I could only avoid the siren song of $4.95 trades for so long, here are my opinions of TradeKing in 2,144 words and 4 screenshots. Last week, I joined the masses and opened a TradeKing brokerage account. I did so partly because I wanted to understand the process and answer some of the emails I’ve been receiving, and partly because I was impressed by their Options Education Center and wanted to dip my toe in the waters of something I never really understood. I had heard that TradeKing offers the easiest way to pull off multiple options related transactions (because they’re often used as hedges) at once. More on that later, let’s get to the basics.

Account Application Process

I opened an individual account (with margin enabled) and Level 1 - Covered Calls options trading. Opening an account at TradeKing takes about five minutes and three screens (plus a confirmation screen). They asked for all of your standard brokerage account information details like name, address, social security, employer information, financial information, trading experience, whether you want to be able to trade on margin and with options, etc. Nothing remarkable, quick and easy.

One interesting security measure they put in place was a pop-up keyboard for the password entry. You click on buttons to enter your password, a measure that seems a bit like overkill, though it’s nice that they thought of it. I’ve never seen a company use that during the account opening process. (this is the same keyboard used for logging on to TradeKing)

After the application process, you are asked to agree to several agreements. The agreements run the gamut of agreeing to accept real time quotes, certifying that you’re a nonprofessional, etc etc. After you agree to all those, you’re allowed to join the TradeKing “community!” Yay!

TradeKing Community

The TradeKing Community is TradeKing’s attempt to leverage the social media craze and create a place where traders can share thoughts, opinions, and ideas. I believe Zecco has a similar Zecco community but very few other brokerages do this. I know for a fact that there is no Vanguard or TD Ameritrade or E*Trade community like the one at TradeKing and Zecco. At the moment, it’s very slick looking but lacks a bit in participation. I’ll explain more later.

The major parts of the community are:

• Community Home (shown right): The community front page captures a taste of every other section of the community, including three huge buttons in the header going to Trading Activity, Trade Notes, and the Forums.
• Trading Activity & Trade Notes: You can trade with funny money and track your progress here, with the aggregate data of trades being listed in Trading Activity. You can tell that the community is still quite small as on this day (May 29th, 2008) the most active stock is Ford with 10 trades. Most of the notes have zero or one vote.
• Groups & Forums: You can think of Groups as almost like forum categories and the forum as the big list of every discussion going on. The groups themselves are still of a reasonable size (Beginning Investors has the most with 126 members) but vary in terms of quality, scope, and purpose. Anyone can start a group, so you have groups with intuitive names like “Value Investing” and then ones that have less intuitive names (Street Addicts is one). Some groups have membership rolls in the single digits (Socially Responsible Investors has one member).

But let’s be honest, you don’t sign up with a brokerage because you want to meet friends, you sign up because you want to make money in the stock market.

Transferring Money

Step one to making money on the stock market, after opening an account, is getting funds into that account. They make it pretty easy, simply go to the navigation menu up top and click on Services > Transfer Money. I went with the ACH transfer, which required the basic information (ABA routing #, account #, etc). Unfortunately, there’s a mandatory minimum five day hold after you setup an ACH link.

After linking my account, you can only have one account link at any one time. If you want to link another account, you have to delete your current ACH linkage and add the other one (including five day wait). Another minor annoyance is yet another five day hold on ACH deposits if they exceed your account balance (if you deposit less than your account balance, there is no hold).

Making Trades

The TradeKing trading screen is pretty slick. I like how you get a quick quote on the ticket you enter into the ticket trade form, it appears immediately with useful information (Bid, Ask, Last, Change, Volume, and Company name). It’s nice not to have to click “quote” or something silly like that. (ignore the fact that my account balance says $0.00, I took the screenshot before making any trades… five days is a long time to wait!)

Disable Preview Step: If you hate previewing your order, it’s nice that they allow you to disable the preview step (you can also setup a default stock and option trade quantity on the same page, though I find that probably won’t be too useful). There is a link underneath the Preview Trade button that takes you to your Settings, then just click the “Bypass Order Preview Screen.” You’ll notice your trading button changes from Preview Order to Place Order. (if you want to change it back, it’s under Services > Settings > Trading & Real-Time Quotes)

One feature that is missing that I found valuable at TD Ameritrade was a floating window that allowed me to trade regardless of the screen I was on. At TD Ameritrade, there was a little Javascript-like form at the bottom of each screen that let me enter in tickers and submit trades even if I was on a general information screen. While it’s hardly a chore to click on trade, having that window was a “nice to have” feature.

