I have had a non-retirement account with Zecco and a Traditional IRA and Roth IRA with TradeKing for a few years, ironically, and have frequently mentioned both here.

At first I was surprised at the news, but I really shouldn’t have been surprised at all. The merger makes a lot of sense for the two companies – they offered identical prices for trades – $4.95 per stock or options trade and $9.95/$10 for mutual funds, both were strictly online brokers, and they are up against larger, well-funded, formidable competitors. Heck, the CEO’s of each respective company first met in middle school and then worked together at a prior employer, so perhaps it was destiny that they join forces again.

I don’t see any downsides to the merger just yet. Online discount brokers compete on price, service, features, and offerings. In this case, they have the same trading prices (and have confirmed they won’t change), both have good service and features, and the investment offerings should only expand with a merger.

I do have three questions that have not yet been answered through their merger FAQ’s yet:

1. Will the merged company adopt Zecco or TradeKing’s annual IRA fee? My IRA is with TradeKing because they don’t charge a fee, while Zecco charges a $30 fee. I hope they opt for TradeKing’s fee structure.
2. Which interface will they adopt? Both are good, but I prefer Zecco’s a bit more and the Zaptrade tool is pretty awesome.
3. Which customer service team do they model? TradeKing has been ranked #1 in customer service for three years in a row in SmartMoney magazine’s broker rankings (2010, 2011, 2012). My experiences with Zecco customer service have been great, but with TradeKing’s service reputation, it seems natural that they might adopt the TradeKing model.

Even though the merger has not been officially approved by regulators yet, it seems likely to go through as the combined company won’t have a new-found dominant market share in the brokerage industry. Assuming approval, I have a short wish list for the new company, which would benefit all users:

1. It would be great to see Zecco/TradeKing start to offer free ETF trading as Fidelity, Schwab, Vanguard, and others have started doing. Adding to ETF positions at $4.95 per trade is simply not cost effective. If you want to be a one-stop shop for investors, you really don’t have a choice.
2. Adopt the TradeKing $0 IRA fee and don’t institute inactivity fees.
3. Get rid of any account closing fees.

Can you tell I don’t like fees?

For the time being, it is business as usual for both companies.

What do you think about the Zecco and TradeKing merger, and what would you like to see from the new company in fees, features, service, etc.?

Related Posts:

• Zecco Review
• TradeKing Review

Zecco & TradeKing are Merging is copyrighted by 20somethingfinance.com without consent to republish.

How much international stock exposure should you have?

It’s a great question. And I’ve been looking into my own foreign stock allocation lately.

In my research, I found Vanguard’s “Considerations for investing in non-U.S. equities” – an annual research report that looks in to the topic.

The report states that,

“Common advice recommended by most financial institutions is to allocate 80% into U.S. (domestic) stocks versus 20% into foreign stocks.”

Where did this “common advice” come from?

The reason often given is the “diversification benefit”, or the point at which any further allocation increase in foreign investments would not increase the diversification value.

Having 80% of all your assets in one country’s stocks is the peak of diversification?

I thought I’d take a common sense approach to the issue by looking at two key data points:

1. U.S. GDP as a percent of the world’s GDP
2. U.S. equity market cap as a percent of the world’s equity market cap.

I can’t see two more relevant data points than this as it pertains to stock allocation, but I am just a naive amateur. Here’s what I found…

Percentage of the World’s GDP from the U.S.

If you’re not sure what GDP is, it is the market value of all officially recognized final goods and services produced within a country in a given period. In other words, what the economy of a given country actually produced.

Why consider this? Stock values can go up and down. They can be overvalued and undervalued. But what a country actually produces is much less subjective.

If we’re going to truly diversify based on actual economic activity, it may make sense to base your domestic versus foreign investment on actual GDP data.

Given the 80/20 recommendation, we will go in to this assuming that the U.S. GDP is roughly 80% of the world’s GDP.

How do the ACTUAL #’s shake out?

The total annual GDP of the world is approximately $63 trillion.

Back of the napkin math here: 80% of $63 trillion = $50.4 trillion.

So the U.S. has a $50.4 trillion GDP, right?

Not so fast! Try $14.58 trillion, or about 29% of what one might expect, given the 80/20 recommendation.

It turns out that U.S. GDP as a percentage of world GDP is approximately only 23%. This number would indicate that perhaps the reverse allocation 20% U.S./80% international would be more appropriate than the opposite.

On top of that, the percentage of U.S. GDP versus the world GDP is only declining every year.

Check out this graph from Google Public data that shows U.S. versus world GDP numbers over the last 50 years:

The world has seen almost exponential GDP growth, while the U.S. has seen slower flat-line growth.

Curious.

How About U.S. Versus International Market Cap?

GDP is one thing. What about actual market cap value?

Market cap value is how much the total value of equities is actually worth. So this is a comparison of the share price value the publicly traded companies of the U.S. have produced as a percentage of total world share price value.

Let’s see what we come up with…

In the aforementioned Vanguard report, I found the following data point – “as of December 31, 2010, U.S. equities accounted for 42% of the global equity market”.

In other words, foreign equities accounted for a full 58% of the global equity market.

