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Learn To Be a Smart Online Investor

By Elizabeth Wasserman

Everyone's heard stories about people who gave up their day jobs to spend more time investing in the stock market. Shanna Rendon, of Grand Junction, Colo., is one of those daredevils. A few years ago, Rendon left her job as a cancer cell researcher and began managing her family's investments full time. And all she needed was the Internet and the family computer.

"All the investing I do is online," says Rendon, who also teaches classes for Better Investing, a nonprofit community that helps people manage their investments.

To be sure, the Internet has made it easier for individuals to take charge of their investments and execute their own trades in stocks, bonds or mutual funds. But given the dramatic rises and equally dramatic drops in the market, you can just as quickly lose your shirt as make a million.

If you're thinking about devoting more time and resources to online investing, here are some questions you need to ask before taking the plunge.

Why should I consider online investing?
With online investing, you can get up-to-date access to information about your investments. Many sites give you free access to research. Also, online software allows you to make pie charts of your investments to see if you're meeting investment goals.

And the fees are often lower than paying a firm to manage your portfolio or to place trades.

That said, Maria Scott, editor of the American Association for Individual Investors Journal (AAII), says that online stock trading might not always be the right path for new investors. New investors could benefit from more guidance and developing an overall investment strategy. She recommends that online investing newbies start by using the web to research investing basics, such as an asset allocation strategy, via web sites such as AAii, CNNMoney, Quicken, SmartMoney, Bankrate or Yahoo Finance.

One way to get started is to use your offline brokerage firm, many of which provide detailed instructions on their web sites about how to buy and sell stocks, bonds or mutual funds on the web. Traditional brokerage firms also do independent research and may suggest investments to you and give you assistance making trades online. Some of these companies, such as Fidelity, also offer free telephone assistance on how to electronically process your trade. Several online firms, such as E*TRADE, also offer a variety of easy-to-use tools to screen stocks and funds to find the right investment for you, calculate potential income from your investments, and analyze the risks in your portfolio. There are also "discount brokers," which are brokerage firms that discount their commission fees on trades. But the discount also means that you have to do more research on your own versus having an expert broker do all that homework for you.

How much money do I need to get started with online investing?
Before you register, it is a good idea to check out how much money you'll need to open an account with the online brokerage. Some online brokerages, such as Ameritrade, have no minimum requirements and will allow you to open an account with enough money to cover your purchase and trading fees. E*TRADE, one of the first online brokerages, requires a minimum deposit of $1,000 for cash accounts and $2,000 for margin accounts. If you want to buy mutual funds, however, many have a minimum requirement for investing -- often from $2,500 to $5,000.

Short on cash? Another option is to roll over Individual Retirement Accounts (IRAs) to an online brokerage. You'll still need to save the money for retirement (or else you will face penalties), but you'll be able to actively trade in stocks and funds online.

Should I use a discount online broker?
To place a stock trade online can cost as little as $7 at a discount online brokerage while a traditional broker that offers online trading might charge as much as $45. But make sure you read the fine print. Some online discount brokerage firms require minimum account balances of $50,000 or more to qualify for bargain-basement trading fees. 

More importantly, experts advise that you do your research about any brokerage firm before handing over your money. The U.S. Securities and Exchange Commission suggests that you research whether the firm is licensed in your state and whether it has been the target of consumer complaints or has had run-ins with regulators. Each state has a securities regulatory agency. The Financial Industry Regulatory Authority, formed in 2007 by the National Association of Securities Dealers and the enforcement division of the New York Stock Exchange, maintains a database of licensed brokers. You may also want to ask about the firm's employees and their educational and professional backgrounds.

Will my investments be safe with an online firm?
Most reputable online brokers practice a high level of security when handling your money. You want to work with brokers who are members of the Securities Investor Protection Corporation (SIPC). The SIPC is an industry initiative that insures its member firms' customers in the case of bankruptcy or other financial difficulties. They help return customers' cash, stock and other securities (see SiPC for more information).

Many brokers also promise on their web sites to cover any losses that result from unauthorized use of their brokerage services. Online brokerages want you to take an active role in protecting your information, too, by checking your account statements, protecting your passwords and having updated anti-virus and anti-spyware programs on your computer. The U.S. Securities and Exchange Commission lists the latest scams that online thieves are trying, including imitating brokerage firms and even regulatory agencies in order to get you to turn over private information that will let them steal from you.

When will my trades be processed?
Traditional online brokerage firms will process a trade in stocks or bonds immediately. But some discount brokers offer lower fees because they process their trades only once per day, instead of immediately. If you place a trade at midnight with these discount brokers, the sale or purchase will be processed when the financial markets open again the next morning. Also, if you are investing in a mutual fund, the online trade is processed at the end of the day based on the closing share prices on the fund's assets.

"Theoretically, that shouldn't make much of a difference if you're a long-term investor," Rendon says. But in the age of the Internet, she prefers trades that are processed immediately and show up in her account within seconds.
 
Maybe the biggest difference between online and offline investing is the fact that you no longer have to wait for your monthly statement to gage your portfolio's performance. Either way, you should always invest with caution -- online or offline -- and that means getting expert advice and researching your options and the risks before you place that trade. Mainly, it's important to do your homework regarding your own finances, investment goals and about how to use online investment tools so you feel confident, Rendon says. "One thing is to be comfortable with the computer. And don't let the brokerage web site intimidate you. Look at the research and what tools they have available -- knowledge is power."