Online Menace?

By James J. Cramer

Online trading can be intoxicating. The commissions are so low and the action so fast-paced that hundreds of thousands of new people each month find themselves hooked into the Internet, trading for $8 a pop, loving the excitement and potentially the rewards. But has online trading turned the stock market into a giant casino that threatens the financial lives of Americans? That's what John Steffens, a Merrill Lynch vice chairman in charge of stock brokerage, contends. He has gone to war against Internet trading in a series of public speeches, chronicled last week in the Wall Street Journal, urging individuals to abandon their free-trading ways and stick with the good old-fashioned (and expensive) hand-holding, broker-to-client method at which Merrill Lynch excels--and on which it is betting its future.

My response to Steffens? As I like to say in my daily online column: Wrong! Sure, some people shift in and out of stocks so rapidly that they undermine their returns. Some people also gamble compulsively. Others drink too much or abuse drugs. Overdoing anything can be hazardous. But overtrading is no more the fault of low-cost, online investing than America's swelling waistlines are the fault of its ever more efficient farmers.

Americans love to do things for themselves. It's cheaper, faster and more satisfying. Just as homeowners in the 1980s learned to go to Home Depot, individual investors in the '90s have learned that they can get online almost all the information that used to be available only to the high rollers. And small investors can now trade for the same low commissions that giant institutions get--$8 for 100 shares, vs. the $100 or more that Merrill and other full-service brokers typically charge.

This represents a great leveling of the investment playing field. More than a decade ago, when I set up my hedge fund, my principal worry was whether I could get public information in time to process it at the speed of the big boys who controlled billions of dollars. I even positioned my fund near my old employer, Goldman Sachs, so I could quickly get to its research library. I paid the $1,500 a month necessary to get the latest financial feeds. I had to negotiate hard with brokers for lower commissions.

Now look at how the world has changed. Today there are plenty of online services (including mine, thestreet.com that give you as good a financial-news feed for $10 a month as the ones that cost $1,500. All the information I used to get from the library? It is available on the Net. And if I want to take action, I connect by computer to any online-trading room in the country and have my trades executed as swiftly and cheaply as if I were running Fidelity.

Here's some advice on how best to take advantage of these changes. If you have the time to do your own research and are comfortable with the Internet, you can learn everything you need to know there about personal finance and investing. You can buy stocks and mutual funds through a discount online-trading account, either at thestreet.com or through links to other investing sites through time.com/personal But don't let the low cost and convenience make you forget you're a long-term investor. If you lack the time or inclination to do it yourself, by all means seek a fee-only financial planner or full-service broker. But understand that you'll pay more through fees, commissions or both.

Cramer runs a hedge fund and is founder and columnist for thestreet.com an investing website. Nothing in this column should be construed as advice to buy or sell stocks.