Stock trading is a very alluring way of earning money. However, most of the times a stock broker is one of the greatest deciding factors for the outcome of the trade. With the advent of the Internet the new mode of stock trade having started is the online trading. This way of trade has seen a great increase in popularity. And now, though the traditional method of the trade still remains the mostly used method, the online way is soon expected to prevail it, actually within a decade or so from the date of the birth of online one.
The question is what an online broker is and what makes a good online broker? Well let us deal with the topic stepwise. Let us, for that, first understand about a broker. When you want to buy the shares of a company, there are many formalities that need to be satisfied to make a successful legal transaction of the shares and the money, from one person to the other. These formalities such as paperwork are done for you by a stock broker. Also, a broker acts as a mediator between the buyer and the seller of the stock. Thus he has the central role in the trade and this is why he can be called as a deciding factor of the trade. The broker charges a small amount of commission for his service. The more experience the broker, the more commission he will charge. This is because since the broker is with you during a trade, he can guide you on which company to invest in and which one not to. More knowledgeable and more experienced brokers give better advice and hence charge more commission.
Now let us reveal the mystery about the Online trading companies. These are actually the companies that provide brokerage services to the traders, but the difference is that they operate on the Internet and mediate through the Internet. They are actually any company that connects you to the share market and provides you with the brokerage services. Online trading has many advantages over the traditional trade. And this is the reason why stock investing through these online brokers has become so popular in such a small duration. Some of the advantages of trading through the online trading companies are listed below:
LOW COMMISSIONS They charge very low commission rates, without compromising on the quality of the service they provide. Hiring a human broker is costlier because a human can serve a limited number of people and will have to earn his livelihood from their commissions. However, there is no such limitation with an online broker. They can charge very low commission rates per head, but still earn high profits as they can serve virtually unlimited number of people around the world. This is why stock investing can be very efficient through them.
24 HOURS They are open 24 Hours a day. This is an advantage because you can trade through them anytime you like, unlike the traditional stock market where you can trade only during the job hours. This gives you the choice of carrying the trade even as a part-time.
SAVES TIME They save time that would be lost in traveling had you traded through the traditional way. All you need to have is a computer connected to the Internet, and you can trade from any corner of the world.
USER-FRIENDLY The online trading companies provide an easy user-friendly interface. They also provide you a lot of information and education on the trade and the market. This way, you learn allowing you to put your education and experience into being an improved online trader.
Several other companies came and went during the boom and bust, and the stock prices of these online brokers have been volatile, but historically, the online stock brokers have been good investments in their own right.
E-Trade - Godfather of Online Stock Brokers
E-Trade was the first of the online brokers. It went public in August of 1996 at a split-adjusted price of $2.81 per share. E-Trade stock now trades around $22 per share, so any lucky investor with $2,500 in extra money and the foresight to see how big online brokers would become back in '96 would now have close to $20,000 to show for his hunch.
Then again, if he would have sold out in 1999 when the stock hit its all-time high, he would have pocketed nearly three times as much.
Today, E-Trade is probably not a good buy. Intense competition among the online stock brokers have driven down the price of trades - that's great for E-Trade's customers, just not its own investors.
In an attempt to cut down on the competition, E-Trade tried to take over other online brokers in 2005, but failed when in a defensive move, online stock brokers Ameritrade and TD Waterhouse combined to form TD Ameritrade.
TD Ameritrade - Two Online Stock Brokers In One
Ameritrade was the second entrant in the field of online brokers when it went public in March of 1997 at $1.25 per share. Don't you wish you would have picked up 1000 shares back then? If you did, you'd now be sitting on a cool $14,000 and change.
Like most other online brokers, Ameritrade's stock has been very volatile. In less than six months in 1999, it shot up from single digits to around $60 per share. Then it began a long, painful slide for two and a half years, all the way back down to $5, before making four year a climb back to its current level of respectability.
The biggest news for Ameritrade came in 2005 when it purchased TD Waterhouse. The two online stock brokers formed a single company, now known as TD Ameritrade.
Charles Schwab - The Great Grand-Daddy of Online Stock Brokers
Charles Schwab has always been an innovative person and company. Schwab was the first discount brokerage firm of note in the U.S.; providing an avenue for investors to trade stocks without all the bells and whistles or the extra fees that come with them. Thus, it was only natural that this pioneering company would quickly join the ranks of online brokers.
Because Schwab's business is more diversified than the other online stock brokers, its stock has not been as volatile. In fact, SCHW is currently trading near its five-year high, something shareholders of the other online brokers could only dream of.
Going into the future, this model of diversification is likely to lead to further growth, as Schwab just recently applied for and received a bank charter, which will allow it to do banking business for its clients.
Options Xpress - The New Kid on the Block
Options Xpress (OXPS) went public in January of 2005 at $20.09 per share. The stock quickly plummeted by 35 percent before staging a major bull run all the way to $34.94. As the youngest of the online stock brokers, Options Xpress probably has the most room for growth.
Furthermore, since the industry has been seeing its share of mergers and acquisitions, there is a good possibility that a larger company, such as E-Trade, may launch a takeover bid for Options Xpress. When this happens, share prices almost always go up.
Options Xpress did see its share price decline significantly in June of 2006, and as a smaller, newer company, it may be the riskiest of the online brokers.
Before acting on any investments discussed in this article, be sure to talk to your investment advisor.
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