Dear Penny Sleuth Reader,

Six months ago, Susan and John (neighbors who invest together) bought a $1 penny stock. They each spent $500. And their orders were filled at the exact same price.

After trading even for months, the company came out with a strong quarterly earnings announcement a few days ago. Afterward, the stock rose to $2 in a hurry — doubling John and Susan’s money. As you might expect, the two decided to sell. They immediately called their brokers and exited the trade — at the exact same price.

At the end of the day, John and Susan met at Starbucks to revel in their success. They pulled up their account summaries as they sipped on a skim latte with nonfat soy milk. And to John’s surprise, Susan had more money in her account!

How could that be? They each invested in the same company. They each bought at the same price. They each spent $500. And their brokers each got them at out the exact same price. Yet Susan’s account showed a balance of $986. And John’s account was worth $950.

John almost choked on his girly coffee. “What gives?” he said out loud.

Online Broker Reviews: 90% vs 97.2%

Well, it turns out, Susan and John used different online brokers.

John used Fidelity’s online services to buy and sell his stock. He paid $25 per buy and sell transaction. (So his total commissions were $50 for this trade). And Susan used Scottrade — a deep discount online broker with virtually no bells and whistles. She paid $7 per buy and sell transaction. (So her total commissions were $14 for this trade).

When it was all said and done, Susan walked away with a total net profit of 97.2% and John made 90%. And the only thing that was different was their broker!

This minor detail is a big deal — especially for small-cap investors and traders like you. Using the right broker can save you thousand of dollars a year in profits. Choosing wisely can be the difference between making 30% a year and barely breaking even. In fact, having the right broker is the most important choice you can make — except for choosing what stock to invest in.

Having said all that, I spent the last six hours researching online brokers for you — comparing commissions, fee structures and balance requirements. I’ve also included phone numbers, Web addresses and a few notes on what kind of services they offer.

Check it out. Here’s my official Online Broker Review (in no particular order)…

1 ) E*TRADE: E*TRADE charges $12.99 for both market and limit orders — including penny stock trading for $1 or less and all OTCBB stocks. You need at least $1,000 to open an account with E*TRADE. And there is a $40 quarterly fee for using their services. E*TRADE is a cheap online broker mainly for active traders who don’t need a lot of handholding.

E*TRADE’s contact info: phone: 1-800-387-2331, Web address: http://www.etrade.com/.

2 ) Fidelity: Fidelity charges $19.95 for both market and limit orders — including all penny stocks. You need an opening balance of $2,500 to open an online account. But once you do, there is no quarterly or annual fee.

Fidelity offers a lot more research capabilities — and is marketed for the more serious investor (with a higher net worth) who likes the bells-and-whistles of a full-service broker.

Fidelity’s contact info: phone: 1-800-544-6666, Web address: www.fidelity.com

3 ) Scottrade: Scottrade is one of the cheapest online brokers you will find. It charges $7 for both market and limit orders. There are no quarterly or annual fees. So even if you are an inactive investor, you won’t be penalized for “not trading.” The only drawback for penny stock investors is this…

In addition to the $7 flat commission, they charge an additional fee of 0.5% of the total principal. So if you spend $500, you owe Scottrade an addition $2.50 added onto that $7 commission — making your total commission come to $9.50.

Like E*TRADE, Scottrade is a very bare-bones broker. If offers no handholding whatsoever. But it is cheap!

4 ) Charles Schwab: Charles Schwab may be the pioneer in the discount broker world, but it isn’t the cheapest. It charges $19.95 for market and limit orders — and an additional $0.015 for all shares over 1,000. In addition, Schwab charges you a service fee of $45 a quarter.

To open an account with Schwab, you need a minimum of $2,500. And for small-cap investors, you need to be aware of one thing…

It only costs $19.95 to buy or sell any small-cap or penny stock. However, if you buy more than 5,000 shares, you have to pay $0.003 for every additional share.

Charles Schwab’s contact info: phone: 1-866-855-6770, Web address: www.schwab.com.

Online Broker Reviews: TD Waterhouse — but –

5 ) TD Waterhouse: TD Waterhouse charges $17.95 for market orders and $20.95 for limit orders. You need a $1,000 starting balance to open an account with TDW. And you are charged a $25 quarterly fee — which is waived if you make three or more trades in a 6-month period.

For you small-cap (or penny stock) investors, there is no additional fee to trade or invest in OTCBB stocks.

One note to keep in mind about TDW: It is in the process of being acquired by Ameritrade. So my guess is it will soon adopt Ameritrade’s commission and fee structure. Of course, we’ll have to wait and see. The “helpful representative” I spoke to couldn’t tell me a thing. Shocker!.

TW Waterhouse’s contact info: phone: 1-800-934-4448, Web address: www.tdwaterhouse.com

6 ) Ameritrade: Ameritrade is one of the better-known deep discount online brokers. It charges a flat $10.99 for all market and limit orders — and that includes your OTCBB and penny stocks. You need $2,000 to open an account with Ameritrade. And you are charged a $15 quarterly fee if your account balance falls below $2,000 OR you don’t make four trades every six months. (In other words, if you make four trades, you are exempt from the $15 fee).

Ameritrade’s contact info: phone: 1-800-454-9272, Web address: www.ameritrade.com

7 ) Firstrade: Firstrade is one of the online brokers I never heard of before today. But it caught my attention with its $6.95 commissions, no annual or quarterly fees and no minimum opening balance required. It is truly a deep discount brokerage service that should only be used if you don’t need any help whatsoever.

As far as buying and selling penny stocks, Firstrade does mark up their commissions a bit. If you trade stocks that sell for $2 or less, you must tack on an addition fee of ½ a cent per share. So if you buy 1,000 shares of a $1 stock, it will cost you $6.95 plus $5. So your total commission would equal $11.95.

Firstrade’s contact info: phone: 1-800-869-8800, Web address: www.firstrade.com.

8 ) Vanguard: Vanguard is a more full service online broker — similar to Fidelity and Schwab. So it should come as no surprise that you must pay more that you would with E*TRADE or some other deep discount broker.

Vanguard charges $25 to execute any market or limit order. It assesses a $30 annual service fee for every client. You need a minimum opening balance of $3,000. And if you are interested in buying penny stocks, it gets a little hairy. You pay a flat $20 commission per play plus 2% of the total principal.

Vanguard’s contact info: phone: 1-800-992-8327, Web address: www.vanguard.com.

9 ) Wang Investment: This is another broker I knew nothing about before today. But it too is competing with the likes of E*TRADE, Firstrade and Scottrade. Wang Investment charges $8 for most market and limit orders. I say “most” market and limit orders because it costs $25 to buy or sell stocks that trade for $1 or less.

They charge a $30 service fee every six months. And there is no minimum opening balance required to open an account with Wang.

Wang Investment’s contact info: phone: 1-800-353-9264, Web address: www.wangvest.com.

10 ) Trading Direct: Trading Direct charges $9.95 for all market and limit orders — including OTCBB and Pink Sheets stocks. There is no minimum opening balance required to start an account up. But they do charge a $60 annual fee — unless you make at least one transaction per year.

Trading Direct’s contact info: phone: 1-800-925-8566, Web address: www.tradingdirect.com.

I hope this helps you in your penny stock trading. Remember, money saved on commissions is just as important as money earned on a solid stock pick!

Trade well,

James Boric
Dec 7, 2005

Online Broker Reviews: Revealed: The Best Online Brokers was originally featured in the Penny Sleuth.