LOG ON AND PROFIT.

A beginner's guide to online investing

BRANDON LEDYARD BUYS AND TRADES STOCKS SUCH AS JDS Uniphase (Nasdaq: JDSU), TriQuint Semiconductor (Nasdaq: TQNT) and Ariba (Nasdaq: ARBA) online. The profits from his investments have afforded him certain luxury items, without tap ping into the family budget.

The 28-year-old school psychologist and self-directed investor paid $3,000 for a 1982 granite BMW with only 60,000 miles, which he bought from a friend. "The stock market has given me that extra cushion to get fringe benefits I couldn't get before," he says.

As an online investor for the past two years with Charles Schwab, Ledyard expects his passion will continue to pay off. Already, Ledyard's investments have helped allow his wife, Barbara, to stay home and care for their three-year-old daughter, Lauryn, and 14-month-old twin sons, Zavier and Zion.

RANKS OF ONLINE INVESTORS SWELLING

Ledyard's is just one of a growing number of American households joining the burgeoning ranks of online investors. The number of North American households involved in online trading is expected to grow to 4.3 million by the end of this year, up from 3.5 million in 1999 and just 500,000 in 1996, according to a 1999 report from Forrester Research in Cambridge, Massachusetts.

Thanks to a bullish stock market in recent years and the Internet's growth, a stampede of consumers is logging on to turn a quick profit or realize the potential of retiring with a hefty nest egg.

There are several critical factors potential online traders should consider before choosing an online broker, such as continuing to do business with a professional broker or trading with both online and offline brokerages. Investors need to carefully evaluate their investment styles as well as short-term and long-term financial goals.

Though personal advice is a big priority with most online investors, most trade electronically because of lower fees, greater convenience, real-time access to accounts and research capabilities, says Kenneth Clemmer, an analyst at Forrester who did an in-depth report, "Investors Grade eBrokers," for the research firm. Clemmer surveyed about 100,000 North American households, plus 10,000 online consumers. The survey was conducted from late December 1998 through mid-January 1999.

FROM CAUTIOUS TO AGGRESSIVE

The study found that out of all investors with Internet access, most fit into one of these categories:

* Retirement by the book. These are online investors who follow reasonable strategies to obtain a comfortable retirement, making up 13%. Their investments on average are a modest $49,235.

* Aggressive affluent. This group makes up 32% of online investors. They take risks, trade almost 10 times a year on average and have a mean net worth of more than $320,000.

* Portfolio cruise control. The most risk-averse, comprising 11% of Internet traders. They trade moderately and only to maintain their considerable investment portfolios, which average more than $320,000.

* Get rich quick. These investors are typically the 20-somethings, day-trading crowd, representing 15% of online traders, and another 13% use both online and offline brokers. They trade frequently despite their modest net worth of $38,277.

Among the study's other findings:

* Online traders tend to be young, educated and wealthy professional men. They trade twice as often as their offline trading peers.

* Convenience is the biggest draw for online traders. About 45% of them have switched brokerage firms in the past. Almost one-quarter of them did so because they could not trade online.

Clemmer says the findings show how fast online trading is growing and why it will continue booming and keep making up a larger percentage of all stock transactions. Indeed, business is brisk. The number of online accounts reached 5.4 million and assets jumped to $374 billion in 1998 according to Forrester data. But those figures are projected to swell to 13.7 million accounts and assets of $309 trillion by 2003.

TRADING FOR EXTRA CASH

As a relatively new online investor, Sylvia Thomas, 52, could fall between the retirement by the book and aggressive affluent categories. She manages the office for her husband's business, Lanny's Hobby Shop, an auto body shop in Los Angeles.

Thomas first invested in stocks with cash she accumulated in her 401(k) and defined benefit retirement plans at Pacific Bell Telephone. When Thomas left the utility four years ago to help her husband, she was determined to build up her portfolio. At that time, she moved her money into a Merrill Lynch IBA, investing in blue chip stocks like Disney (NYSE: DIS) and AT&T (NYSE: T) and avoiding risky investments.