Options: The screen to your right is the Covered Call Trading Screen and it, on one screen, lets you buy both the underlying stock and write/sell the Call option to go with it. I’m still very much a novice when it comes to Options, so the terms Butterfly and Condor and all that jazz are meaningless to me, but the Covered Call is something that’s pretty easy to understand. A call option is the right to buy the stock, “call for it,” at a specific price. When you write/sell a call option, you’re selling someone the right to buy a stock from you at a specified price. A covered call means you’re writing a call for shares you already own. This screen lets you buy the stock and write the option, two things at once, and is clearly more convenient than forcing you to buy the stock and write the option on two different screens.

I plan to read more about options trading, enough to become comfortable (I talk about the education center later, where I read their options playbook) and then I may speak to this section in greater detail.

Finally, the backend systems of TradeKing rely on Legent Clearing. Everything from actual trades, securities clearance to settlement is done through Legent and they service a bunch of well-known clients such as Pointe Capital, MyStockFund Securities and OptionsXpress.

Maxit Tax Manager

TradeKing offers a Maxit Tax Manager, by Scivantage Maxit, that tracks your gain and loss, including the following listed features:

• Tracks all transactions and running cost basis of your securities.
• Automatically adjusts cost for corporate actions (splits, mergers, spin-offs, etc.)
• Automatically identifies and adjusts cost basis for wash sales
• Sets default standing orders for matching sells to tax lots such as Minimize Tax, First In–First Out, Last In-First Out.
• Calculates Unrealized and Realized Gains and Losses
• Generates Tax Reports, such as the Schedule D automatically

As of this review, I haven’t really gotten a chance to look too much in depth about this because I haven’t sold anything.

Research

Trading is nice, but what about the information you need to make informed decisions? Most brokerages offer third party reports (or their own analysis) to help you made decisions. TradeKing uses a system called MarketGrader. MarketGrader describes itself as essentially a big quantitative calculator that crunches all sorts of factors and gives you a number. Yep… a number.

In the screenshot to the right, you can see Yahoo’s analysis. Growth got a B-, Value got a B, Profitability got a B-, and Cash Flow scored a B+. End result? A 48.8 and a flashing red Sell rating. If you want more information, the PDF Report doesn’t really provide it. There’s a paragraph explaining each of those four categories with a few pages of pretty graphs and charts. Surprisingly, the report’s Overall Grade of 42.8 didn’t match the initial Overal Grade of 48.8, which was strange.

Research overall isn’t bad at TradeKing, but the individual stock reports were a little disappointing. They did, however, garner four stars for research in the latest Smart Money 2008 Best Online Brokers survey, likely on the strength of their other data. Comparatively, E*Trade offers (for Yahoo) analyst reports from Credit Suisse, Reuters, Standard & Poors, Rochdale Research, Sabrient, Thomson, as well as a Jaywalk Consensus Report (by BNY Jaywalk). TD Ameritrade offers reports from The Street, Standard & Poors, Ford Equity Research, Market Edge, and the Jaywalk Consensus Report. Both firms received five stars from Smart Money (and both charge more for trades).

Education

This is probably one of my favorite parts of the site and I devoured their Options Playbook chapters, authored by Brian “The Options Guy” Overby. I knew very little about options and this little “playbook” gave me enough information to be dangerous to my bank account. It went through all the terminology, all the plays, all the scenarios for all the plays (especially valuable), and was done in an entertaining (a lot of jokes, some of which were bad jokes) that made it fly by. You don’t need an account to view the Education Center.

Customer Service

Customer Service is very responsive, I was connected to a CSR via their online live chat in less than five seconds. I asked him a litany of general account related questions (I was trying to clarify the whole ACH hold issue I mentioned above) and he was very responsive and informed. If I run into any “real” customer service interactions, I’ll post them in the future.

One interesting tidbit I learned was that the ability to add multiple bank links was not a priority at this moment, which is understandable.

