INVESTOR BLOG

Monday, June 06, 2005

Requirements for Investing

What You Need
There's basically three things you need in order to start benefiting from the financial markets: Knowledge, savings, and a broker. The first two are self-explanatory in that you should know what to invest in by formulating a strategy and have money to see that strategy to fruition.

How To Place A Trade
The third one often complicates people who are trying to get into the market. Most potential investors know that they can use their PC or cell phone to invest money in stocks, but don't know exactly how its done. The laptop is, however, merely a tool which allows you to place a trade. Someone who sits in loud and messy downtown office called a stock broker is the missing link to your order execution. Though these days the majority of trades occur online you still need to open an account with a broker for your stock buy/sell order to be routed to the exchange trading floor.

The Stock Broker
Many people who would like to invest in the market mistakenly believe they can send their order directly to the exchange floor from their computer. You cannot send your order directly to the exchange floor. The order must be executed indirectly (through the broker) for which you are charged a commission.

Can't I Buy Shares Directly From The Company?
Other would-be investors mistakenly think that the company who's stock they'd like to purchase is the actual party selling them the stock. Though such a scenario would occur in something called an "Initial Public Offering" (IPO) - a time when a company sells its shares to the general public for the very first time - within the "primary market", the majority of trades occur in the "secondary market" - i.e., the shares you buy would come from other traders who are selling the same stock.

Types of Stock Brokers
Back to the broker... There are two primary types of brokers you can open an account with: 1] Discount broker, or 2] full-service broker. A discount broker only offers order execution service and some online trinkets like charts, stock screening tools, and business newswires. The trinkets are usually found better elsewhere on free sources on internet, like Yahoo! Finance and MSN Money. A full-service broker provides all the offerings of a discount broker with the addition of investment advice and financial planning advice.

Selecting A Broker
Most people opt for discount brokers because of the cheaper commissions and the fact that they choose to work their own investment strategies rather than being spoonfed by someone sitting in a high-rise who puts his commission ahead of their financial interests.

Opening An Account
After you've decided whether you prefer the services of a discount broker or a full-service broker you have to find one. Google and Yahoo! ads related to keywords "discount broker" are often helpful in find a broker. Some American brokerages offer trading services outside of the United States (like E*trade and Ameritrade which offer services in Canada as well).

Also, most banks offer investment brokerage services too. Therefore, if you have a checking or savings account visit your bank's website or call it to know if it offers investment brokerage services.

The Checklist
Commissions are a major question on every new investor's checklist. However, it rarely pays to bargain hunt for the cheapest discount broker because in this day and age the big guys know they can't fool the little guys by over-charging because the client will soon discover the service cheaper elsewhere. Once you do the math on commission rates charged by various brokers you'll soon discover that you'll be charged pretty much the same by every brokerage no matter how cheap one ad may appear in comparison to another.

The more important thing to evaluate (espeically for day traders) is order execution time. Though most brokers are up to par with having orders filled quickly the "5 second guarantee" ads you see can sometimes be slightly misleading so read the fine print!

Some brokers also have "inactivity fees" and charge slightly different interest rates on investment loans. Such loans are only available to investors who are approved for a margin account (more about that later) and are collateralized against stocks you hold within the account, so be sure you are familiar with your level of risk tolerance.

Also, interest rates the broker pays you for "idle money" in your account also vary slightly from broker to broker though this rate is very small percentage wise.

Evaluating The Broker
You can open trading accounts with several brokerages at the same time for evaluation purposes if you like, and then close the accounts of the ones you don't like. If you do this quickly (close the poorly serviced accounts within a month or so) it shouldn't affect your credit rating or credit score, but be weary of closing old accounts without first inquiring with your broker about the ramifications it will have on your credit history and credit score.

Your Credit Report and Score
You can order a free copy of your personal credit report by writing a written request to the credit bureau(s) with two pieces of photo-copied ID - one of which must contain your picture. There are three credit reporting bureaus in the United States: Equifax, Experian, and Trans Union. (Equifax and Trans Union also operate in Canada). You can also order an instant copy of your credit report and score online, however, you will be charged a fee for the service by the bureaus.

Inaccurate Info in Your Credit File
Requesting a report from each of the bureaus is wise because sometimes one bureau may have inaccurate or suspicious information about you on file. Such information can often be cleaned up with a phone call, but you should write them a signed and dated letter for assurance.

Then order your report again within a few weeks/months to see if the neccessary adjustments have been made. For more serious matters, like credit fraud committed against you, you'll need to go through a fairly tedious process to restore your credit score. You may even require the services of an attorney.

Types of Trading Accounts
There are two primary types of discount or full-service trading accounts you can open with a stock broker: Cash account or margin account. A cash account only permits you to execute orders for which you will settle in cash through funds previously deposited in your account. A margin account gives you the services of a cash account with the addition of providing you with the ability to pay for part of your trade with funds which are lent to you by your broker.

With a margin account you also have the privilege of opening an options trading account. Options are not the same as stocks, but a highly lucrative trading market administered by the "Options Clearing Corporation" OCC - a government body - exists for options trading. A highly recommened book and Audio CD called "Getting Started In Options" by Michael C. Thomsett about the subject may be available from your local library.

Good Luck on Your First Trade!
Once you have opened a cash or margin account with an investment brokerage you can begin initiating your investment strategies from your notebook PC, mobile phone, or handheld organizer!

Take caution to follow your broker's online security instructions when executing a trade over the internet, however - i.e., public library, internet cafe PC.