By Candice Choi
AP Personal Finance Writer
NEW YORK (AP) -- The Super Bowl is less than two weeks away and the talking baby ads are hard to escape.
Even if you're sick of the E-Trade ads, they may have you pondering whether it's time to finally test your hand in the stock market.
You won't be alone. More people are warming up to the do-it-yourself trading platforms offered by online brokers. After steady growth for the past several years, the number of active accounts at the five largest brokerages is expected to grow a combined 11 percent over the next two years, according to the research firm Aite Group.
Still, wading into unknown territory can be frightening when money is on the line. Here's a primer on getting started.
----------
Shopping for a Brokerage
The main attraction of an online brokerage is their low trading commissions. That's especially true after the top firms got tangled in a price war last year.
The biggest players -- Charles Schwab, E-Trade, Fidelity, Scottrade and TD Ameritrade -- now charge between $7 and $10 per trade. But when comparing prices, be sure you factor in lesser-known fees too. For example, some brokers may charge to transfer money out of an account or to close it. Minimum account balances could be another factor if you have a limited amount of money to invest. Charles Schwab, for instance, has a $1,000 minimum balance requirement and Fidelity has a $2,500 minimum.
Beyond pricing, you also want to compare what services are available.
Fidelity, for example, says it provides the most independent research reports of any of the big five. If you want the option of walking into a branch for help, Scottrade has more than 450 locations across the country.
Smaller brokerages may set themselves apart with more unique services. TradeKing and Zecco, for example, tout their social networking functions.
----------
Finding an Investment That Fits
The multitude of investment options can be overwhelming. And the growing popularity of exchange-traded funds may be adding to the confusion for newcomers.
ETFs, which now make up more than a third of the trading volume on U.S. exchanges, bundle together investments in a particular market index. So if you think the S&P 500 is going to continue to climb, you may choose to invest in an ETF rather than an index mutual fund.
The upside of ETFs is that they come with far lower fees than traditional mutual funds. The annual expense ratios for ETFs hover around 0.1 percent of the investment amount. This covers operational costs.
By comparison, fees for mutual funds are far higher because a professional is actively managing the portfolio of investments. The fees for mutual funds can vary widely, but new investors often neglect to factor in how they'll impact any gains, said Ted Beck, CEO of the National Endowment for Financial Education. In general, Beck suggests looking for funds with fees between 0.5 percent and 1.5 percent. But don't assume that a higher fee guarantees a better performance.
There are no ongoing fees when buying individual company stocks. This investing route is best if you have the time and patience to become a seasoned, hands-on trader. As a shareholder, you'd want to keep tabs on a company's financial reports and market news that could affect its health. This could include the release of a new product, lawsuits against the company, or broader economic data such as rising gas and oil prices.
----------
Knowing When To Hold 'Em
One of the most common mistakes among new traders is buying and selling too often. This typically happens because they're spooked by day-to-day movements in stock prices.
But trades cost money and can quickly eat into any gains. The key is not to react to relatively minor price swings; if the underlying financials of a company or mutual fund are sound, any losses should recover over the long haul.
"You don't want to sit at your computer watching the red and green arrows all day," said Adam Ritt, a spokesman for Better Investing.
Selling too quickly has negative tax implications too. If you sell less than a year after you buy an investment, any gains are recorded as income rather than capital gains. For most people, that means the money will be taxed at a higher rate.
This is less of a worry for mutual fund investors, who are paying for the pros to make decisions on buying and selling. Still, you want to watch performance and any changes that might impact your decision to invest, such as a change in who's managing the fund.
----------
Online:
-- www.betterinvesting.org, Better Investing, an educational club for investors, offers numerous free online guides and webinars.
-- www.smartaboutmoney.org, The National Endowment for Financial Education has a section on the basics of investing.
-- www.sec.gov/investor.shtm , The Securities and Exchange Commission's office of Investor Education and Advocacy provides tips on avoiding fraud.
Published: Mon, Jan 31, 2011
