Irwin Greenstein reports from his new office in Baltimore, which overlooks a family-owned market that sports huge banners for Lotto and Keno…

*** If there are any small-cap skeptics left on the planet, just let me say, “Will you please pack it in already?” That’s because the Russell 2000, the benchmark small-cap index, set two back-to-back records this week in a spectacular run-up that still has legs…and I’m talking Lance Armstrong legs.

On Wednesday, the Russell 2000 leapt 0.5%, to reach an all-time high of 609.61. The Penny crew here ran down to James’ office to celebrate. Not only did the Russell 2000 reach nosebleed territory, it was continuing to trounce the Dow Jones industrial average, which closed at 1,333, or 11.4% away from its high, and the S&P 500, which was languishing at 23.9% below its all-time high. Well, we told ourselves, that’s what the fat cats get for following the large-cap pack.

But come Thursday, the Russell 2000 DID IT AGAIN. Yes, incredibly, it hit 616 — a full percentage point higher than Wednesday. And 2 points more than the previous high of 614, set on March 10, 2000.

Given this powerful momentum, small caps may continue to soar through the end of the year. President Bush’s re-election is certainly a factor, since it’s no secret that Wall Street loves him. But a related dynamic is that the war on terrorism will need a full pipeline of innovative technologies to whip the bad guys, and nobody does innovation better than small-cap companies. Entrepreneurs are obsessed with bringing a better mousetrap to market, and when they hit it big, everyone wins…customers, executives and, best of all, shareholders.

*** That’s why I checked in with the vFinance Entrepreneurial Confidence Index (VECI). I originallycovered it in the Oct. 22 issue of Penny Sleuth. The VECI measures where entrepreneurs and venture capitalists are putting their money. For us, it’s a great indicator to determine which small-cap segments will be hot once these startups consider an IPO over the next 12-36 months.

Speaking of setting new records, the October VECI survey was compiled from 3,200 participants, 14.3% more than the previous month’s survey. So which segments made the top of the list? Computer and software services showed the most interest, followed by real estate and leisure.

*** I was talking about the VECI results with Jonathan Kolber, editor of Vantage Point Investment Advisory. Jonathan’s job is to spot the most interesting and inventive small-cap companies you never heard of and show us how to make a mint with them.  Just the kind of entrepreneurs who participate in the VECI surveys.

Jonathan confided in me that in his upcoming issue he’ll profile a company that’s doing landmark work with antioxidants and life extension. His research has uncovered an astounding fact: The company’s discoveries are potentially millions of times more potent than vitamin C. Major university research is showing their supplement can halt, and in some cases reverse, many age-related diseases. It’s even starting to win over skeptical scientists who don’t believe in supplements. This groundbreaking development will mean better health for millions and big profit opportunities for investors. Jonathan is one of the brightest guys I’ve ever met, so check him out:

http://www.agora-inc.com/reports/VPI/288B00

Online Broker Beauty Contest

Two-and-a-half years ago I sold my house in San Francisco for a tidy profit. Not long after, my wife and I moved to beautiful Baltimore — where homes cost a fraction of what they did in the fifth most expensive housing market in the country. So we went from a tiny post-war tract house with spectacular bay views to a 23-room Victorian fixer-upper in a posh historic district. And after the plaster dust cleared, I was able to pocket some money.

Wanting to take advantage of my good fortune, I decided to invest my profits in a few small-cap companies I’d been watching over the last three months. Ready to get started, I called my full-service broker. After chatting for a while (which meant listening to him try to sell me on a new 401(k) plan), I finally got around to telling him which stocks I wanted to buy. That was when I went into shock.

Just to execute a buy order with him was going to cost me $50-250 per transaction. And on top of that, I would have to add several thousand dollars into my account.

I was only interested in buying stocks that were $3 and under…and he wanted how much? Just to break even on my investment, I would have to make at least 20%. I said, “Thanks, I’ll get back to you.”

After that incredible phone call, I decided it was time to dump my full-service broker and look for a cheaper alternative better suited to my new investment strategy.

My first objective was to trade online — cutting out high-priced broker assistance whenever possible. As a small-cap investor like you, I simply COULDN’T afford to pay a ton of money in commissions. I knew that the cost of trading online without broker assistance could reduce commissions by 80% or more compared to my full-service broker…who apparently really enjoyed his filet mignon for lunch.

I also knew that I was going to be holding these stocks for a year or two. I wasn’t looking to trade in and out. So I didn’t need the cheapest commissions on the market. I could afford to pay a bit more in order to get the level of service I wanted.

For instance..

I knew I’d want access to an online portfolio-management feature. I also wanted the ability to trade across a wide range of exchanges. And high-quality broker assistance was an essential backup in case I found myself in a jam.

With that basic criteria in mind, I spent a morning searching the Web for great online broker deals. I came up with a bunch that I thought you’d find helpful in managing your own portfolio of small-cap stocks. If you’ve ever wondered what online brokers are out there, wonder no more. I scoured the Web, and here are the main brokers you need to know about…

*** Ameritrade is one of the most popular online brokers. Online trading commission starts at $10.99. If you need a broker to help you out, the charge could go up to $29.99. The minimum account requirement is $2,000.

