Sharebuilder Review

Buy With the Big Boys

Buying whole shares is probably not a deterrent if you want to buy a cheap stock, but what about a stock that's more expensive? With ShareBuilder you can actually buy $2 worth of Berkshire Hathaway B shares (typically trading over $3,000 per share ). That's 0.06% ownership of one share that you can own. No traditional broker would allow that. (Note: Even ShareBuilder won't allow you buy Berkshire A shares.  And let's face it, if you can afford a whole share of Berkshire A, you're probably not too concerned about the difference between $1 and $16 for a commission anyway.)

Because of their partial share ability, I believe for amateur investors such as myself with a small portfolio and limited funds this simple concept is extraordinary because it actually helps level the playing field with Wall Street. That sounds like a tall order, but considering my example above with Berkshire Hathaway, ShareBuilder allows an amateur investor to put money into the same high quality stocks as professional investors, and at the same proportions. That means that even a small asset base can be structured and built over time to be an incredibly diverse and broad-ranging group of stocks, regardless of share price. Theoretically, you could have a portfolio that literally matches the S&P 500 for a minimum investment of $1440 including commissions (if you had the $1 trade plan) and the minimum allowed $2 purchase for each of the 500 stock in the S&P. Of course it would take over 2 years to match the S&P stocks, and the percentage of each stock you owned would be different, but it could happen.

So, how does ShareBuilder really work?

Once you open and fund an account, you can invest in 2 ways: Real time trades or plan trades.

With real-time trading (or limit orders) ShareBuilder is really no different than any other discount broker. You enter a market or limit order for a stock (full shares only for real-time), you buy immediately or when the limit price hits, and you pay the commission. Real time trades with no extra costs are $9.95.

The other way to invest, the encouraged method, is through an ‘automatic investment plan'. The purpose of this plan is to allow you to buy into a stock cheaply, at a fixed cost, over time. This method allows you to dollar-cost-average each of your holdings individually. The theory being that eventually the overall value of the stock will go up above your costs, and even if you make mistakes, you'll hedge your losses and make money. You calculate your gains by the total amount of money you put in, and subtract that from the current value of your holdings.

The Plan

To create an automatic investment plan, you select the stocks you want to buy and the dollar amount you want to invest in each stock. You also choose whether you want to invest weekly, bi-weekly, or monthly. You submit your order, and the order goes through every Tuesday. If you choose bi-weekly, it would be every other Tuesday, or monthly. You have until 5pm (eastern) on the Monday before your order goes through to finalize your selections. (If there is a market holiday on a Monday, you must finalize your order by the Friday before.)

If you have no pre-set plan, the cost is $4 per trade to buy. As long as the plan is active, the system will re-order automatically the same stocks you selected on every specified Tuesday. You can modify or stop the plan at any time up until the Monday deadline. (I have actually been able to cancel some automatic investment purchases after the Monday deadline up to about an hour before the market opened with my Advantage plan).

The funding for your purchase comes from cash that's electronically deposited into your ShareBuilder account beforehand, or it can be drafted automatically from your bank account each week. Electronic deposits to or from a linked bank account are free. Only one account is permitted to be setup at a time however. Funds transferred will be available the next day if you put in the transfer request before 5pm eastern. You don't have to fund your account to open it, but you do have to make sure that you can afford to cover the amount that will be drafted for your periodic plan buy orders.

What are the account options and the plans?

You can open the following ShareBuilder account types: Individual, Joint, IRA (traditional or Roth), Educational, or Custodial. The accounts are free to open and maintain, but the IRA and ESA have yearly fees. You can open your account with a $0 starting balance.

Once the account is open, you choose which plan you would like to have, if any. Plans are Basic, Standard, and Advantage. You're actually registered for the Basic plan which has no obligation to trade just for signing up. Also depending on your plan, you may have access to certain tools that ShareBuilder provides. For example, a tool called ‘Gainskeeper' is available with Advantage, which helps you to track your dollar-cost gains. (I haven't found it to be entirely accurate so I seldom use it).

The Basic plan: no strings attached

With the Basic Plan, automatic purchases (if set it up) will cost you $4 per trade to buy. Real time trades cost $9.95. The beauty of the Basic plan is that you don't have to setup a plan. You don't even have to trade anything. There aren't any inactivity fees. You can fund the account whenever you like, and you can trade whenever you like. Even if you fund the account and don't trade, the money earns interest in a competitive money market account.

Standard and Advantage plans: A few strings, but only if you don't think ahead:

The Standard Plan is the middle plan. Real time trades are $9.95, but it also costs you a ‘subscription fee' of $12 per month. This fee is automatically deducted from your credit card each month whether you purchase stock or not. That's a ‘string' you'll have to consider. However, if you plan to actually use your ShareBuilder account to ‘build' a portfolio, that $12 is really your commission cost. The $12 fee entitles you to 6 free trades per month when you use the automatic investing system. That works out to $2 per trade if you use all 6 trades in a month. If you go over 6 per month, it's $2 extra for each additional trade in-plan.

If you find yourself going over 8 or 9 trades (for in-plan buys) per month, you'll want to consider the Advantage Plan. This plan is $20 per month, and is automatically deducted from your credit card. But this plan entitles you to 20 free trades each month, which works out to $1 per trade if you use your plan. Again, you're charged $20 per month regardless of activity. But considering that you're only spending $1 per stock to buy any stock offered, and since you can buy a minimum of $2 worth of a stock, it's not too outrageous. If you're serious about saving/investing, you should be putting away at least that much anyway.

