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In the next 60 seconds, we'll usher you through the five major steps to choosing and setting up a discount brokerage account. Start your stopwatches, Fools...

0:57: Decide how much you'll invest
Will it be $500, $5,000, or $50,000? Some discount brokers require a minimum initial deposit of $2,000. Others require $500. And some require no minimum, or accept smaller initial deposits to open an IRA. Your first step is to figure out how much dough
you plan to start with.

0:50: Consider what you'll be investing in
While we're partial to stocks, you may also want to invest in mutual funds (particularly index funds), options, bonds, or certificates of deposit (CDs). Not every online broker will offer all of these, so make sure you can buy what you want through your broker.

0:38: Compare broker fees and services
Check out and compare how much different brokers will charge in commissions and fees. For a quick comparison of four major brokerages, check out this aptly titled Broker Comparison Table, where you can see how some of our sponsors stack up. For extra credit, visit other brokerage sites to see what they bring to the table. You'll of course want to find out information about trading commissions, but also compare account maintenance fees, IRA custodial fees, and other costs.

*waived if > $2,000 in assests OR 4 trades/6 months
** waived if > $5,000 in assets OR 4 trades rolling 6 months; Starts 9/30/01
***waived if > $10,000 in assets OR 4 trades/year

But don't simply judge online brokers by how much they charge. Some have a lot more to offer. Eyeball this checklist to help decide what additional services interest you:

phone trades
research products
local offices
check-writing capabilities
ATM access
a free Koosh ball

0:21: Do the paperwork and sign the check!
Setting up an account is usually as easy as downloading the application forms, signing them, and folding them nicely into an envelope with a check to fund your account. You'll receive confirmation of your ability to start trading in pretty short order. Voila! (Even easier is transferring your loot from your old brokerage account to a new one. They do all the work!)

0:03: Revel publicly
You're now "in the know." Memorize a few key lines to drop at the next office cocktail party: "I'm in the market for the long haul. Still, I couldn't help but click over to my discount brokerage account twice today." Or "I'm only a few trades away from owning an island next to that tow-truck driver."

Whew! Done in just under 57 seconds. Congratulations, Fool! You've just taken a giant step toward controlling your financial future.

For those of you with a few extra minutes to spare, here's some additional reading:

How to Invest $20, $100, and $1000
Ten Ways to Size Up a Broker
When you're filling out the application, you'll need to choose the type of brokerage account you want.
We make it easy.

Check out nearly everything we have to say on the topic of Choosing a Broker in our Discount Broker Center.

©1995-2002 The Motley Fool. All rights reserved.

How To Invest $20, $100 and $1000+

Got only $20 to put away right now?

You can use it to buy shares in Intel or Johnson & Johnson or Harley Davidson (you rebel), to name a few of more than a thousand options available. And what about $100 or $1000? Your options are even greater.

We're not here to tell you where to invest your money. We won't lay out a handful of stocks on a "buy" list or have you mimic our real-money portfolios. But what we can tell you is how you can invest your money -- the mechanics of investing small, large, and medium amounts of cash.

How to invest $20
Let's start with $20. We're going to assume that you've already paid off any high interest debt and that you have some money stashed in a safe place (like a savings or money market account) that you can get to quickly in case of an emergency expense. Now you find yourself with a little extra dough and you want to begin investing for your future.

Is it even worth it to invest such a pittance?

Heck, yeah! One of the best ways to invest small amounts of money cheaply is through Dividend Reinvestment Plans (DRPs), also known as Drips. They and their cousins, Direct Stock Purchase Plans (DSPs), allow you to bypass brokers (and their commissions) by buying stock directly from the companies or their agents.

More than 1,000 major corporations offer these types of stock plans, many of them with fees low enough (or free) to make it worthwhile to invest as little as $20 or $30 at a time. Drips are ideal for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). Once you're in the plan, you can set up an automatic payment plan, and you don't even have to buy a full share each time you make a contribution.