42% for the U.S. is certainly better than the 23% GDP number, but it’s still a far cry from the recommended 80% allocation. Heck, even the Vanguard Total World Stock Index fund has a 50% allocation in foreign stocks (vs. 45% U.S.).

It used to be as high as 70% as recently as the 1970′s (probably when the 80/20 meme was created), but it has dipped quite a bit. Here is the graphic breakdown (U.S. in blue, world in brown, black line = 50%):

Yet the 80/20 Rule Persists

At the end of the Vanguard study, despite looking at significant data that proved otherwise, Vanguard fell back on the 80% domestic (U.S.) to 20% foreign recommendation. Why? The “diversification benefit”.

The odd thing is, that they actually have a graph (figure 2b in their study) that shows the global market is actually less volatile than than the U.S. market alone. So investing more towards the 42/58 breakdown is less volatile, not more, as one may be led to believe.

Intuitively, this makes sense. Think of it this way. If you had a ton of stock in your company, would you want 80% of your net worth tied up in that stock? No, you’d be crazy! What if the company tanked, went under, or severely declined in value? You would probably realize that you needed to overcome your “homer” bias for your company’s stock because you know the company so well.

So why would you tie 80% of your net worth in to the U.S. economy by having a “homer” bias for U.S. stocks?

Why not get out and diversify?

What about Foreign Vs. U.S. Stock Performance?

According to a study done by Ibbotson Associates, a global allocation beats a U.S. focused allocation over the long-term. $10,000 investment in a global portfolio in 1970 would have grown to about $500,000 in 2009 compared to about $410,000 only if invested in an U.S. S&P 500 portfolio.

That’s right, a global portfolio has historically beaten a U.S. focused portfolio, even over a period when the U.S. experienced vast economic growth.

OK, that’s past results, which we know doesn’t necessarily mean anything for the future. So how do current valuations look?

At the present moment, foreign stocks have a P/E ratio of 8.6 vs. 13 for the S&P 500. This would indicate that either U.S. stocks are relatively over-priced, or foreign stocks are relatively under-priced. Higher growth rates tend to result in higher P/E ratios (and we’ve already shown foreign growth rates vs. the U.S.). Yet, we see the opposite in prices.

My Conspiracy Theory View of the 80/20 Rule

My guess is that the 80/20 rule first became an investment meme at a time (most likely the 1970′s), when it might have actually made sense to have an 80/20 allocation based on total market cap and U.S. GDP vs. world levels. At that time, it was also expensive and difficult to find, research, and purchase international stocks. Today, that’s not even close to being representative of reality. So why has it persisted?

The U.S. financial sector needs it to persist. So they continue to tell us year after year “80/20, 80/2o”. And it’s worked!

At some point, it may have transitioned to a planned conspiracy. Think about it for a moment…

How do the large U.S. financial institutions make their money? Mostly by charging a percentage of total assets fee.

If U.S. investors were to realize that the 80/20 rule was outdated and move significantly more assets to foreign stocks it would mean the financial institutions would:

1. see investors flee from U.S. stocks, driving the U.S. market cap down and many amateur investors out of the market entirely (which results in lower revenues/profits for them due to lower assets being managed).
2. see their own share prices and net worth decline as a result of investors fleeing their own stocks and the market altogether and also as a result of lower revenues/profits.
3. be forced to increase their operating costs as they would have to significantly boost their presence globally with analysts, research, etc., in order to stay competitive with their peers.

The 80/20 rule is safe for them.

I’m just not so sure it is safe for us.

Disclaimer: I am not a financial adviser, just a contrarian and a bit of a conspiracy theorist. You can draw your own conclusions on how much to allocate in international stocks.

Related Posts:

• 7 Online Brokers with Commission-Free ETF’s
• What is Passive Index Investing?
• How to Start an Online Broker Account

Is the U.S. Vs. International Stock Allocation 80/20 Rule a Conspiracy? is copyrighted by 20somethingfinance.com without consent to republish.

It’s been speculated that Facebook is looking to raise $10 billion from the stock IPO, and achieve a measly market valuation of $100 billion (for comparison, Ford is valued at $38 billion and Yahoo is valued at $19 billion).

If you’re not sure what an IPO is – it’s an acronym for “initial public offering”. It basically means that Facebook would be raising significant capital to run its business through selling and opening up its stock to the public for the first, or initial time.

And if you’re not sure what an IPO is, that also is a telltale warning sign that you probably should not be buying the stock.

Familiarity Does Not = Good Investment

Why not buy the stock of a company you know and love? Everyone knows Facebook and what it is. We have all likely used it at some point or another. Many of us every day. And many of us love it, at that. But that doesn’t necessarily mean that its stock and the fundamental business behind it will be successful.

Knowing what a business is or does is a good first step. But when you frequent a business, you tend to get emotionally connected to it. It would be easy (and dangerous) to assume that just because everyone knows and most use Facebook, its stock can only go up. Let’s pull the trigger, I don’t want to miss out on it if it explodes, right?! That kind of assumption and desire to turn a blind eye to business fundamentals can result in you getting burned.