Fees

So, trading looks good, the community is young but growing, everything seems on the up and up with TradeKing… is there a catch? If there ever was a catch (can you tell I’ve been reading Gotcha Capitalism?), maybe it’s in the fees… but they’re not. $4.95 a trade, no minimum balance requirement, no account maintenance fee. Mutual funds trades are a little pricier at $14.95 a trade for no-load mutual funds but they beat a lot of their competitors (TDAmeritrade costs $49.99, E*Trade costs $19.99). If you are only going to get funds from one brokerage, say Vanguard or Fidelity, then I’d recommend opening accounts with them rather than buying through TradeKing; otherwise TradeKing looks good on the transaction fee category.

There are no fees for account inactivity and IRA maintenance ($50 for termination or transfer, which is standard). If you want paper statements, those will cost you $2.50 a piece and trade confirmations will cost $1.00. I recommend going paperless anyway (or just print up the documents yourself).

Conclusion

My experience with TradeKing so far has been good. There were a few small annoyances like waiting five days for the ACH link, then another five days on the first deposit, but overall it’s been a solid experience. The TradeKing “community” area looks nice but I don’t know how great that’s going to be considering they’ve had it open for a while and it still appears to be in its infant stages (or at least it’s only a toddler).

The one area I was quite impressed with was the educational areas where they taught you about options. Options can get tricky so explaining all the scenarios is certainly a plus and if you fancy yourself an options house, which I believe TradeKing does to a certain extent, you definitely need a place where you teach people how to do those types of transactions. While I won’t be entering into any Butterflies or Condors in the near future, at least I’ll know what the heck they are.

If you made it this far, thanks for reading, this is by far the longest and most comprehensive review of… anything, that I’ve ever done. Hopefully you found it valuable!

Last week I wrote about a little preview to the SmartMoney 2008 Broker Survey in which SmartMoney released some preliminary results from their annual ranking of brokerage firms. SmartMoney has published the full details of their report and I’m sad to say that TradeKing did not retain the top spot they enjoyed the last two years (third place isn’t bad!).

Summary

SmartMoney changed the way they listed their rankings a little this year. Last year, they separated “discount” and “premium” brokers. Compare the tables from 2007 versus the tables from 2008, they went from three (premium, full-service, discount) to one (umm… everything).

Of the 2008 top 5 (they were, in order, E*Trade, Fidelity, TradeKing, TDAmeritrade, Charles Schwab), only TradeKing came from the 2007 Discount Brokers bracket and they took the third spot (so one could argue they are still reigning champs of the Discount Broker conference?), the rest came from premium brokers.

The Winner: E*Trade

E*Trade snagged the top spot this year with nearly five stars across the board. They also shared a nod for the best trading tools with TD Ameritrade and topped the list for best banking services (sharing that one with no other brokerage). When you can offer an interest rate of 3.25% on your holdings and not require thousands and thousands in the bank, it’s no surprise they were given the nod there. I personally enjoy using E*Trade for my stock trading because of this convenient link between the bank and brokerage.

Incidentally, in 2003’s rankings, E*Trade scored 9th in the “basic discount broker” category because of their $22.99 a trade commissions. It’s amazing what five years and “listening to feedback” can do for you.

The Top 5

Looking strictly at stars, not much separated the top five. While the criteria were not equally weighted, each one scored five stars in at least two categories and a minimum of three stars in each (in fact, only TD Ameritrade had two three-star categories, every other broker had only one).
Here were the concerns (and my comments) about the top five:

1. E*Trade: None listed, they are so perfect.
2. Fidelity: Commissions were on the high side, at $10.95, I agree. Though I don’t really consider Fidelity a discount broker (in 2007, they were considered “premium”).
3. TradeKing: Weaker fund selection, though they were noted for low commissions ($4.95 a trade).
4. TD Ameritrade: No negatives listed, though they only gained three stars in banking services. Their interest rate on cash of 0.1% was the lowest of all the sixteen listed brokers by far (second lowest was #9 Scottrade at 0.5%)
5. Charles Schwab: Is Schwab really a discount broker? Commissions run $12.95 a pop, hardly “discount” prices, but they had only three-stars in customer service.

TradeKing: 2007’s #1 Discount Broker

They probably got hosed this year by the rejiggering of categories (they had to update their little award picture!) since they were the only one of the top five to have come from last year’s discount category. Of the top ten, they were the second cheapest to Interactive Brokers (a firm I hadn’t heard of before this year’s survey) by a significant margin (after TradeKing, second cheapest was Firstrade at $6.95, a 40% difference). TradeKing did score a ribbon for best customer service and were the only firm to earn five stars in that category.