The catch: selling
(Ok, it's not really a catch, but it's something you need to consider)

By now you should understand how cheap and easy it is to buy into practically any stock that ShareBuilder offers. And you can invest minimally by buying only a portion of a stock, as little as $2 worth. But on the flip side, buying cheap can lull you into a sense that everything is cheap. You must remember that when selling your $2 portion of a stock, it will cost you your real time trade price of $9.95. That can become quite expensive if you don't have a good long term strategy.  (Every so often they'll have a deal where you can sell small holdings of partial shares for less, but don't count on it.)

As you can see, with ShareBuilder it can be quite easy over-diversify, and lose your money if you were to need it. If you don't plan correctly, you might as well consider your investment money lost. You should only invest using ShareBuilder for the long term, and have a plan going forward, as well as an exit strategy.

For daytraders, maybe, but amatures definitely

For day traders, ShareBuilder might not be a good idea, but then again with some of the services thay've added like real time quotes and margin trading, it wouldn't be terrible either although there are limited day-trading tools or trackers for active traders.

For amature investors that follows the SB plan, their system forces you to slow down, research, and think about your purchases. It's much easier to wait until Monday afternoon to see what happens to a stock you're unsure of during the week, than to feel pressured into buying immediately. In fact, it takes a lot of faith to day-trade using your automatic (low commission) plan. If you put in a high dollar buy order on Monday night trying to turn a quick profit on a small percentage increase, it can be nerve racking knowing that your trade won't settle until sometime the next day. The keyword here: sometime; because in-plan trades are not instant when the market opens. They may not even go through until after hours Tuesday for certain foreign and ADR stocks.

Another good, rather amazing aspect of ShareBuilder is that if you do crave more risk, you can actually participate in certain selected IPO's if you qualify. This is also virtually unheard of for amateur investors with other brokers.

For the Riskier: Margin and Options

ShareBuilder has two options trading levels: Level 1 and Level 2. You are granted one of these levels based on information you give to them in your options application.

With Level 1 you can:
-Write a Covered Call
-Close a Covered Call
-Perform a Buy / Write (Buy a stock position and write a covered call)
-Perform an Unwind (Close a covered call and sell a stock position)

With Level 2 you can do what you can with Level 1, plus:
-Buy a call
-Buy a put
-Sell a call
-Sell a put

Overall the options experience is intuitive. Targeted at the amature investor, ShareBuilder has some good learning tools and resources. They also claim to limit you to pre-selected options, but I haven't run into any particular stock options being blocked yet. To put in an order, you simply look up the option chain, select your order type, and put in the order. Just like buying a stock real-time with them.

Pricing

Options are not included as an option (no pun intended) in your automatic investment plan. Therefore all options transactions are charged at 9.95 + $1 per contract. So buying a single option contract (the right to buy 100 shares of stock X at a set price), would cost you your real-time rate, plus $1. To buy 2 contracts would be your real-time rate, plus $2 and so on.

Option-al

Overall, the option to buy and sell options is nice to have. While you have to be careful, options can be a good way to take on more risk if you so choose and leverage your money a little better - if you can stay on top of things. Conversely, if you're willing to write off the expenses, being able to buy 'put' options is an excellent form of 'insurance' against your current share-built holdings.

Margin-al

Sharebuilder also gives the option to buy on margin, meaning with money on loan from Sharebuilder.  For people who know what they're doing, this can be a great way to maximize returns using someone elses money.  For those that don't know what they're doing, margin trading can be dangerous as it's a form a debt.  I have not personally used margin for trading, but the option is another nice-to-have.

Overall

If you have a sensible, long term strategy, ShareBuilder can be very valuable tool. It allows you to buy into the market at your own comfort level and pace. It can also allow you to make progressively better deals buying into a stock if you're diligent, which will maximize your gains while still dollar-cost averaging. It actually lends itself very well to a phrase I'll call ‘some-days trading'. Meaning that you don't trade every day, but you use ShareBuilder to your advantage by adjusting your purchases according to the market, and selling when appropriate.

But just like any investment, the fewer of something you own, the higher percentage that something must go up before you break-even on commissions. ShareBuilder makes it possible to own the minimum, and in doing so may make it virtually impossible to earn any gains at all. If your investments are too miniscule, you'd be better off with a savings account. With ShareBuilder, you may have to hold a stock for an extraordinarily long time, and accumulate a lot of it. And of course the longer you accumulate, the more buy commissions you're paying, which only subtracts from your gains. Using a traditional broker, you might have saved up enough money in advance (in an interest bearing account) to have bought full shares with more dollars, which would have lowered your percentage cost, and allowed the stock to go up less for you to make a gain.

Advantages
-Partial shares
-Automatic purchases
-Low commissions
-‘Express funding' (A feature for real-time trades. Allows you to fund a purchase directly from your linked bank account without having to first transfer the money and wait overnight)
-Dollar cost averaging
-Real time and limit order trading
-IPO participation
-No inactivity fees or initial obligations
-Competitive money market rates
-Options and margin trading

Disadvantages
-In-plan trades may take a long time to settle on Tuesdays
-Real-time sell commissions are required, no cheap plan to sell.