers: This site gets a moderate number of comments, and one great thing I noticed about them is that questions get answered. If you look at the posts that have a reasonable number of comments (like this, this or this) – you will see that readers answer a lot of questions. I feel really great to think that we have a helpful reader community in here. Thank you!

4. OneMint Got Hacked: Sometime last year, the site got hacked. The weird thing about the hack was that it injected spammy Viagra links on the site, which were not visible to readers. Those links were only visible to search engines, and that screwed me up pretty badly. I used to see Prescription drug ads on the site and I got suspicious but didn’t know enough to investigate properly. Finally, one day the OneMint feed got corrupted, and people who were subscribed to OneMint’s feed on Google Reader were seeing nothing but spammy links. It took quite a lot of effort and brilliance of my good friend – Robin to help me get out of that mess. Big thank you to Patrick who wrote me an email telling me about the problem and Kim who helped trouble shoot the problem. Thank you guys!

I hope you liked these little stories, I hope we have more interesting and positive experiences in 2010, and stay away from spam for good.

Airlines overbooking, big houses and options rights

Here is the first weekly links post for the year. Posting is going to get a bit irregular for about a month, as I will be taking a vacation for a month or so. Normally, there is a post every weekday, links post on Saturdays and carnivals every other Sunday.

I think there will be about 3 or so posts every week (instead of the usual five), not many links post, and the carnival will only return in February. A few fellow bloggers are helping me out with guest posts during this period, so there will be some diverse perspectives during this time.

If anyone else is interested in a guest post, please contact me.

With that said, here are the links for this week:

Why do airlines overbook flights @ Weakonomics

Want a big house? Tour this small one, change your mind @ The Digerati Life

Discover credit card review @ The Smarter Wallet

What to do when your credit card rates increase @ Ask Mr Credit Card

Obligations and rights of an options trader @ Options for Rookies

Layaway pros and cons @ Financial Highway

Three small caps @ Tip Blog

0% Interest credit cards, 12 months balance transfer @ The Digerati Life

The most important financial goals for 2010 @ Cash Money Life

Image by Mass Distractions

Happy new year 2010 to all

Here’s wishing all readers a very happy, healthy and prosperous new year. The year starts off with a lot of people being cautiously optimistic, and I hope no one is disappointed. As for me, I am always hopeful.

I am not much into resolutions, but I do plan to read and exercise a lot more this year, and also make the most out of my time (read: waste less time).

What about you, do you have any resolutions?

Image by Paul Moody