Looking at some other famous internet IPO’s of the past year:

• Groupon: now trades at $16, down almost 40% from its end of first day trading price of $26.
• LinkedIn: now trades at $59, down 37% from its end of first day trading price of $94.
• Pandora: now trades shy of $10, down 50% from its end of first day trading price of $19

I have used and like all three companies. And had I followed my emotions and bought them up right away without doing my homework, I would have lost significant money. Why? The businesses behind the stocks have failed to live up to their hype.

Now, don’t get me wrong. I’m not trying to deter you from buying Facebook stock. All I’m saying is this: do your homework beforehand & don’t just follow your emotions or the herd.

Before Buying Facebook Stock Right After its IPO, Consider These Questions…

Here are some questions that you might want to consider before jumping on the Facebook IPO, or any IPO:

1. What is the company’s business model? How does it make money?
2. How does it stack up against similar company’s in some of the key metrics (i.e. in Facebook’s case: revenue per user, revenue per 1,000 impressions).
3. Can the price of whatever the company makes money from increase?
4. How is it doing financially? Does its revenue growth rate warrant the likely price/earnings ratio it will command?
5. Is the company’s growth rate increasing? Can it continue increasing?
6. Does the company have a huge amount of debt that will be tough to overcome?
7. How much room for user-base growth is there?
8. Is there room for geographic expansion?
9. Is there significant potential to grow the amount of revenue per user? Will the company’s user-base buy into that or permit that?
10. Are there any governmental investigations that might hurt the company?
11. Are there any major lawsuits against the company?
12. Does, or will, the company have a dominant market position versus its rivals?
13. Are there significant competitive threats from startups or other giant players entering their niche?
14. Do you believe in the company’s management?
15. Would you buy the company if you weren’t a user/customer and weren’t familiar with them?
16. Would I only be buying this stock because I don’t want to miss out on it if it explodes? (this is what causes bubbles, my friends)
17. Am I only buying because everyone else is buying it?
18. Is it a good market right now for an IPO to succeed?

Oh, and when you’re done pondering those questions, don’t forget to like the 20somethingfinance Facebook page.

Facebook Stock IPO Discussion:

• Would you buy the Facebook IPO? Why or why not?
• Do you think Facebook will continue its rapid growth?
• How do you see Facebook growing revenue?
• How do you think Facebook’s stock will perform?

Related Posts:

• Should you Pay off Debt or Invest?
• Passive Index Investing
• How to Get Over the Fear of Investing
• How to Start an Online Broker Account

Facebook Stock IPO: Should you Buy it? is copyrighted by 20somethingfinance.com without consent to republish.

Out of a group of 30 twenty-somethings, zero people raised their hands. ZERO!

That shocked me, and I decided that I wanted to help readers overcome some of their big objections or fears on getting started investing.

The series included:

1. Investing outside of a 401K: I polled readers on why they haven’t invested outside of a 401K.
2. Should you pay off debt or invest? I took a look at where you should focus when you have discretionary income.
3. How to start an online broker account: I discuss where to start your investment account.
4. Getting over the fear of investing: I highlight the danger of not investing.
5. Passive index investing: I discuss one of my favorite investment strategies for amateurs.

I’ve also covered some additional investing basics in the past:

• What is an ETF?
• ETF’s vs. Index Funds
• How to make a stock trade
• What is a mutual fund?
• How to buy a mutual fund
• Investing in a REIT

But one thing that I don’t think we’ve discussed enough is our confidence in the market.

Our generation has grown up watching the stock market lose money, as a whole, over the last 12 years. Before that, it was just expected that you could invest your money and pull in 10-12% annually, on average. Automatic, invest it and forget it, and retire a rich woman/man.

But those days are seemingly gone. Our stock markets have been heavily influenced by:

• the media
• war/terrorist acts
• institutional/professional investors
• energy prices
• political turmoil
• debt crises
• the global economy
• currency drama
• computerized trading

And watching all these manic fluctuations and no net gain in over a decade has really destroyed our confidence in investing in the market.

It just occurred to me as I was sitting and thinking about barriers to investing that this, possibly more than any other issue, is why our generation hasn’t jumped to be active investors.

So, I want to throw the questions out to you:

• Have you lost confidence in the stock market? (take the poll)
• Why do/don’t you have confidence in the market?
• What would it take for you to have more confidence in the market?

Have you Lost all Confidence in the Stock Market? is copyrighted by 20somethingfinance.com without consent to republish.

I later polled readers as to why they had not started investing outside of a 401k. And now we’re hitting each of the reasons why. The first part in the series dealt with the question of whether you should pay off debt or invest. The second on how to start an online broker account like Zecco or TradeKing. And the third on how to get over the fear of investing.

In this fourth part, we’ll discuss investing theory, particularly why I prefer passive index investing over any other strategy.

Now that you have an online broker account, you’ve funded it, and you’re armed with knowledge and motivation to not let your money sit in a hole in the ground, it’s time to get out there and trade like a pro!

Not so fast…

The Market is Dominated by Institutional Investors

According to John Bogle, the founder of Vanguard, institutional investors own 70 percent of American corporations, up from 35 percent in 1975. An institutional investor is a person or group that manages a large pool of money – such as a hedge fund, mutual fund, pension, bank, or insurance company. Why should that matter to you?

