FOOL SCHOOL
The Benefits Of Trading Online

June 24, 2002

Before examining the pros and cons of trading online it's worth outlining the three main types of broker.

1. Full Service
Here you hand over your money to the broker and he decides which shares to buy and sell. You pay handsomely for this privilege and you usually need a hefty amount of capital to even get in the front door. For some reason these types of brokers tend to be very fickle, buying and selling shares all the time. If we were cynical we might say that had something to do with the fact that they get commission on every trade.

2. Advisory
These folk will let you buy and sell whichever shares you want, but they will also have suggestions about what you should do. They might recommend switching from Amalgamated plc into Agglomerated plc, as they've just been rated "accumulate carefully" by Trade, Grabbitt and Runn. Again, it is in their interest to persuade you to trade. They charge less than full service brokers though.

3. Execution-only
As the name implies, these brokers will simply do as they are told and nothing else. Now that's more like it. Naturally, this type of service is the cheapest of the three. For that reason they are often called Discount Brokers. Their lower charges, combined with the fact that we believe you should make your own decisions when it comes to investing, mean this is the sensible choice whichever way you look at it.

All online brokers are execution-only. But you can also trade by phone. Some brokers even offer a touch-tone service with unique numbers you can dial representing each individual company.

The advantages of online trading

1. Cost
Employing a humble server to deal with thousands of customers is much cheaper than manning banks of telephones. The brokers are able to pass on these cost savings to you, and the savings can be quite significant. Many online brokers offer flat rates for as little as £10 whereas a telephone broker could cost you £25 per trade or 1.5% of the value of the shares you have bought, whichever is the greater.

2. Accessibility
You can access your online broker 24 hours a day, 7 days a week. You can't deal all the time -- the markets in London are only open from 8am to 4:30pm Monday to Friday -- but you can check your account and even leave orders to be executed once the market is open, if that is what you really want to do. It makes it a lot easier to deal during working hours as well.

3. No more queues
No one likes queuing. When there's money involved people get even more agitated. With an online account there is no more hanging on the telephone. It's true that on some occasions some brokers' servers have got overloaded and people have not been able to access their accounts 100% of the time. But all the brokers are devoting a lot of resources to ensuring that such problems are addressed. Remember, you can always use the phone as a backup in emergencies.

Choosing your broker

If you plan to be a buy-and-hold investor who doesn't trade frequently and doesn't hyperventilate about whether your order is executed within 12 nanoseconds or 12 minutes, the broker you choose won't affect your blood pressure or the amount of money you end up with over your lifetime. Not to any serious degree anyway.

But if you're planning on being a fairly active trader, the slight differences in costs and services between competing brokers will add up. Some of them are targeting their services at more active traders and a few are even offering packages of services, including options trading, that a totally Foolish investor would surely not be interested in.

What we would consider the core service -- minimal fees per trade, accounts with low or no annual fees, satisfactory customer service -- will be more or less standard across the major online brokers. But in the next two articles we'll look costs and customer service in more detail.

More: The Fool's Broker Centre