While you have to keep good records for tax purposes, Drips may be one of the surest, steadiest ways to build wealth over your lifetime. (For more details on Drips, see "What if I can only invest small amounts of money every month?"

How to invest a couple of hundred bucks You've weeded out all the wooden nickels from your spare change jar and have tallied up a few hundred bucks. Instead of blowing it on snack food and Elvis memorabilia, consider investing it in an index fund (the only kind of mutual fund Fools like). An index fund that tracks the S&P 500 is your entrée into an investment that has traditionally returned 11% a year, and lately has been doing a good bit better than that.

There are some index funds that require as little as $250 for you to call yourself an owner.
This low minimum is usually restricted to IRAs (Individual Retirement Accounts), as you'll see in our index fund comparison chart. After your initial investment, you can add as much money as frequently as you like for no additional costs or commissions. You purchase index funds directly from mutual fund companies, so there are no commissions to pay to a middleman.

If you have a few hundred dollars to start with, then this is a great, low-cost way to establish an instant, widely diversified (500 companies!) portfolio.

How to invest $500
Once you're up to $500, your investment options open up a bit more. You can still buy an index fund, and will now have your pick of fund companies that have higher minimum initial investment requirements. This freedom will enable you to shop around for a fund with the lowest expense ratio.

You should also put some serious consideration into opening a discount brokerage account. You'll want to focus on the account option that best serves your needs -- an account that has a minimum initial deposit, or even none at all. That means you can open up an account with whatever investing money you have available, and start researching and perhaps purchasing individual companies. (Or, if you're enamored of index investing, you can easily invest in Spiders a stock-like investment that mimics the performance of the S&P 500.)

The key here is to keep your costs of investing (including brokerage fees) to less than 2% of the transaction value. So if you're planning to add to your position in stocks a few times a month, a Drip or an index fund may still be the way to go.

How to invest $1000+
What can you do with one grand? Obviously, with $1000 you can open up a discount brokerage account, but look at the rewards if you can scrape up an additional $1000 a year to add to your original investment:

Say you've got 40 years to retirement. If you start with $1000 and invest an additional $1000 each year, and your money earns 10% annually, then when you're ready to retire at age 65, you'll have $532,111.07. That seems worth it to us. If you have earned income, you can set up a Roth IRA, and you won't even pay any taxes on that $532K when you withdraw it. Your mileage may vary, so use this handy savings calculator to play with the inputs.

Again, even at this level, the key is to keep fees from eating up your earnings. So make sure that the costs of investing (including brokerage commissions, stamps to mail in checks, and books that help you learn to invest) are less than 2% of your account's overall worth. Nowadays, with such low commissions being offered by discount brokers, it's easy to manage your account for much less than 2% of your assets annually.

©1995-2002 The Motley Fool. All rights reserved.

Mutual Funds: Costs
Expense Ratios

By Bill Barker (TMF Max)

Let's say you were assessing whether or not a mutual fund was likely to outperform the market over the next ten years and were allowed to ask one and only one question about it. What would that question be? "What is the fund's three-year return?" "What is the ten-year return?" "What is the mutual fund's favorite color?" "Briefs or boxers?"

No, it really shouldn't be any of these. (Though if somebody would like to ask either of these last two questions to a broker trying to sell them a mutual fund, and wishes to write it up as a Fribble, there's a pretty good chance that we might publish it.)

Returning to the matter at issue, the first question that you should answer before buying or deciding to continue to own a mutual fund is "What about the costs?" While a recent
mainstream press news article has declared that most fund investors are "[d]azzled by performance, indifferent to cost," we hope to elevate you to well above the average in the next 500 words or so.

The costs of owning a fund are called the expense ratio. (This is distinct from the costs of buying a fund, which are the sales loads which we describe here. The expense ratio represents the percentage of the fund's assets that go purely toward the expense of running the fund. The expense ratio covers the investment advisory fee, the administrative costs, 12b-1 distribution fees, and other operating expenses.