An institutional investor’s job is to get good returns for the people who are giving them money to manage. As a result, they have resources available to them that an amateur like you or I do not.

They have:

• insider knowledge (legal or otherwise)
• ability to negotiate on their trades
• technological trading tool advantages
• time & knowledge: it’s 100% of their focus
• the ability to visit companies first hand, to see what they do and talk to their executives
• the ability to heavily influence the market

We have none of that.

Even if we spent 40 hours a week studying every stock we wanted to trade in and out of, we’d still be at a disadvantage to them.

So don’t do it! To buy and quickly sell (trading) stocks, is like saying, “the price of these stocks, mostly determined by institutional investors, is wrong and I know better when to buy and sell than they do”. While that may very occasionally be true, 99.9 times out of 100, it is  not.

From personal experience, I have tried this strategy and failed massively with it. Occasionally, I made some quick money. But more often than not, I lost money, and whether I profited or lost, it was very stressful. I was watching that ticker go up and down multiple times every day, and my mood would swing based on whether a stock was in the green or red at that moment. Quite addicting. Kind of like gambling. And not a healthy way to live.

A Better Investment Strategy

So, I’ve basically shot down stock trading. Kind of depressing, isn’t it?

Don’t let it be – there is a better way. It’s called passive index investing. And it’s not sexy or thrilling, but that may be just what the doctor ordered when it comes to making money.

To explain what passive index investing is, I’ll first need to explain what an index is.

A market index measures the value of a group of investments, pooled together. Much like a mutual fund, it is a way to diversify through investing in a number of different securities (stocks, bonds, etc.).

For example, one of the more popular indexes is the S&P 500, which is a committee selected group of 500 large cap (market value) stocks, mostly domestic, that are meant to resemble the market as a whole. Another example of a market index is the Russell 2000, which includes 2000 small cap stocks.

You’ll also find indexes that measure different sectors of stocks such as international, health care, real estate, REIT’s, and just about any other way you can group stocks.

Passive Indexing

Passive indexing is investing in market indexes through one of two vehicles – an ETF or index fund. In their simplest sense they are both meant to diversify, track an index, and be a low cost alternative to actively managed mutual funds.

So how do they perform?

Actively Managed Funds Vs. Indexes

We’ve established the many disadvantages that amateur investors are going to have versus institutional investors. But how does passive index investing perform against institutional actively managed mutual funds?

Let’s take a look. This should be eye opening. What you see here is % of U.S. equity funds that were outperformed by their comparable index over one, three, and five years.

Source: Standard & Poors CRSP

Enlightening! In not one category did an actively managed fund classes outperform an index over the last 1, 3, or 5 years. And in some cases, more than 80% of actively managed funds were outperformed by the index.

This has historically almost always been the case. Mutual fund managers are humans, just like you and I. Even though they have more tools and resources available to them, they are still prone to error and making subjective emotional decisions. They are good, but are they as good as the market as a whole? Not often.

Index Investing Strategy Takeaways

I’m obviously a fan of index investing. You’re free to make your own conclusions and invest how you see fit and your mileage may vary on how this strategy performs (in other words, invest at your own risk and get the opinions of others). However, index investing has some clear advantages that you should consider:

• it’s passive: it doesn’t take much work or research to buy and let it sit for a while
• it’s diversified: your risk is much more spread out than a comparable mutual fund and definitely more diversified than a handful of stocks
• it’s low stress: because it’s diversified, you’ll sleep better at night
• it’s cheaper: than managed funds b/c expense ratios are lower
• performance: as evidenced by the table above, indexes, on average, outperform managed funds

What’s not to like about that?

Passive Index Investing Discussion:

• What do you think of passive index investing? Is it the investment strategy you use?
• Have you traded in and out of stocks? How has that worked for you over the long run?
• Does everything I’ve presented here make sense? We’re moving into the complex world of investing and it’s hard to cover in one post what entire books have been dedicated to.

Related Posts:

• 10 Free Financial Services
• Zecco Review
• TradeKing Review

How to NOT Invest Like a Pro (and beat them) with Passive Index Investing is copyrighted by 20somethingfinance.com without consent to republish.

I later asked readers why they had not got started investing outside of a 401k. The first part in the series dealt with the question of whether you should pay off debt or invest. This part will deal with how to actually start a discount online brokerage account.

When I polled readers, 18% said that the reason they have not invested is they didn’t know how to start an online broker account. Hopefully this post will do an adequate job in removing that barrier.

What is a Discount Online Broker?

A discount broker differs from a full-service broker in that YOU make the decision on what to invest in and actually execute the trade on your own. That may sound scary at first, but it’s really not so bad.

There are plenty of discount online brokers out there that have helped drive the cost of trading for amateur investors down significantly over the years. A discount online broker is really all you need. Full-service brokers charge exorbitant fees and don’t necessarily have your best interests in mind.

What Can you do Through an Online Broker?

