CUT YOUR COSTS BY 85% TRADING ON THE INTERNET
By IRA HELLMAN REPORTER ASSOCIATE: LUIS FERNANDO LLOSA

(MONEY Magazine) – You know those illustrations that supposedly show human evolution--the ones in which a monkey turns into an ape, which turns into a Neanderthal and so on, until we reach the pinnacle of the species' development, which is, of course, you. Well, a similar evolution has been taking place among the hominids on Wall Street. There, the progression has gone from high-priced, full-commission brokers through mid-priced discount brokers and then to no-frills deep discounters. And now that trend has reached its latest logical permutation: online discounters that let you use the Internet's World Wide Web to buy or sell stocks at once unimaginably low commissions--as little as $12 a trade.

Today, roughly 11 Internet brokerage sites serve nearly 700,000 online investors--a number expected to more than double to 1.6 million by 1998. The main attraction is those razor-thin commissions, which web brokers can afford to offer because of their lower overhead. A $12 cut on a 100-share trade at $30 per share is just 30% of what a traditional discounter would charge for the same order. And it's a tiny 15% of a typical full-service broker's levy.

To get wired with a Web broker at home, you'll need a computer, a modem, a Net connection and a Web browser such as Netscape Navigator. The process is simple: Just download an account application directly from the brokerage's Website. Print it out, fill it in and send it back via snail mail (a.k.a. the U.S. Postal Service) along with a check to cover the account minimum. In about a week, you'll receive an account number and password. You can also download a form to have securities transferred from an account at another brokerage into your Net account. Once you're online, you can go directly to the firm's trading page, type in the ticker symbol of the stock you want to buy, enter the number of shares and hit "submit." Done! You'll automatically receive a confirmation by mail and sometimes by phone as well. Some firms now e-mail them. And if you just can't wait, you can check your account status right after your trade is executed.

Most Net brokers rely on a three-tiered security system to keep hackers and thieves out. For starters, customers need both a private identification code and a password to access their accounts. Also, if you use a Web browser with state-of-the-art security, like Netscape Navigator 2.02, Microsoft Internet Explorer 2.0 or America Online 3.0, your data are automatically encrypted and can't be decoded until they reach their destination. Finally, each brokerage has an electronic "firewall" that will let only specified trade and account information in or out. Because these systems can't exchange money or securities via the Internet, a hungry hacker couldn't remove a penny (or penny stock) from your account. Even to get into your account, he or she would have to break the encryption code and figure out your ID and password--a process experts say would involve about a month of work using two supercomputers.

There are, however, a couple of things to get used to when you invest in cyberspace:

--You get no grace period on your trades. Conventional brokers give you three business days to pay for stock you've bought or to deliver the stock you are selling. But online you must have enough cash in your account to cover the transaction before you trade. Alternatively, you can apply for a margin account, which authorizes the brokerage to borrow against your other stocks if you're short the cash to buy new ones.

--There is no hand-holding. If you need advice on what to buy or sell and when to do it, you won't get it. With any discount broker--especially when you're paying less than $15 a trade--avuncular counseling isn't included in the package. So make sure that you're clear on your strategy and have your own sources of information before you point your cursor at the Internet brokerages.

The table below describes key costs and services available from the major discount brokers now operating on the Web. Don't be surprised if there are more Web brokers (and more services and maybe even lower fees) by the time you read this. The online industry measures change in terms of days, not months or years. Right now, at one end of the spectrum are firms that charge next to nothing and give service to match. For example, the firm with the $12 trade, eBroker, doesn't even have an 800 phone number for customer service. If you have a question, you must e-mail the staff in Omaha who promise to get back to you within 24 hours.

If you're just starting out, you might prefer a brokerage that costs a bit more but gives you fuller service. "Novices may find they need help just to place their orders correctly," notes David L. Brown, co-author of Cyber-Investing (John Wiley & Sons, $24.95). For example, Lombard Institutional Brokerage offers such amenities as 24-hour trading assistance, Quote Baskets that update the price of any 10 designated securities every two minutes and daily stock graphs with every price tick for the entire trading day. Cost for this luxury online life: $34 a trade for up to 5,000 shares, with a $500 minimum opening balance. Lombard and others, such as the Net Investor and WealthWEB, also offer a long list of research materials, from company reports to stock forecasts, plus services like free checking accounts. So start surfing.

Reporter associate: Luis Fernando Llosa