But when she didn't get the returns expected, she decided about two years ago, to be more aggressive and subscribed to Merrill Lynch Online. Using the online brokerage service allowed her to research and trade stocks on her own while maintaining her relationship with a professional Merrill Lynch broker.

The transition also allowed Thomas to expand and diversify her portfolio, which today includes Microsoft (Nasdaq: MSFT), Qualcomm (Nasdaq: QCOM), Home Depot (NYSE: HD), the John Hancock Small Cap Growth Fund and the Federated High Income Bond fund.

The move is paying off: Thomas's portfolio is now worth about $450,000, up 37% from $328,000 nearly two years ago. Using Merrill's online service gives her a one-stop financial trading, research and information center, where she can access the latest market news, read analysts' stock picks and learn when companies are initiating stock splits and paying dividends.

Separate from her retirement money, Thomas maintains an E*Trade account, worth less than $10,000. She feels freer to take risks on more volatile sectors with this account.

An avid reader, Thomas uses "downtime" at work to research stocks, giving her decision-making authority on which stocks to buy instead of just relying on her broker. But she also likes getting her broker's advice on decisions that will affect her long-term goals.

"I'm investing for the long term, hoping to retire by the age of 59," says Thomas. Although she considers her E*trade account secondary, she hopes to use the profits to augment her retirement fund.

Her efforts have given Thomas cash for such things as remodeling her living room and making other home improvements. Also, she is helping to pay for daughters Alicia and Chanelle's college education.

CHOOSE CAREFULLY

Experts say there are several factors to consider before choosing an online broker. The main considerations: commissions and fees; advice and information; and, channels and accessibility.

Clemmer suggests that fees probably matter most because they hit investors' wallets every time they do a transaction. "Consumers should get a sense of how often they trade and what they buy," he says. He also says active traders should be more sensitive toward commissions than less frequent traders. The reason: a $20 difference in commissions is negligible for one transaction, but compounds quickly after 10 to 20 trades.

Clemmer says the level of advice and information is another crucial factor in determining which online broker to choose. He says some self-directed investors need little more than stock quotes. Conversely, less self-directed investors might want to read analysts' research reports, recommendations and even consult with an advisor. "Consumers need to select the firm with the right amount of hand holding, if need be," he says, either from a financial planner or a broker.

Another element to consider is the relationship between investor and broker. He says some firms with online brokers have great customer-service call centers and even brick-and-mortar branches. "Some people will be OK with only using the Web, while others will want to know [that] there's a person they can call."

Active traders should consider online brokers with low-cost trade fees and fast execution capabilities. Those attributes are less significant for those who trade less. "Both novice and experienced investors might find any combination of these important," Clemmer says. "The key question is not experience, but investing style."

TRUSTING YOURSELF WITH YOUR OWN MONEY

For Ledyard, the fact that he trusts himself the most with his money drove his decision to trade online. That, coupled with not having the pressure of a broker telling him what stocks to buy or sell, meant he could educate himself about the market and make a profit.

He says convenience and price were also big factors. Ledyard spends about $30 per transaction with Charles Schwab investing online, compared to at least $50 per trade if he used a full-service broker.

An online investor since March 1998, Ledyard typically buys stock in blocks of 50 to 100 shares and makes about two to three transactions a quarter, up from one a quarter in the beginning. "If I didn't have to pay the capital gains taxes, I'd trade more often."

Ledyard describes himself as an "aggressive investor with a long-term view," indicating he balances buying volatile investments with the potential to make decent returns over time. His best performer: JDS Uniphase. The stock has split 2-for-1 three times since he bought it last June, providing him a 500% investment return.

He also likes doing the transactions himself and finds trading on the Net fairly simple: enter the number of shares to buy, type in the company's ticker symbol and indicate if you want the dividends reinvested. The broker will confirm your order and view your account. "It's that easy," he says. "I figure why pay someone else to do that when I can do it myself. It allows me to see where my money is going and how I'm doing."

Ledyard appears to be typical of many online investors.

