An idiots introduction to assets and investing. Who, what, when, where, why, and how part 2

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Last week, I discussed the who what when and why. Today I’d like to discuss the where and how to invest. This bring me back to my other article that reviewed the 19 investment brokerages that consumer reports examined for trading. Of the 19 investment brokerage companies, the top three included First trade securities, Etrade financial, and Trade King. Trade King is actually rated number one by Smart Money, magazine by the Wall Street Journal.

HOW and WHERE: In order to invest in the stock market, you have to open a brokerage account. You can pick any one of the 19 listed in the article that I discussed. The smartest thing to do is probably to visit each site and see which broker you like best. The easiest way to go about it is to find the one that is ranked highest by consumer reports (if you trust them) that has the lowest price per trade. I will list the trade fees for the top 3 based on consumer reports:

1. First Trade Financial = 6.95 flat rate for online market orders and limit orders. Options are 6.95+ 0.75 per contract for online market and limit orders. You get 100 free trades if you fund your account with 2000 dollars and the free trades are only good for first 45 days. You get another $100 dollars in rebate if you fund in $25,000 and a $100 dollars cash back if you fund instead $50,000.

what are option orders? = options are stocks that you have the right to purchase at a later date. A “call option” provides a person the right to buy at a set “strike price” at some time on or before an expiration date which is the date the option contract expires. The option holder can elect to “exercise” that option or in essense buy those stocks at that strike price or allow the option contract to expire and become worthless. A “put option” on the other hand provides the right to sell at a set price. There are different ways to valuate options based on futures and option exchanges. The basic trading can be done in 4 basic ways: Long call, short call, long put, and short put. Because of the complexities of options…I will discuss options in another article at a later time.

2. Etrade Financial = 12.95 flat rate for online market orders and limit orders. This cost goes down once you pass 50K in assets or make more than a certain amount of trades. For our purposes (since we’ll be making few trades) the fee is most likely going to be 12.95 flat. We add another 75 cents per option contract if you trade options. If you open a brokerage account with Etrade, they offer 100 free trades for first month.

3. Trade King = 4.95 flat rate for stock trades market or limit and 65 cents per options contract. There is no initial incentive but it is the cheapest of the bunch. There is also no minimum that you need to fund so you can get started with little money.

4. Zecco Trading = Absolutely no fees. This is a new company and I am still in the process of opening up my trading account with them. They recently dropped their initial account minimum to zero dollars so you can open an account without any deposits. They also allow IRA accounts. They allow up to 10 trades per day and a total of 40 trades a month and after that its only 3.50 per trade. Options only cost 3.50 plus 60 cents per contract. I don’t see any negatives to this company but i’m not sure how quick their transactions are. However, for most beginning investors, it would matter very little. If you are concerned, then the thumbs up seems to go to Trade King as being an established trading company.

So with these 4 companies, you can open either a taxable brokerage account or a retirement account.

1. A retirement account such as an IRA or roth IRA can be opened at any time with a contribution maximum of 4,000 dollars per year. This amount increases to 5,000 dollars in 2008 and in 2009 the contribution maximum will be adjusted annually for inflation with 500 dollar increments. In 2007, if you are 50 or older, you can make a catch up contribution of 1000 dollars.

Remember that in a roth IRA, you are putting in after tax dollars into your account. You don’t get to deduct anything from a roth IRA when you do your taxes but then again, you don’t get taxed when you take out your money. There is also an income maximum to this account so if you make greater than 99,000 as a single person or 156,000 as a married couple filing jointly, you start to lose the ability to contribute to the ROTH IRA.

You can also put money into a traditional IRA which is tax deductible but you pay taxes on it when you take money out of the account. There is no income maximum to a traditional IRA but the contribution limits are the same.

Remember that you can only contribute (currently this year) 4,000 dollars total. So if you put 2,000 in a roth IRA and 2,000 in a traditional IRA, you met your 4,000 maximum. Also remember that once the fiscal year passes by, you cannot go back and put in money. If you fail to use this benefit, you lose the ability to contribute for that year.

There are pros and cons to both accounts. For me, I opened a ROTH IRA, ultimately though, it may make sense to contribute to both accounts. Since my income is low right now and I expect my income to rise as I get older, I am going with a ROTH and then as I pass the income threshold to contribute to a roth, I will switch over to a traditional IRA

2. Taxable brokerage account: this is a seperate account that you put your money. This is not a retirement account. The thing about this account is that you put in after tax money into the account AND then pay taxes on your investments when you take the money out. Remember that you only pay taxes on the gains that you make so don’t worry about thinking you are going to get doubly charged by the government. If you hold your stock for over 1 year, you get charged a capital gains tax which currently runs at 15 percent. If you hold for less than 1 year you get charged tax at the standard income tax level that you are in. I also have a taxable brokerage account.

When you do decide to make a trade, buy a stock, sell a stock, but a mutual fund or etf, you should do some research before jumping in. First stopping point for me is finance.yahoo.com Discount brokers such as Trade King and Zecco are the best for making stock trades and ETF trades (Exchange Trade Funds). If you want to buy mutual funds, remember that it may cost you extra if you buy another company’s mutual fund with a different broker. For example, you buy a vanguard fund with your ameritrade account. So with mutual funds, you should buy vanguard funds with a vanguard account. But why would you buy actively managed funds nowadays when you can buy passively managed ETFs especially with zero dollar trades offered by Zecco?

so how does this article apply to you and I? Basically, I think its good sense that you start to invest as early as you can. I’ve covered the basic things to start your way into the investing world. Everyone can start trading. With Zecco, you have no minimums to invest and you can buy even 1 share and see what happens to it. I recommend that you read the wall street journal, read online news article on business, watch CNBC, etc. I’ve only been in the market for 3 years and of the companies that i’ve invested in, i’ve made a few thousand dollars already. The other thing that I have gained over the years is the amount of knowledge about how businesses work.

If you do want to open an account with either Trade King or Zecco I would appreciate it if you check out the links on this webpage - thanks
note: I am not a certified financial advisor