The nifty thing about the expense ratio is that it wraps all these various costs and expenses into one number so that you don't have to do a lot of math. Currently the typical expense ratio for an actively managed mutual fund is about 1.5%, and that number has been going up lately. With an expense ratio of 1.5%, a mutual fund is cutting itself in on 1.5% of the total money in the fund every year. That's whether there's a good year or a bad year for the fund. Even if the stock market doesn't go up at all over the course of the year, the mutual fund will still pay itself 1.5% of the assets within the fund. With the trend being the way that it is, you as a potential or actual mutual fund investor should be aware that as time goes by, it is likely going to become more and more expensive to own an actively managed mutual fund.

An expense ratio is the total of the following components.

The investment advisory fee or management fee is the money necessary to pay the manager(s) of the mutual fund. On average, this fee is about 0.50% to 1.0% annually of the fund's assets, and is necessary to make sure that the manager of the fund can be very well-dressed at all times and is able to go on good vacations.

Administrative costs are the costs of record keeping, mailings, maintaining a customer service line, etc. These are all necessary costs, though they vary in size from fund to fund. The thriftiest funds can keep these costs below 0.20% of fund assets, while the ones who use engraved paper, colorful graphics, and phone answers with highfalutin' accents might fail to keep administrative costs below 0.40% of fund assets.

Surely the fee that you as a mutual fund investor should be most outraged by is the 12b-1 distribution fee. This fee ranges from 0.25% of a fund's assets all the way up to 1.0% of the fund's assets. This fee is used for marketing, advertising, and distribution services. Yup, that's right. If you're in a fund with a 12b-1 fee, you're paying every year for the fund to run commercials and try to sell itself. Can this in any way really help you? Do you enjoy seeing advertisements of your fund or your fund family on television? Unless you really do, you should probably avoid funds that charge a 12b-1 fee.

You don't really need to concern yourself too much with how these components of an expense ratio are divided. You just need to know the bottom line. For actively managed funds, the average expense ratio is rising as funds shift fees away from the up-front loads that they know are driving sales away, and into the annual expense ratios where they are more easily hidden.

Meanwhile, in the wonderful world of index funds, the expense ratio is typically around 0.25% and gets as low as 0.18% for the king of all index funds -- the Vanguard 500 Index.

However, just because a fund labels itself an index fund does not mean that it has the extremely low expense ratio of the best index funds. Some mutual fund companies, knowing that their clients have heard about the superiority of index funds, have started index funds with expense ratios of more than 1%. Avoid these like the plague. If you've read this far, you can do better than that, Fool. In fact, where index funds are concerned, you should probably simply be getting the one with the lowest expense ratio -- probably around 0.18%.

Costs matter -- tremendously. If you're buying a mutual fund using a full-service broker's advice, there's a very, very good chance that you've just bought a fund with high costs. If you want to figure out the costs of owning any mutual fund, it doesn't take long – make sure to check out the SEC's excellent mutual fund cost calculator.

You can find the expense ratios of mutual funds at websites such as Morningstar's. You can also get the information from newspapers like The New York Times. On Wednesday of each week, The Times lists expense ratios for all mutual funds. Look over the charts and compare the expense ratios of funds managed by full-service brokerages such as Merrill Lynch or Morgan Stanley with their 1.5% to 2.0% (or higher!) average expense ratios. Then look at Vanguard's table showing averages of less than 0.5%. Remarkable.

There's more to the underperformance of mutual funds than charging too much. There also is the behavior of mutual funds as overactive traders of stocks and market-timers. These habits, which will never help any portfolio over the long term, also weigh heavily on the performance of mutual funds

Ten Ways to Size Up a Broker

Ready to open a discount brokerage account but not sure where to start? Wondering if you're getting the best service for your money from your current discount broker? Either way, here are 10 things that will help you size up a broker and choose the best
one for your needs.

1. Trading Commissions
Surprise! Cheaper is not always better. We know you've probably figured that out, but the price-per-trade at a discount broker may also indicate the level of customer service that comes with it. If you aren't trading in and out of stocks very often (and you shouldn't be), and you're not too concerned about whether your trade is executed within 15 seconds or 2 minutes (and you shouldn't be), there really isn't a significant difference among the brokers charging $7 to $20. If you go much cheaper than that, you may have trouble getting someone on the telephone to answer any questions you may have. And if you're paying much more than that, you should expect near-flawless service.

