There’s no question that online investing has changed the way consumers buy and sell stocks. “Within a short period of time, we came from a very controlled situation where you had people recommending stocks and investments to us, to an environment in which it’s really easy to make poor decisions,” suggests Lee Hevner, president of the National Association of Online Investors (NAOI).

At the same time, organizations like the NAOI (www.naoi.org) and online services like ShareBuilder (www.sharebuilder.com) and BuyandHold (www.buyandhold.com) provide investors—both beginner and experienced—with the education to make smart investing decisions.

Beware of Come-Ons
At ShareBuilder, the focus is on a tried-and-true approach—long-term investing. Brian Ratzliff, ShareBuilder’s vice president of marketing, says that many online brokerage firms are focused on active trading. Although he believes they provide quality service, he cautions that they’re not for everyone.

“You need to trade fairly frequently to make their business model work,” Ratzliff explains. He points out that some sites may charge as little as $4.95 per trade, but to get that price, you need to make 75 trades during a 3-month period. “That works out to more than one a day because there are only 66 market days in a quarter,” Ratzliff says. The stock market, Ratzliff offers, is a perfect vehicle for putting money away on a consistent basis and setting yourself up for the long haul.

Ratzliff explains that many full-service brokerage firms have very good online tutorials to help beginning investors get their feet wet. Those types of services, he says, are beginning to stratify the online investment community.

“For consumers with assets of less than $200,000, there will be online services they can use at more basic brokerage firms,” Ratzliff says. “For individuals whose assets grow beyond that, we are beginning to see online firms add on layers of additional services. The bigger, more financially powerful firms are providing more services to help separate themselves from the pure execution firms. We will begin to see consolidation among these brokerages because there are just too many of them.”

Park Your Money
Whether you are well versed in or fairly new to online investing, BuyandHold’s CEO Peter Breen still believes in a long-term approach. To facilitate that ap-proach, the company offers its customers the ability to invest through dollar-based investing and fractional share ownership. It means that individuals can start investing in stocks with an initial deposit as low as $20 and purchase fractional shares of stocks in whole dollar amounts.

“By having dollar-based investing we were able to lower the minimums, so people could purchase stocks trading at $200 a share that they were previously unable to buy,” Breen explains. “We felt that it would be great if people could invest their money in a dollar-based manner and know that every single cent they had (minus the company’s $2.99 commission) was going to work for them.”

Breen, Ratzliff, and Hevner all agree that the one constant for investing is education. “There is an attitude that people are missing out unless they’re involved in online investing,” Hevner explains. “The tools and power are there for individual investors to educate themselves. But if the investment of time is only an hour a week, you might as well buy mutual funds.”

Breen echoes those thoughts. “When online investing first became popular, we were in a raging bull market. But this past April and these past few weeks have been wake-up calls. The discipline and fundamental approach that existed when a good broker had a strong relationship with his/her client is the philosophy that you still have to follow.”—Ed Rabinowitz