Ameritrade is suited for take-charge investors who want to balance low-cost trades with modest resources. You have to be more educated than a beginner, and the professionals available from Ameritrade will expect a modest of level of experience. That means most questions should be confined to using the service itself instead of general questions about the stock market.

If Ameritrade fits your trading profile, this would be a good company to use. (www.ameritrade.com)

*** E*Trade has a commission of $9.99 for active traders under its Power E*Trade service. For customers of its Priority E*Trade service, the commission is $12.99 per trade, plus contract charges that range between $1.25 and $1.50. The commission gets bumped up to $19.99 for Nasdaq, market, limit and stop orders. You’ll also pay an extra penny per share for orders over 5,000 shares. Talking to a broker will cost $45. Other nominal fees vary depending on your account balance.

E*Trade is a full-service online brokerage. Because the company is eager to up-sell services, you can take plenty of time asking about investments of all kinds. Expect E*Trade to be generous with its information. They have a lot of experience in working with new traders. But remember, the company’s ulterior motive is to build the kind of relationship with you that will allow them to provide as many financial services as possible. (www.etrade.com)

*** Investrade’s commission starts at $7.95 per trade. Brokerage assistance costs $10. The minimum balance requirement is $2,000.

Investrade is targeting inexperienced traders who want to move up into a range of other financial services. This site is unique in its educational slant, offering everything from a glossary to an online “course” that is a high-level overview of some options trading theories and terminology. Think of Investrade as a low-cost alternative to E*Trade.(www.investrade.com)

*** Invest.com has a low commission of $4.99 per Internet trade, up to 5,000 shares. If your trade is under 100 shares, there’s a $5 surcharge. Broker assistance costs $12. But to get these low rates, you must have at least $5,000 in your account.

This site is bare bones and highly functional for experienced traders. The company claims that it can keep costs down because it prefers investors who have at least 12 months of investing experience and at least six months of experience using the Internet. (www.invest.com).

*** Charles Schwab’s Schwab Signature Trading package has an entry-level commission of $9.95. That commission applies to online equity trades in eligible accounts once 30 or more qualifying trades are placed in the household per quarter and/or once the household balance reaches $1 million or more.

Hypertraders may want to investigate Schwab’s CyberTrader service. CyberTrader offers special pricing if you trade more than 1,000 trades or 1 million shares per month, but the base rate is also $9.95 plus 0.6 cents per share for the first 2,000 shares and 0.3 cents per share above 2,000 shares (there’s a $1 minimum).

Since Schwab is a full-service broker, the fees vary widely depending on your level of investment with the company. There’s lots of hand-holding here, but you’ll have to ante up for it. (www.schwab.com)

*** Scottrade is another broker noted for its cheap commissions – $7 for an Internet trade plus $1.50 per contract, but at least 75% of your trades must be done online to qualify for that deal. For Nasdaq and listed limit, stop and stop limit orders, add $5. A broker assist costs $17. And you need only $500 in your account.

Scottrade offers a full range of financial services, although its Web site doesn’t provide that same warm level of comfort as, let’s say, Schwab’s.

It’s probably a good idea to be an experienced trader for this service. (www.scottrade.com)

*** XoomTrade’s flat fees start at $5 per trade for the average investor. But there’s also a refundable monthly charge that ranges between $14.99 and $39.99, depending on which of the four services you subscribe to. Each of the service levels addresses increasing volume and sophistication.

If you’re somewhat experienced, XoomTrade sounds like a bargain. (www.pointdirex.com)

The Fine Print

In searching around, I came across a bunch of caveats, exceptions and other fine-print minutiae that you should be aware of before you agree to anything.

If you think you’ll need a lot of tech support, find out if there’s a ceiling on the amount of time you can get before a fee kicks in. And speaking of tech support, it would be very helpful if you knew the specs of your computer…just to make sure that the brokers’ software will run on it without a hitch.

Almost all of these online brokerage services have surcharges for electronic communications networks (ECNs). An ECN is an automated exchange that matches orders between market makers and investors. ECN fees generally range from 2-10 cents per share, but in rare instances, they can be upward of $25 per trade.

I strongly suggest calling the broker before you sign up for its service. Make sure you ask about any hidden fees. And know exactly what services come with the plan you want. If you want to trade after-hours, make sure you are able to. If you know that you’ll be trading large blocks of stock (usually more than 5,000 shares at once), make sure you know about any surcharges for doing so. You may also want to check to see if the online brokerage can execute an order that large.

Remember, it’s your money. So you can ask as many questions as you want. Make sure your broker suits your needs. If it doesn’t, move on.

Happy trading,

Irwin Greenstein

November 12, 2004

P.S. By the way, I ended up going with E*Trade. I had used it a few years ago, and I was happy with the service…and so with that in mind, I settled for a commission that was on the higher end of the spectrum. But as I mentioned, since I was planning on holding the stock for a while, I just thought I’d live with it.

Given that your strategy may be different, you may choose another broker. All of them have responsive sales folks, accessible via toll-free phone numbers, who are happy to answer your questions. Don’t feel pressured to make a decision. Take your time. Choose carefully. And best of luck.

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

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