Brokers Quietly Lowering Costs, Adding Investment Options for Occasional Traders

It's becoming easier and more economical to buy stocks a little at a time.
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Truly hyperactive traders, the kind who eat leftovers for lunch in front of their computer screens, may number as few as 100,000. Estimates are hard to come by. What's more certain is the number of online investors who use the Internet to make anywhere from one to several dozen trades per month. By 2003, that group is expected to number close to 10 million, according to

Forrester Research

.

With a market that huge and growing, it should come as a surprise that mainstream brokers -- like those catering to active traders I wrote about in

last week's column -- are racing to find a business model that'll win them customers. Some of the ideas being tried could radically change the way we invest.

The Age of Ubiquitous Investing

All of us have a few hundred or thousand dollars just sitting around collecting miserly bank interest. Suppose you could park that money in an index fund until you need it. That's a service offered by

X.com, started by 28-year-old South African

wunderkind

Elon Musk.

At X.com, which aspires to be an online financial supermarket, customers can put their money into traditional savings or checking accounts. Or, they can put as little as $1 at a time into any of three index funds (

S&P 500

, international or bond) or a money market fund, all managed by indexing giant

Barclays Global Advisors

. None of the funds carry sales charges.

Analysts predict X.com's easy-access funds will be copied by banks everywhere. Here's an idea that, if it catches on, could turn millions of us into addicted daytraders. Imagine yourself sometime in the future working at the office, with a stock ticker in the bottom of your computer screen. You notice that all major indices are moving up nicely. So, clicking on a simple icon on your screen, you transfer your entire checking balance into the S&P fund. In 20 minutes you've made enough to buy dinner out that night. Maybe there should be two icons: one to short the index and one to go long.

Little by Little

Of course, daytrading at work could get you fired. And you risk losing this month's mortgage payment if you mess up. So if you want to play it safe, try out

Sharebuilder.com. Set up an account and you can have monthly amounts deducted from your bank account and invested in stocks. In this way, you can dollar cost average into any of 2,000 stocks or exchange-traded index funds for just $2 per transaction. Unlike traditional online brokers, Sharebuilder.com lets you buy fractional amounts of shares.

Mass Customization

There are more mutual funds to choose from than stocks. But maybe you'd like to create your own "fund" -- something you can easily do by signing with

Folio

fn

. The Vienna, Va.-based online broker was launched last month by Steve Wallman, who served on the

Securities and Exchange Commission

from 1994 to 1997. Pay $295 annually, and you can trade in and out of 2,500 of the most actively traded stocks -- as often as you like. (Trades are executed only twice a day, though.) That fee's far easier to take than the $1,000 and up annual management fees or the six-figure account minimums that full-service brokerages like

Merrill Lynch

and

American Express

require for unlimited trading. But, of course, it's considerably more than the free trades offered by

FinancialCafe.com,

freetrade.com and the soon-to-be-launched

Freetradez.com. (

TSC

recently

profiled these free-trade brokerages.)

Folio

fn

differs from these free brokers in that it enables you to easily trade baskets of stocks, which Wallman calls folios -- hence the site's name. The brokerage created 75 folios that represent various investment strategies and sectors. In essence, these ready-made stock portfolios are similar to the increasingly popular exchange-traded index funds -- except there are no management fees whatsoever, unless you count the $295 you pay annually to trade them.

As I mentioned, Folio

fn

customers can create folios of their own, too. Theoretically, you could create your own folios of energy stocks, tech stocks, financials or whatever and trade them with a single mouse click. That, of course, is where the $295 all-inclusive trading fee makes sense. If you were paying, say, $12 to trade each stock in the folio, you'd have to maintain huge positions in each stock in order to capitalize on small intraday moves by the sector. Otherwise buying and selling the entire sector might easily cost you $300 in round-trip commissions.

Single-Entry Bookkeeping

Commissions notwithstanding, actively trading entire blocks of stocks will create an accounting nightmare when it comes time to prepare your taxes. But what if you could compute your tax liability with each trade you make? Right now, many brokerages let you download your portfolio directly to

Microsoft Money 2000 or

Quicken personal finance software. However, downloading doesn't always occur seamlessly. Expect to do a fair amount of setup work and tinkering to get these programs to work.

GlobalNeTrader.com, a brokerage I

wrote about last January, is reportedly working on a feature that keeps a running tally of what you owe on a Schedule D capital gains tax form. Let's hope more brokerages are working on applications like this.

YouDecide.com has an even more ambitious goal. The company wants to be the portal site for all its customers' financial services. But unlike the major banks, brokerages and insurance companies with similar aims, YouDecide.com has no plans to develop these services in-house. Rather, it's partnering with brokers (so far,

A.B. Watley

and

Dreyfus Brokerage Services

) as well as insurers, online banks and tax preparation providers.

"We pride ourselves on having an agnostic platform where we have no vested interest in any one provider," says Caroline Vanderlip, YouDecide.com's vice president of marketing. You can move money from one of these providers to another and track these moves via a single statement. At some point, Vanderlip promises, you'll be able to compute the tax ramifications of these moves in real time.

With an app like this, someday your bank interest, capital losses from bad trades and deductions for business insurance will all theoretically be tallied throughout the year. And you'll only need to review and sign your tax return come April. Now that's the Holy Grail!

Next week: How to build the ultimate trading computer system.

Mark Ingebretsen is editor-at-large with

Online Investor magazine. He has written for a wide variety of business and financial publications. Currently he holds no positions in the stocks of companies mentioned in this column. While Ingebretsen cannot provide investment advice or recommendations, he welcomes your feedback at

mingebretsen@onlineinvestor.com.