2. Other fees
You'll get a good idea of what we find important as far as additional fees in our comparison chart of our broker-sponsors. Beyond the trading commissions, you'll find that brokerages may charge other fees, including fees for transferring assets into the account, fees for closing an account, IRA custodian fees, wire transfer fees, account inactivity fees, annual fees, and fees for not maintaining a minimum balance. If you know your needs, you won't end up paying for services you don't need.

3. Minimum initial deposit
If you're just starting out, consider what you'll be able to comfortably invest initially. Some brokers have account minimums, so find the one that best fits your budget. We have more on this topic here.

4. Customer service
For Fools, this is a biggie. If nothing else, you should put some time into researching a broker's customer service before you sign on the dotted line. In the case of discount brokers, customer service includes website performance and interface. Check out each brokerage's website. Is the interface intuitive? Can you find what you're looking for without having to click 65 links? Is it speedy? If talking to a live human is important to you, test their phone service. Does the brokerage answer the phone promptly? Is there an office nearby, just in case you need to talk face-to-face? (Not everyone does, but if that's important to you then put it down on your checklist.) You'll definitely want to see how the brokerage does at sending you all relevant material you ask for online.

Finally, check out The Motley Fool Discount Brokerage discussion board for invaluable insight into the praise and complaints that are being made regarding each of the major brokerages. It's an active board, with many strong opinions. Understand that those with complaints are more likely to post their thoughts than satisfied customers.

5. Traditional banking services
This might not be tops on your list, but if you want to consolidate your PINs and pennies, think about looking for a brokerage account that can accommodate your banking needs.
Many brokers now offer:

Money market sweeps
Check writing and bill payment
Visa cards
Direct deposit
ATM cards

Your cash will typically attract higher interest rates in a brokerage money market account versus the typical savings or checking account. Check out our banking area for more details.

6. Research
Some brokerages market their research as a real plus. That's fine, but you probably don't want to pay for it. There's plenty of research available for free all over the Web (including at Fool.com). Some of the offerings include analyst reports, real-time quotes, and detailed financial data.

7. Mutual funds
No-load mutual funds can be purchased directly from mutual fund companies, so unless you're a mutual fund trading addict, the availability of thousands of mutual funds in one location probably shouldn't affect which broker you choose. While you may purchase some no-load mutual funds from discount brokers without paying a transaction fee, some brokers do charge a fee for funds -- so be sure to check on this before making a purchase. And, of course, if there's a particular mutual fund family that you're set on using, make sure that the brokerage you select offers that family of funds.

8. Investment product selection
All the brokerages offer stocks traded on the major exchanges, and most will offer equity mutual funds. But there are a number of other investment vehicles that you may wish to use. If you're somebody interested in risking your hard-earned moolah on over-the counter (OTC) bulletin board stocks (shame on you!), you'll have to see which brokerages offer them. Other choices such as options, government bonds, corporate bonds, and the like are not available through every brokerage. Determine what you expect you'll need -- we're fans of just plain old stocks, especially if you're young -- and act accordingly.

9. Other methods of getting your trades executed
What if the Internet breaks? We'd all probably get a bit more exercise and sun now and then. Seriously though, sometimes you may not have access to a computer. Check out whether the brokerages you're considering also have touchtone phone trading, and how that works. Sometimes you just might want to place an order through a real, live person, and many discount brokerages offer that possibility, too.

10. Other freebies and perks
We wouldn't suggest making too big a deal about the freebies. After all, they are one-time things, and $100 or a new Koosh ball probably isn't going to be worth the hassle if you soon find that you've made the wrong choice and have to move your account elsewhere.
Still, free money is free money (and Kooshes are a great way to relieve stress). So if you find yourself deadlocked on which brokerage to go with, cash (or some other perk) can be a persuasive tiebreaker.