Zecco: 14th of 16th - Ouch!

What about #14 Zecco with their free trades? (they get a lot of blog press) They scored very weakly across the board for each of the five categories (one star in Trading Tools, Research, and Customer Service) though they received special citation for the worst customer service of the bunch. The $0 per trade offer is a compelling offer but if you’re looking for some hand holding, you won’t get it. Tou get what you pay for ($0). If you only need a broker to enter your trade into the market, Zecco is a good deal; if you’ll ever need to talk to someone about anything… you might as well slide up the commission price chain and go with someone like #6 Firstrade ($6.95 a trade) or #3 TradeKing ($4.95 a trade). You shouldn’t be trading so much that much anyway (though Sharebuilder, the epitomy of buy and hold, took dead last).

There you have it, another year, another brokerage survey from SmartMoney. If you’re looking for a bank and brokerage in one, I personally recommend E*Trade because they make it easy to link up the two (open up one account and you can open the other within minutes online), which can be a good or a bad thing.

Source: SmartMoney’s Annual Broker Survey [SmartMoney]

Smart Money reviews brokers every single year and they recently just gave a preview to their results. Rather than give the straight ranking, they discussed some headline categories (Commissions & Fees, Research, Trading Tools) and then listed the best and worst from each category.

For best commissions and fees, they listed Interactive Brokers, a brokerage firm I hadn’t heard of but does charge pretty rock bottom fees (half a cent per share on equity trades). They also showed the spread was anywhere from $4.95 for TradeKing to $112.50 for Fidelity on broker-executed trades.

For research, my Roth IRA brokerage, TD Ameritrade, took the top honors with Zecco and SoGoTrade splitting the worst place ribbon. One interesting point made was that J.D. Power’s research showed that good research trumps trade execution and customer service with regards to overall satisfaction. I found that pretty surprising since there is a wealth of free investing information out there but trade execution and customer service is where the rubber actually meets the road. If they can’t execute your trade or if you can’t get on the phone with someone in a few minutes, that’d be a deal breaker for me.

Last but not least, E*Trade and TD Ameritrade snatched the number one and one-a spot for trading tools with Sharebuilder playing caboose. It’s not surprising because Sharebuilder isn’t for the typical trader, it’s for people looking for an easy way to reinvest their dividends back into equities. TradeKing’s social networking area got a shout out as did Zecco and WellsTrade, but that was because they offered less than half the thirteen tools their researchers were looking for. Thirteen tools? Wow.

Anyway, check out the preview, I’m eagerly anticipating their results and whether TradeKing will need to update their current banner and call it a three-peat.

SmartMoney’s 2008 Broker Survey

Welcome to any Smart Money readers who may have found their way to this site after reading Will Swarts’ The 1040 Is a Great Tool for Planning article. Unfortunately there wasn’t a live link but I’m glad you still made it. Three weeks ago Will Swarts called me up about a post I wrote several years ago about how to use your 1040 as a planning tool and we had a pleasant half hour chat about what it was I meant. Essentially the article just points out line items on the form that might be of interest if you’re doing your own financial planning. For example, line 49 is for education credits, did you know about all the tax breaks you can get for continuing your education? If not, line 49 is a great introduction to the keywords and phrases you’ll need to know if you plan on doing some continued research.

I hope you enjoy your stay, poke around at all the signs and sounds, and if you ever need anything, don’t hesitate to contact me.

Imagine that you were able to buy shares of a holding company before it actually held anything other than straight cash, that’s what investing in a special purpose acquisition company (SPAC) is like. A SPAC, usually run by relatively well-known hotshots, is a shell company that seeks to raise money that they will use to purchase a business and run it better. It was recently the target of a “Stocks to Avoid” column in Smart Money magazine (page 28, June 2006 issue) and I myself would have serious reservations about investing in a shell company whose business plan is as weak as any of these SPACs.

The interesting part is that the SPAC usually guarantees that if they don’t find a takeover candidate within 18 months, they will return your money less 20% for lawyers and underwriters! Seems like a shady operation to me. Here are some names and tickers of SPACs:

• Good Harbor Acquisition Partners (GHBBU)
• Acquicor Technology (AQR/U)
• Services Acquisition (SVI)

I think the “Ten Things (Someone) Won’t Tell You” series in Smart Money is great and some of them are available online for you to read (in case you don’t get a subscription). In this particular case, the (Someone) is a Real Estate broker/agent and some of the information included in the article is a must read if you’re going to be buying or selling a home.