There is a pretty long list of things that you can do through a discount broker, including:

• Putting your money into a money market account. If you leave your cash sitting, most will offer a nominal savings rate, much like a bank.
• Investing in a CD.
• Buying and selling stocks.
• Buying and selling stock options.
• Buying and selling index funds and other mutual funds.
• Buying and selling bonds.

And it’s relatively cheap to do all of them. Stock trades at most discount brokers are $7 or less and many offer no-transaction fee mutual funds, index funds, and ETF’s (more on what each of these is down the road…).

To put it simply: an online broker is a one-stop shop for you to invest your money in just about anything.

The Best Online Brokers: A Comparison

To get started, you need to pick a broker. There are a lot of good ones out there. Most offer relatively cheap trades. Some charge annual fees. Others have high minimum opening contributions. Some have better customer service and trading tools than others. Depending on your situation, the best discount broker for you might vary.

I generally look for accounts that don’t charge BS maintenance or inactivity fees or annual fees. I also look for low costs to trade stocks and funds and an easy to use interface. Here are a few of my favorites (none of these have inactivity or maintenance fees, and only 2 have annual fees):

TradeKing:

I have both my Roth IRA and Traditional IRA with TradeKing. TradeKing does not charge fees on their IRA’s and stock trades are only $4.95 each. Check out my TradeKing review for a full run-down.

• Stocks: $4.95/trade
• Mutual Funds: $14.95/open
• Minimum Opening Deposit: $0
• Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee
• Promotion: Reimbursement of up to $150 in transfer fees.

Zecco:

I have an investment account with Zecco because they offer $4.95 stock trades. They once offered 10 free trades per month if you had a balance over $25K, but they no longer do that, unfortunately. Check out my Zecco review for more on them.

• Stocks: $4.95/trade
• Mutual Funds: $10/open
• Minimum Opening Deposit: $0
• Annual & Inactivity Fees: $30 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee

Scottrade:

I have had investment accounts with Scottrade. They have always maintained a flat $7 trading fee while others have shifted their fees around to gain new customers. One nice thing about Scottrade is that they have over 500 local branches that you can visit.

• Stocks: $7/trade
• Mutual Funds: $17/open
• Minimum Opening Deposit: $500
• Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee

OptionsHouse:

OptionsHouse has the lowest prices of the group at $3.95 for stocks and $9.95 for mutual funds. Don’t let the ‘options’ in the name scare you. You can do all of the standard stock and mutual fund investing with Optionshouse that you can elsewhere. They aim to make a platform that is friendly to options traders.

• Stocks: $3.95/trade
• Mutual Funds: $9.95/open
• Minimum Opening Deposit: $1,000
• Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee
• Promotion at the moment: Open a new IRA and get 100 free trades and up to $125 in transfer fees. Use promo code IRA FREE. Or you can open a non-retirement account and get a free Dell computer monitor.

Vanguard:

My 401K is housed with Vanguard. What I really like about them is they have an extensive list of very cheap index funds and ETF’s under their brand and they don’t charge you for trading in and out of them. If you want to invest in their index funds and ETF’s and have a large enough balance to avoid the $20 annual fee, then Vanguard is a great choice.

• Stocks: $7/trade, branded ETF’s & index funds are free
• Mutual Funds: $35 (if you go with Vanguard, just invest in their funds for free as they have the best index funds and ETF’s out there)
• Minimum Opening Deposit: $0
• Annual & Inactivity Fees: Vanguard charges a $20 account fee on IRA’s and other accounts if you have less than $50,000 in assets. If you have more, there are no fees. There are also $0 inactivity fees.

Schwab:

Much like Vanguard, Schwab carries a number of low cost branded ETF’s that they don’t charge you to trade in and out of. Their trading prices are otherwise the highest of the group, at $8.95 each and $49.95 to buy AND sell mutual funds that are not their brand. Don’t go with Schwab unless you intend in investing in their funds.

• Stocks: $8.95/trade
• Mutual Funds: $49.95/open & sell (excluding Schwab funds, which are free)
• Minimum Opening Deposit: $1,000
• Annual & Inactivity Fees: $0 for IRA’s, $0 for non-retirement accounts, $0 inactivity fee

How to Start an Online Broker Account

Now that you’ve picked out a broker, you’re probably wondering what steps you need to take to actually open an account. Check out the minimum opening deposits required, which I listed in the previous section. Note that buying into a mutual fund is usually more prohibitive than actually opening your broker account. Many mutual funds require you to have an opening investment of $1,000 to $2,500. Stocks and ETF’s don’t have these requirements.

Once you have that sorted out, the steps are generally as follows:

1. Create a login and password.
2. Choose the type of account you want. For most of you, it will be an individual investment account (non-retirement), a traditional IRA, or a Roth IRA. You’ll then be asked whether this is a cash or margin account. Since trading on margin is risky, you’ll want to select ‘cash’ 99.99% of the time.
3. You’ll then have to fill out a ton of personal information about yourself including marital and income status, your social security, previous investing history, etc. This information is required by federal law when you start a new broker account, so everyone has to do it, despite how invasive it may seem.
4. You’ll have to fund your account. Most online brokers allow you to do this in a few different ways: via ACH withdrawal from a bank account (usually free to do), via a wire transfer (your bank usually charges for this), via a transfer from another broker, or via check. Note that most, if not all, brokers accept cash or other form of payment.
5. After you fund your account, there is usually a clearing period of up to a week for a background check and for the funds to clear.
6. That’s it. As soon as your funds are cleared, you’re ready to invest!

