Online Stock Brokers - Are They Good Investments?

The dot-com boom and bust could have never taken place without the emergence of online brokers. First, there was E-Trade (ET), which was quickly followed by rival Ameritrade (AMTD). Then, veteran discounter Charles Schwab (SCHW) joined the field of online stock brokers.

Several other companies came and went during the boom and bust, and the stock prices of these online brokers have been volatile, but historically, the online stock brokers have been good investments in their own right.

E-Trade - Godfather of Online Stock Brokers

E-Trade was the first of the online brokers. It went public in August of 1996 at a split-adjusted price of $2.81 per share. E-Trade stock now trades around $22 per share, so any lucky investor with $2,500 in extra money and the foresight to see how big online brokers would become back in '96 would now have close to $20,000 to show for his hunch.

Then again, if he would have sold out in 1999 when the stock hit its all-time high, he would have pocketed nearly three times as much.

Today, E-Trade is probably not a good buy. Intense competition among the online stock brokers have driven down the price of trades - that's great for E-Trade's customers, just not its own investors.

In an attempt to cut down on the competition, E-Trade tried to take over other online brokers in 2005, but failed when in a defensive move, online stock brokers Ameritrade and TD Waterhouse combined to form TD Ameritrade.

TD Ameritrade - Two Online Stock Brokers In One

Ameritrade was the second entrant in the field of online brokers when it went public in March of 1997 at $1.25 per share. Don't you wish you would have picked up 1000 shares back then? If you did, you'd now be sitting on a cool $14,000 and change.

Like most other online brokers, Ameritrade's stock has been very volatile. In less than six months in 1999, it shot up from single digits to around $60 per share. Then it began a long, painful slide for two and a half years, all the way back down to $5, before making four year a climb back to its current level of respectability.

The biggest news for Ameritrade came in 2005 when it purchased TD Waterhouse. The two online stock brokers formed a single company, now known as TD Ameritrade.

Charles Schwab - The Great Grand-Daddy of Online Stock Brokers

Charles Schwab has always been an innovative person and company. Schwab was the first discount brokerage firm of note in the U.S.; providing an avenue for investors to trade stocks without all the bells and whistles or the extra fees that come with them. Thus, it was only natural that this pioneering company would quickly join the ranks of online brokers.

Because Schwab's business is more diversified than the other online stock brokers, its stock has not been as volatile. In fact, SCHW is currently trading near its five-year high, something shareholders of the other online brokers could only dream of.

Going into the future, this model of diversification is likely to lead to further growth, as Schwab just recently applied for and received a bank charter, which will allow it to do banking business for its clients.

Options Xpress - The New Kid on the Block

Options Xpress (OXPS) went public in January of 2005 at $20.09 per share. The stock quickly plummeted by 35 percent before staging a major bull run all the way to $34.94. As the youngest of the online stock brokers, Options Xpress probably has the most room for growth.

Furthermore, since the industry has been seeing its share of mergers and acquisitions, there is a good possibility that a larger company, such as E-Trade, may launch a takeover bid for Options Xpress. When this happens, share prices almost always go up.

Options Xpress did see its share price decline significantly in June of 2006, and as a smaller, newer company, it may be the riskiest of the online brokers.

Before acting on any investments discussed in this article, be sure to talk to your investment advisor.