Web Sites Allow Small Investors to Share Stock Market Experience
About a year ago, my son Will asked me if he could start investing in the stock market with his allowance and the money he makes walking a neighbor’s dog. I was delighted by his interest in the market, but when we looked into it we discovered a problem. Many of the stocks Will wanted to buy were selling for $100 or more a share. Even if he could muster up enough money to buy an entire share, the $14.95 commission would wipe out a big percentage of his potential profits.
That’s why I was delighted when I heard about ShareBuilder, a Web site that allows you to purchase stock in virtually any denomination. Now it’s both possible and affordable for Will, my daughter Katherine or anyone else to make small investments in their favorite stocks.
You can, for example, buy $20 worth of Yahoo Inc. stock, even if the stock were selling for $130 a share. In fact, ShareBuilder not only makes sense for kids but for many adult investors as well.
ShareBuilder is a service of Bellevue, Wash.-based Netstock Direct Corp., a privately held company whose investors include Wells Fargo & Co., General Electric Co., Goldman Sachs Group Inc. and Safeco Corp.
If you buy stocks for your kids (in a custodial account) on a recurring basis, you pay ShareBuilder only $1 per transaction, regardless of the amount you buy. Adults buying stocks for themselves pay $2 a transaction. These prices assume that you make regular purchases on a weekly or monthly basis. You can make a one-time purchase for $5 a transaction.
Most ShareBuilder investors, according to Netstock, invest between $200 and $300 a month. But many invest in much smaller amounts.
One big drawback, though, is that trades are not executed immediately. Instead, the company takes all the orders it receives during the week and executes them on the following Tuesday. That way, it combines all its orders, including those for partial shares, into one big purchase. Money is automatically deducted from your checking account the day before the trade is executed. You can optionally place a real-time trade, but that will cost you $19.95 per trade.
Let’s say you wanted to buy $20 worth of Microsoft Corp. Regardless of what Microsoft was selling for the day you placed the order, you would get the actual price on the day and time the order was executed. If, at that time, Microsoft were selling for $80 a share, you’d wind up with one-fourth of a share. If you keep buying the stock, you’ll eventually wind up with one or more full shares. Even though you may own only a portion of a share, you’re considered a full-fledged stockholder in any company you invest in and are entitled to annual reports and other stockholder information and services.
ShareBuilder is not for day traders or anyone who wants to try to time the market. It’s for those investors who believe that making regular contributions to a stock fund or well-performing individual stock, over time, can yield impressive results.
Another caveat is that you can’t buy just any stock. ShareBuilder sells only the top 2,000 stocks, based on market capitalization (the total value of outstanding shares).
ShareBuilder doesn’t sell mutual funds, but it does sell index stocks that trade like stocks but invest in a basket of companies from a specific industry, index or exchange. You can, for example, buy the Nasdaq 100 Trust, which invests in the top 100 companies listed on the Nasdaq Stock Market. Likewise, you could purchase S&P; Deposit Receipts, which closely tracks the S&P; 500, or the Diamond Trust, which tracks the Dow 30.
Although the cost of purchasing stocks is very low, ShareBuilder charges a standard fee of $19.99 per execution to sell any shares or portions of shares. Unlike purchasing, selling is always on a real-time basis. You can sell full and partial shares, so if you owned 5.2 shares of a stock, you would be able to sell your entire stake.
To register to use ShareBuilder, you need to enter the account and bank-routing numbers from your checking account, but you don’t need to mail in a voided check. In fact, you don’t need to mail in anything. You can perform the entire transaction online and begin trading immediately.
A user can open one master account, with one user name and password, and create multiple sub-accounts for different family members.
My wife and I have a joint account, but we also have individual accounts for each of our kids. Anyone with access to the master account can transfer funds from the checking account to an investment account, so I’m not giving my account information to my kids. If they want to invest, I have to be there with them.
I can think of some things that would make this service better. I would like to see the company create a system in which adults could fund kids’ investment accounts and let the kids log on and make the actual investments. It would also be nice if adults other than immediate family members could use the Web to fund kids’ accounts--perhaps via a credit card--so that grandparents, for example, would be able to provide regular payments to their grandchildren’s accounts.
New York-based BuyandHold.com offers a similar service. It charges $2.99 per trade but executes transactions twice a day, at 10:30 a.m. and 2:30 p.m. Eastern time, instead of once a week as with ShareBuilder. Another advantage is that you can sell a security for the $2.99 fee. The sell order isn’t executed in real time but will be executed that day at either 10:30 a.m. or 2:30 p.m. Eastern.
You can register at the Web site, but unlike ShareBuilder you have to mail in a check and a copy of your registration form before you can begin trading. After that, you can transfer funds directly from your checking account. BuyandHold’s EZ-Vest service allows you to invest regular amounts weekly, monthly or quarterly.
So now that we have a service that my kids can use to invest wisely, the next trick is getting them to actually use it that way. A year ago--when Will was 12--he was anxious to follow his dad’s advice with a long-term investment strategy. But now he’s a teenager.
When I approached him on the subject recently, all he wanted to do was to find an undervalued company destined to make a fast comeback so he could sell and make a quick profit. He asked if he could invest in CDNow Inc., which had fallen precipitously from a 52-week high of $23.26 to about $3.40 a share. I said he could buy $20 worth if he wanted to, but even if the stock went up dramatically, the $19.99 selling commission would wipe out his profit.
ShareBuilder, I reminded him, is for the long-term investor. “Long-term investing is boring,” he responded. “I want to make money right away.”
Will, of course, is not alone. Still, I don’t mind letting him play around a bit to see how he does, so I’m getting him a BuyandHold account--with a small amount of his own money--so he can buy and sell for $2.99 a trade.
He may get rich, but I’m not holding my breath. Meanwhile, I’m still in charge of his college fund, which, boring as it may be, is doing quite well thanks to a gradual long-term investment strategy.
*
Technology reports by Lawrence J. Magid can be heard between 2 and 3 p.m. weekdays on the KNX-AM (1070) Technology Hour. He can be reached by e-mail at larry.magid@latimes.com. His Web site is at https://www.larrysworld.com.