Here is a summary of the useful nuggets of info:

• Success rate of open houses are 2%, according to the National Association of Realtors. Smart Money warns that agents like open houses because it can get them some new clients.
• Agent fees are negotiable. There are a lot of agents and now that there’s been a bit of a slowdown (just like when things were heating up), there’s more competition. Lots of agents hit the market whenever the housing boom start and now they need work.
• Your agent might not be telling you about every offer. They’re supposed to but sometimes they don’t, which is illegal, but it still happens so demand that they bring every offer to you.
• Remember seller agents work for the seller and must divulge all information, don’t overplay your hand and reveal too much.
• Agents know nothing about zoning so don’t take their advice as to what you could do to your future home.
• Agents are also not lawyers, even if they pretend to act like one. Be careful when you enter into any agreements such as rent backs - your real estate agent isn’t a lawyer and you could get screwed if things aren’t worded properly.

(Yes, I realize I just summarized 6 of the 10 things)

This month’s issue of SmartMoney magazine has a section all about credit cards and their picks and runner ups depending on what you’re spending on. As usual, I disagreed with some of their picks, you’ll probably disagree with their picks too, and I have pretty good reasons why they’re off-target. They broke their picks up into what you get as rewards from the card: Rewards (products), Travel, Cash-Back, and Low-Interest cards; which I think the wrong way to go about it. However, I’ll follow their paradigm in countering their picks.

Category: Rewards
SmartMoney Pick: American Express Preferred Rewards (Green)
SmartMoney Runner-Up: Citi Diamond Preferred Rewards
They picked the AMEX Preferred Rewards because the award values work out to be 1% of spending, so if you spend $10,000 then you’ll essentially get enough points to get a product worth $100 (that’s $100 retail by the way). The runner up is a card that my girlfriend uses, the Citi Diamond Preferred Rewards where you get rewards at a rate higher than 1%, there isn’t an annual fee and you get 5x that at supermarkets, gas stations, and drugstores. With the AMEX’s annual fee of $110, I don’t understand why they received top billing. I don’t see the point of a rewards card when there are cash-back cards available. It’s as if someone forced you to spend your cash-back, so you don’t actually get… cash… back.
Blueprint Pick: Citi Diamond Preferred Rewards

Category: Travel
SmartMoney Pick: Citi PremierPass Mastercard
SmartMoney Runner-Up: MBNA WorldPoints Visa
This category is for cards that let you convert points into generic airline frequent flyer miles you can apply to any airline. It’s a step above airline-branded reward cards but again you are dinged an annual fee and the rewards are still around 1%, with 3% on travel related expenses. Their runner up has no reward fee and earns a little more than 1%, but I suspect the manner in which you spend the points is more restricted.
Blueprint Pick: Bleach, no pick, I think these are worse than the rewards cards because you have to spend it on travel.

Category: Cash Back
SmartMoney Pick: Citi Dividend Platinum Select Mastercard
SmartMoney Runner-Up: Capital One No Hassle Cash Rewards Visa
These are the moneymakers - cashback! With the Citi Platinum Select, you get a minimum 1% with 5% at supermarkets, gas stations, and drugstores. The only downer is that there’s an annual cap of $300 in rewards (which is really $30,000 anywhere or $6,000 at supermarkets/gas/drugstores) but there isn’t an annual fee. This is the card that I use for my gasoline purchases which is crucial these days with skyrocketing prices, 5% back is a solid amount.
Blueprint Pick: Citi Dividend Platinum Select Mastercard

I skipped the Low-Interest category because I know nothing about it (I never carry a balance, never ever). However, if you’re interested their top pick is MBNA Motley Fool Low Purchase APR and the runner up is the Pulaski Bank of Little Rock Visa Classic. Check those out if you need a low interest credit card but you can usually find a 0% balance transfer if you’re lucky elsewhere, can’t beat 0%.

One of these days they should do an analysis of credit cards from the other side - what card to use on what kind of spending to get the maximum cashback. For me, that’s using an American Express True Earnings card for all travel expenses (3%) and at Costco (1%, but the only card other than a debit card that they accept); Citi Dividend Platinum Select card at supermarkets, gas stations and drugstores (5%), and my Southwest Rapid Rewards (read my analysis of it’s value here) for everything else.