Estimated time to complete the application and open an online broker account is usually under 15 minutes. It’s relatively straight forward. The hard part is waiting to invest your funds until they have cleared.

Now What?

You’re probably wondering what to do now. I will go through investing basics in upcoming posts, but I can only take you so far and can’t give specific investment recommendations. Start becoming obsessed with learning how to invest. In the meantime, move your funds to a money market account that will earn you a little bit of interest while you figure out what to invest in.

One step at a time. Open your online broker account first!

How to Start an Online Broker Account is copyrighted by 20somethingfinance.com without consent to republish.

Cuban’s Take on the Market

Back in May, I highlighted Cuban’s commentary on why the market is becoming harder and harder to make money in by investing in fundamentally strong companies.

This week, Cuban wrote a new post, poetically titled “The Stock Market is Still for Suckers & Why you Should Put your Money in the Bank“. Geez, Mark, could you be a little more direct, please?

The basic premise of his post is that ‘capital is no longer expensive and it is no longer scarce’, and until it becomes scarce, it’s going to be hard to make money in the market, or elsewhere, so you should hold on to your money.’

I think the points in his ‘what business is Wall Street in‘ post were a lot more spot on, but this one brings up some interesting points as well. Cuban thinks that the stock market is no longer for him or for any average investor. It’s too risky, too panicky, and too manipulated. Over the last few years, it’s hard to argue with that.

Tony Robbins Economy Rant

The next is Tony Robbins. Now, I’m not a big Tony Robbins fan, in the least, but his 23 minute rant is entertaining and he brings up some good points (unfortunately he rambles quite a bit).

Here’s the first of two videos:

If you don’t have the time to sit through all 15 minutes and 8 minutes in the sequel, here’s a summary:

• He has a lot of friends with a lot of money who correctly predicted back in early 2008 that the market was headed for a big crash. They are now saying the same thing again and getting out of the market.
• This is the longest period of unemployment (time it takes to get a job) in modern history.
• The housing market is absolutely horrible now that the stimulus money is gone, and it’s getting worse.
• The baby boom generation is no longer spending and they were the reason why we had such huge economic growth (financed by debt). Without them spending, there will not be a recovery in the near future and many companies will struggle.

I don’t take much stock in his first point, but the next two are true and backed up by statistical data. The last point is opinion mixed with some fact, but I think it’s a good point. When a generation fundamentally changes their consumption habits and over 70% of the economy is based on the previous consumption habits…. you’re in for some hurt from an economic standpoint, even if the fundamental switch to saving has its benefits. And we are seeing that happen.

And Here’s my Own Bigger Picture Rant…

I agree with some of Cuban and Robbin’s points, but I have a slightly different big picture take on what we’ve seen happen to the market over the last 10+ years now (where absolutely zero capital gains have resulted from the market as a whole) and where it might be headed.

The market gains over the last century have been driven by productivity increases. First it was the industrial revolution, airplanes and cars, advancements in health and medicine, then the computer and other electronic technologies, and finally the Internet and data/information advancements. And all of those things were driven by harnessing energy from cheap fossil fuels and the globalization of economies from around the world.

There’s still room for some gains in the market driven by improvements in all of these areas, and particularly at the micro level with individual companies, but I think we’re at a point in history where the gains are going to be minimal from the market as a whole. We’ve extended people’s lives beyond what is natural. We’ve solved transportation to the point that you can go anywhere in the world. We’ve solved cheap energy (for now). We’ve solved taking from the planet to create buildings and products that we can sell. We’ve solved data exchange. And we artificially inflated growth with debt and played that game out.

We’re not going to see huge gains (as a whole) in equity markets until we see the next big thing that completely changes human life as we know it. When or what could that be? I have no idea. What should you do with your money? I can’t tell you that (because I have no idea). But what I can tell you is that living frugally within your means, saving your money and having a big position in cash for emergencies and tough times, and building your skills and career to be economy-proof are all things that you can’t go wrong with. Prepare for the worst and hope for the best.

What’s your take?

Mark Cuban, Tony Robbins, & My Personal Rants on the Economy is copyrighted by 20somethingfinance.com without consent to republish.

What is TradeKing?

TradeKing is an online discount broker that has a low fee trading structure and strong customer service. Plain and simple. I’ll get into what types of accounts you may want to consider opening or moving to TradeKing in a bit. You can trade stocks, funds, options and other equities through TradeKing.

Trading Fees:

Let’s cut right to what most of us care about the most when it comes to investing online with a discount broker – the fees.

• Stocks: $4.95 (online and even broker assisted on the phone)
• Options: +$0.65 per contract

Other than Zecco, which charges $0 for trades (for accounts over $25,000 in balance, otherwise they are $4.50 per trade), and OptionsHouse (geared towards options traders) at $2.95 per trade, TradeKing’s trading fees are the lowest price of any legit discount broker that I am aware of.