Mike Anderson, spokesman at Ameritrade, one of the nation's fastest-growing online brokers with the recognizable "Stewart" TV commercials, says an active customer has a long-term capital-growth investment plan, an average account of $39,000 and buys and sells stocks slightly more than once a month. He says 40% of these investors own homes worth $200,000 or more and have personal income of at least $100,000. Ameritrade typically charges an online customer about $8 to execute a trade. "Our clients like the value, speed and customer service they receive," Anderson says. "These are self-confident investors who are comfortable doing the research and executing trades on their own."

Anita D'Aguilar, vice president and senior financial consultant with the Private Client Group at Merrill Lynch in Los Angeles, whose company began offering online trading last June, agreed. She says more consumers are trading online because of the growing number of online brokers and discount companies pushing the service, and the growing sophistication of investors who are confident enough to research stocks and execute their own trades.

Merrill Lynch offers online trading services ranging from $29.95 per transaction to a service that carries a set annual fee based on the size of your investment. The service covers all trades and provides a financial consultant. "As a broker in this industry, I'm glad we have products with set' fees," she says. "This is a big thing for us, and many of our clients like the convenience and amenities that come along with it."

But D'Aguilar, who still handles most of her clients' trades, says online trading is not for everyone. She maintains that most investors concentrating on retirement want experienced brokers who can provide them with personal advice and research. Hence, some investors aren't as concerned with price.

Still, a growing number of consumers like the appeal of investing online. Take Winston P. Thompson, a 50-year-old certified public accountant and financial consultant from New York who has an E*Trade account. An investor for five years, his holdings include America Online (NYSE: AOL), NetZero (Nasdaq: NZRO), Novell (Nasdaq: NOVL) and Tyco International (NYSE: TYC). He enjoys investing electronically because of the lower cost, convenience and market data provided on the site. He considers his online investments small, worth about $15,000. But Thompson says the key disadvantages to online investing are the lack of access to personal professional advice and periodic systems failures.

At Datek Online Brokerage Services in Iselin, New Jersey, virtually all of the trades are done online, says Mike Dunn, the company's spokesman. He says those investors primarily want fast executions with lower fees than they can get from traditional brokers and just enjoy making trades themselves.

Carolyn J. Fowler, 52, likes to invest online because of the low fees and the ability to buy and sell stocks and make easy trades among her mutual funds. Fowler, president and chief executive at Fowler Group International Inc., a marketing, sales and learning consulting firm in Hawthorne, California, averages three trades a month. Her online account is worth $25,000 and represents less than 1% of her total portfolio and has an annual growth rate of 14%, but she has good and bad days as a new online investor.

"My online trades represent play money and are directed toward my personal interest in e-commerce, technology and Africa," she says. For her, drawbacks include the time it takes to monitor her account with consistent frequency, the inability to analyze data in a timely manner in order to make decisions (areas where Fowler still relies on her professional advisor) and the numerous e-mail and Internet scams designed to entice consumers to invest online.

Online investing can yield fast trades and quick cash, but it can also lead to an even quicker dip in your investment portfolio. So make sound choices before clicking that buy or sell button.

Who's who on the road to eBrokerage

                                        Online,
                            Trade      have broker,   Online,
                           online      not trading    no broker

Percent male                   70%            56%         56%
Percent female                 30%            44%         44%
Mean net worth             $144,177       $144,179    $125,453
Mean income                 $59,629        $57,889     $47,319
Mean age                        39             43          38
Number of trades per
 year                         7.86           3.80         N/A
Completed 4 years of
 college                       44%            39%         29%
Use PC at work                 78%            67%         62%

                         Not online,   Not online
                         ave broker   no broker

Percent male                  51%          44%
Percent female                49%          56%
Mean net worth            $216,476       $61,328
Mean income                $47,856       $25,141
Mean age                       52           49
Number of trades per
 year                         N/A           N/A
Completed 4 years of
 college                      36%          14%
Use PC at work                43%          28%

Source: Forrester Research Inc.