Introduction to Discount Brokers
Discount brokers are firms that specialize in giving small investors access to the same tools and services that institutions use. They make it easy for smaller investors to invest in stocks, ETFs, and other securities by charging lower commissions.
Discount brokers are also known as commission-free brokers because they don’t charge a commission for executing trades. This article takes a closer look at discount brokers and how they can help you invest your money more effectively with a lower cost of entry.
What is a Discount Broker?
A discount broker is an online brokerage that charges lower commissions than traditional full-service brokers.
The core difference between the two is that full-service brokers charge a percentage of the total investment amount when they make a trade, while discount brokers charge a fixed fee instead.
If a full-service broker charges a $10 commission to make a stock trade, then the more money you invest, the less of a percentage of your total investment the commission represents.
Discount brokers charge a fixed fee per trade, regardless of the amount invested. This makes it easier for smaller investors to budget their investment costs.
How Do Discount Brokers Make Money?
Full-service brokers make money from the commissions they charge investors for trading securities. As a percentage of the total investment amount, these commissions are relatively small.
That’s why you don’t see many full-service brokers advertising low commissions. If you’re shopping for a discount broker, you’ll notice that they don’t advertise low commissions. Discount brokers make their money in a different way.
Instead of charging large commissions, they charge a fixed fee per trade. As a smaller amount per trade, these fees represent a larger percentage of the total investment amount.
That’s why discount brokers are able to offer lower per-trade costs while still making a profit.
How to Find a Good Discount Broker
If you’re new to investing, you might be overwhelmed by all the choices out there.
How do you know which discount broker is right for you? The first thing to do is figure out what your investing goals are. Are you investing for retirement? Are you looking for long-term growth? And are you saving up for a house?
Knowing where you’d like your money to go will help you decide what type of investment to use to generate passive income. You’ll also need to think about your investing strategy. If you’re a long-term investor, an aggressive strategy might be more appropriate.
If you’d like to have some flexibility in your investment, a moderate strategy might be a good fit. You’ll also want to think about your budget.
How much do you have to invest? What type of trading fees are you comfortable with? If you’re investing a smaller amount, the trading fees could represent a larger percentage of your total investment.
Benefits of Using a Discount Broker
Besides the obvious benefit of lower cost, there are a few other advantages to choosing a discount broker over a full-service broker:
- Flexibility – Unlike full-service brokers, discount brokers don’t manage your portfolio for you. This gives you the freedom to sell your investments whenever you want, even if it’s outside of normal trading hours. It also gives you the flexibility to change your investment strategy at any time. Full-service brokers often lock you into a specific strategy with a contract that can take years to break.
- Ease of use – Full-service brokers, require an ongoing relationship with a human advisor. If you’re not in a hurry to get started investing, this isn’t a problem. But if you’re eager to get started and don’t want to deal with the hassle of finding a suitable full-service broker, a discount broker is the way to go.
Drawbacks of Using a Discount Broker
Discount brokers are the best option for new investors looking to start small while keeping costs low. The only real disadvantage is that you’ll have less access to advice from a financial advisor.
Full-service brokers often have financial advisors on staff who can help investors make smart decisions about which investments to choose. There is one other potential disadvantage: since you aren’t working with a financial advisor, you won’t have the same level of access to your account.
You won’t be able to log into your account as often to check on your investments. It’s also important to note that some discount brokers make their money by investing your cash in a money market fund or similar short-term fund while you’re waiting to invest it.
This reduces the amount of money you have in your account while you’re waiting to invest it.
Discount brokers are the best choice for investors who are just getting started or those who want to make smaller, more conservative investments.
Full-service brokers are better for those who have larger amounts of money to invest and want access to financial advisors who can advise them on the best investment strategy. That said, there is nothing wrong with choosing a discount broker.
The important thing to remember is that the more you know about different types of brokers, the better equipped you will be to make a decision that is best for you.