I have my non-retirement account with Zecco because of their low priced trades (check out my Zecco review), and my IRA’s with TradeKing. I’ll tell you why I went with both in the next section.

Other Fees:

Here’s where TradeKing really excels. Whereas some discount brokers try to nickel and dime you with account inactivity fees and IRA fees, TradeKing does not. If you trade lightly or not much at all, you don’t have to worry about getting an account inactivity fee or account maintenance fee (they don’t have either). They also don’t have an annual IRA fee (Zecco charges a $30 IRA fee, which is why I chose to move my IRA’s to TradeKing instead).

TradeKing’s price to buy in to mutual funds is a little bit higher than some discount brokers who offer a number of no-fee funds, at $14.95 to initially buy into a fund, but still very competitive to other broker’s funds with fees (i.e. E-Trade funds cost $19.99). If you prefer ETF’s over funds, that’s not really an issue. Here is a complete list of TradeKing fees.

Minimum Balances:

TradeKing has no minimum balance for their accounts. This is a key factor for someone just getting into investing for the first time, who might not have a lot of money to put into an account right from the get go.

How is the TradeKing Customer Service?

The one time that I called in, I got someone on the phone right away, that person spoke great English, and they followed up with a promised email with documentation minutes after the call. This year, Smart Money rated TradeKing #1 in customer service in 2010 and gave them a 5 star (out of 5 ranking).

For those who like the chat customer service option, TradeKing offers live chat support 8 AM – 6 PM Monday through Friday. No complaints here.

Trading Tools at TradeKing:

TradeKing certainly doesn’t skimp on their tools. With all of the discount brokers I’ve used and the tools included for free in their interfaces, TradeKing can’t be beat in this area. Quickly summarizing each of their tools:

• MarketGrader Research Reports: This is basically an analytical analysis tool that grades stocks (not dissimilar from Morningstar) and whether analysts predict then to outperform or not.
• Technical Analysis: For experienced traders who use the charts, TradeKing provides chart pattern recognition, price forecasting and full educational support.
• Interactive Charts: includes volatility and technical indicators.
• Maxit Tax Manager: A cost-basis and tax reporting tool to help make things easier around tax time.
• Other Tools: probability calculator, profit & loss calculator, options calculator, options scanner, and stock screener.

Banking Services:

This might be an area where you’d be disappointed if you were interested in banking services in addition to trading services. TradeKing is not a full-service bank, so don’t expect a debit card, checking account, mortgage loans, or other bank related services.

Final Thoughts:

It’s one of the two discount brokers I use at the moment, so obviously, I like them. Good service, account security, low trading fees, and no other fees to screw you over. I’d recommend using them for both a regular trading account and a retirement account.

TradeKing Promotions:

• TradeKing is currently offering $150 in reimbursements for those who switch a non-retirement account to them.
• They also offer a $50 referral fee if you refer a friend ($50 for both you and your friends).

TradeKing Review is copyrighted by 20somethingfinance.com without consent to republish.

“Traders the Equivalent of Hackers”

It’s titled, “What Business is Wall Street in?“, and I’d recommend giving it a read. It’s a bit of a longer post, so I’ll highlight some of Mr. Cuban’s finer points. First, Cuban likens Wall Street traders to hackers – justifying their existence through questionable benefits to their industry. He then questions the present state of investing versus it’s original purpose:

“Wall Street is no longer what it was designed to be.  Wall Street was designed to be a market to which companies provide securities (stocks/bonds), from which they received capital that would help them start/grow/sell businesses. Investors made their money by recognizing value where others did not, or by simply committing to a company and growing with it as a shareholder, receiving dividends or appreciation in their holdings.  What percentage of the market is driven by investors these days?“

A Scary Testimony

What’s somewhat rewarding, as an amateur investor – and horrifying at the same time, is Cuban’s admittance that he feels like there is too much stacked against him as an investor these days:

Over just the past 3 years, the market has changed. It is getting increasingly difficult to just invest in companies you believe in. Discussion in the market place is not about the performance of specific companies and their returns. Discussion is about macro issues that impact all stocks. And those macro issues impact automated trading decisions, which impact any and every stock that is part of any and every index or ETF.  Combine that with the leverage of derivatives tracking companies,  indexes and other packages or the leveraged ETFs, and individual stocks become pawns in a much bigger game than I feel increasingly less  comfortable playing. It is a game fraught with ever increasing risk.

What’s scary about this statement is that it’s coming from Mark Cuban. The man is worth $2.8 billion. If a savvy businessman with that kind of capital can’t find his way around the stock market and get proper guidance in how to profit from it – and feels like the little guy getting screwed by Wall Street insiders…. well, you can see where I’m going with this.

Dividends Keeping Him in the Game

Cuban then highlights his investing strategy at the moment – and it’s a good one that I believe in:

The only thing that keeps me in the market is that most of the stocks (not all) pay dividends or some other sort of cash payout.

According to Steven Johnson, director of simcivic.org, “Capital growth in the S&P 500 averaged 2.3% a year from the mid-1920′s to the mid-1990′s. Dividend yields average 4.6% a year, for a combined gain of 7% a year.” That means that 2/3rds of all returns in the S&P 500 over 70 years was from dividends. That is very compelling. And it’s a strategy that I’m starting to believe more and more in over the years.