Finally, remember this: If you're only making five, six, ten, even twenty trades in a year, the difference between paying $7 per trade and $20 per trade isn't significant. We think it's better to make customer service a priority and not sweat about most of the other stuff.
After all, how much did you ever worry about which bank to open your first checking account with? The differences are about the same.

©1995-2002 The Motley Fool. All rights reserved.

Tracking Stocks in a Mock Portfolio
by Selena Maranjian (TMFSelena@aol.com)
Wednesday, October 01, 1997

We've mentioned before that one good way to get kids interested in investing is to have them track some stocks they're interested in, observe how the stocks react to good news and bad, and see how they do at picking stocks. This is actually a great activity for anyone new to investing. Investing your real hard-earned dollars in your first stock won't be as traumatic if you've already been following stocks for a while.

One thing we haven't done, though, is explain exactly how you and your kids might go about tracking stocks. Sure, you can obviously jot down in a notebook the stock names and then track their prices over time. But to be a fully Foolish investor, there's a little more. Let's make it a more realistic exercise and incorporate broker commission costs (or Drip costs). And let's hold ourselves accountable, seeing how our stock performance compares to a benchmark like the S&P 500 index.

A few caveats:

This mock portfolio probably won't be maintained for years, so don't judge it too harshly. And if it does well, don't be overconfident. The point is to get used to following stocks and doing the calculations involved in evaluating performance. If your overall performance isn't too hot over a few months or even a year or two, don't be alarmed. Even the best investors have short-term slumps or are invested during extended market downturns.

Also, some of the math might not be familiar to your child yet. If this is the case, you can either do the calculations yourself or show your child how to do it. There's nothing more advanced than division and multiplication here. Oh -- and percentages.

Alright. We're ready to track our mock portfolio. You'll need either a spreadsheet (or table) on your computer or a big sheet of paper with many columns. Two facing pages in a notebook might do as well. Create 18 columns and label them A through R with the following titles added to each letter:

A — Stock
B — Ticker
C — Date bought
D — # of shares bought
E — Initial price
F — Commission or DRIP fee
G — Total $ invested
H — S&P 500 on buy date
I — Date sold
J — # of shares sold
K — Sale price
L — Commission or DRIP fee
M — Total $ from sale
N — S&P 500 on sale date
O — Gain or loss in $
P — Gain or loss in %
Q — % change in S&P 500 for period
R — Did you beat the market?

You can find S&P 500 levels for any date via the Motley Fool site. To find today's S&P 500 levels, type SPX in the Ticker Symbol form at the top left of any Motley Fool page, check-off the quote selection, and go get it!

Once you're done with that, you're ready to start filling in information. Below is an explanation of everything you'll have to do. Whenever you "buy" a stock, fill in columns A through H. Whenever you "sell" a stock, fill in I through R.

1. Enter the stock name.
2. Enter the ticker symbol.
3. Enter the date you bought the stock.
4. Enter the number of shares you bought.
5. Enter the price of the shares when you bought them.
6. Enter the commission you paid for the purchase.
7. First multiply the number in column D by the number in column E. Subtract F and enter the result.
8. Record the S&P 500 level on the day you bought the shares.
9. Enter the date you sold the shares.
10. Enter the number of shares you sold.
11. Enter the price of the shares when you sold them.
12. Enter the commission price.
13. Multiply J by K. Then subtract L. Enter the result.
14. Record the S&P 500 level when you sold.
15. Subtract G from M. (That's M minus G)
16. Divide M by G. Take the result and subtract 1. Then multiply by 100 and add the percentage sign (%).

Example: 220 / 180 = 1.22; 1.22 - 1.00 = 0.22; 0.22 x 100 = 22%.

Q: Same as above, but divide Q by H. Take the result and subtract 1. Then multiply by 100 and add %.

R: Well, did you? Is P or Q greater?

That's it! Enjoy tracking stocks in your kid's mock portfolio. Remember, learning is earning.
© 1995-2002 The Motley Fool. All rights reserved.