Money for the Long Run: Learn About Online Trading

When you're starting out in your career, it's smart to invest in your employer's 401(k) plan or a mutual fund.

Another option is to dabble in the stock market. Stephen Rapp, 23, of Avon, a recent graduate of Roberts Wesleyan College who works for Rochester Broadway Theatre League, has decided to take that gamble. And rather than doing business with a local financial firm, he's relying on E*Trade, an online discount brokerage firm, to make his trades at a significant cost savings.

The price of cutting costs

Online discount brokerage firms, such as E*Trade or Ameritrade, allow you to conduct business on the Web or over the phone using a toll-free number. You'll pay less in commission fees for trades than you would if you used a standard brokerage firm.

For example, Rapp pays a flat rate of $9.99 to make five to 49 trades per month. He'd pay a $50 minimum commission fee if he used a full-service firm to make such trades, says Antonio Porretta, 30, of Irondequoit, a financial adviser with Brighton Securities.

Low commissions are what attracted Rapp to E*Trade. While he's saving on fees, however, he doesn't have one-on-one contact with a personal financial adviser, which could cost him in the long run.

"A lot of people outside of our business think, 'You must hate service vehicles like E*Trade, because they're taking business' from us. But that's not necessarily the case," Porretta says. The financial adviser says his focus is more than just trades; he cares about creating client relationships.

"The No. 1 reason investors fail is emotion versus a rational decision. An adviser takes emotion out of the equation," he says.

While discount firms provide a lot of historical information about individual stocks, they won't guide you in making investment decisions. And although Rapp does a lot of research before ordering a trade, he admits to making some blunders.

"There are some stocks that I take a dive on, but I have to look at it as part of the learning process," he says.

Another tricky element of online trading is timing. Stock prices can shift while orders are being routed and change before transactions are final.

Is online trading for you?

Researchers have long studied investors' trading habits, and it seems that women do better using online firms than men.

"The assessment is that the men suffer from significantly more overconfidence than the women, provoking them to trade much more, burning up more in trading costs," says Dan Burnside, a certified financial planner and lecturer at the William E. Simon Graduate School of Business Administration at the University of Rochester.

Burnside adds that, in general, online investors tend to buy too few stocks, when experts say that diversification - buying a range of stocks, bonds and mutual funds and participating in a 401(k) plan - is the key to successful investing.

Remember, you can afford to take some risks and make mistakes when you're young, but, in the long run, your goal should be a portfolio packed with all kinds of investments.