Cuban’s Solution

My favorite part of Cuban’s post is that he highlights some solutions for this problem that make sense:

My 2 cents is that it is important for this country to push Wall Street back to the business of creating capital for business.  Whether its through a use of taxes on trades, or changing the capital gains tax structure so that there is no capital gains tax on any shares of stock (private or public company) held for 5 years or more, and no tax on dividends paid to shareholders who have held stock in the company for more than 5 years.  However we need to do it, we need to get the smart money on Wall Street back to thinking about ways to use their capital to help start and grow companies. That is what will create jobs. That is where we will find the next big thing that will accelerate the world economy.  It won’t come from traders trying to hack the financial system for a few pennies per trade.

Bravo, sir. Now if we can only get you a job as the head of the SEC.

Mark Cuban Discussion:

• What do you think about Cuban’s points?
• Are you bothered by the fact that a person with Cuban’s wealth can’t find his own way around the market?
• What would you do to fix Wall Street in order for it to be a welcoming place for the little guy again?

Related Posts:

• How to Make a Stock Trade
• Index Funds Vs. ETF’s
• Zecco.com Review

Mark Cuban’s Solutions to Fix the Stock Market is copyrighted by 20somethingfinance.com without consent to republish.

A trailing stop-loss order sounds like complex investing strategies, however, it is fairly simple to understand when you take a minute to learn what each part of it means. To do that, we’ll go through the different types of orders.

Why learn how to execute these types of trades? For starters, we’re still in a highly volatile market. The S & P 500 is up 67% from its March, 2009 lows (which were down 56% from October 2007 highs). Had you placed a 10% trailing stop loss order on the S & P 500 index ETF (SPY) shares you owned before the market collapse, you would have only lost 10% of your investment off of the peak, versus 56% (like most of us). The same could be said if you bought near the bottom. You’d want to protect your 67% gains, right? Before getting into how to do that with a trailing stop loss order, let’s take a look at some of the basics, first.

Market Order

Most novice investors will never venture beyond a market order. A market order is an order to buy or sell a stock immediately at the best market price. This differs from a limit order (we’ll discuss in a bit) in that you are not able to specify the price in which you would like to buy or sell at with a market order. There are two types of market orders:

• Buy market order: your trade executes at the real time ‘ask’ price.
• Sell market order: your trade executes at the real time ‘bid’ price.

Limit Orders

A limit order is an order to buy or sell a number of shares at a specified price. With limit orders you are guaranteed that the price your order fills at will be at or better than the set price you specified. The problem with this type of order is that if the market price never hits your specified price, your order won’t execute. Here are the two kinds of limit orders:

• Buy limit order: your trade is executed if the market price reaches your specified limit or goes lower.
• Sell limit order: your trade is executed if the market price reaches your specified limit or goes higher.

You basically use limit orders in anticipation of a future event, particularly if you aren’t willing to buy a share for more than a certain price, or sell for less than a certain price.

Stop Order

That brings us to stop orders. These are very similar to limit orders, with a slight difference. A stop order is an order to buy or sell a stock at the market value once a price hits your specified amount. The key part here is ‘at the market value’.  Whereas a limit order executes at or better than your specified price, a stop order executes at the market value when your price is hit.

Stop Limit Order

Confused yet? Don’t be. Stop limit orders combine the features of a stop order and a limit order. Instead of relying on market bid/ask prices once your stop order price has been hit, your stop order turns into a limit order and executes at or better than the price you set if another party is willing to fill it.

Trailing Stop Order

Payday. Finally. When you place a trailing stop order, you enter a stop parameter that creates a moving or trailing activation price. This parameter is entered as a percentage change or actual specific amount of rise (or fall) in the security price. Trailing stop buy orders are used to maximize profit when a stock’s price is falling and limit losses when it is rising. Trailing stop sell orders are used to maximize and protect profit as a stock’s price rises and limit losses when its price falls.

Trailing Stop Loss Order

A trailing stop-loss order limits the downside. How would this work in a bull market? Well, let’s go back to the SPY example. Let’s say you put a trailing stop-loss order on SPY of $10. SPY is now at $115. For example, let’s say that SPY falls to $107. No trade would have executed because SPY didn’t lose $10. SPY then goes up to $150. SPY’s stop price would have reset to $140. Then it tanked and dropped to $115 again. Your order would have executed at $140, protecting $25 of your gain. Nifty.

Other Trading Considerations

Keep in mind that using these types of trading strategies frequently can result in added trading fees. It’s for that reason that you should use a discount broker and try to limit the number of trades that you make. My two personal favorites are Zeccoand TradeKing. As always, I’m not at expert, so invest at your own risk.

Stock Trade Discussion:

• What type of stock trades have you used before?
• Have you ever used a trailing stop loss order? How did it work for you?

Related Posts:

• How to Make a Stock Trade
• Zecco Review

How to Use a Trailing Stop-Loss Order to Preserve your Market Gains is copyrighted by 20somethingfinance.com without consent to republish.