Discount brokers make it possible for investors to buy and sell securities, without paying the higher fees associated with a full-service brokerage. Using a discount brokerage could make sense for investors who are comfortable making trading decisions without the help of an investment professional.
The rise of discount brokerage firms has made investing more accessible for a wider variety of people. Discount stockbrokers can offer both tax-advantaged and taxable investment accounts. It’s possible to build a portfolio with a discount broker that includes different types of investments, including stocks, exchange-traded funds (ETFs) and other securities.
What Is a Discount Broker?
Discount brokers offer investors access to lower-cost securities trading. Many discount brokerage firms operate online or via mobile investment apps. They’re often geared to the DIY investor who’s interested in self-directed trading.
Some of the characteristics of discount brokers can include:
• Investment selection that can include stocks, ETFs, mutual funds, bonds
• Low or zero commission fees to trade stocks and exchange-traded funds (ETFs)
• Fractional share trading
• Low minimum investment thresholds
• Investor-guided trading
While discount brokers offer a flexible way to invest they’re still subject to government regulation. Discount brokerage firms must register with the Securities and Exchange Commission (SEC). They must also belong to the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corp (SIPC).
💡 Quick Tip: Look for an online brokerage with low trading commissions as well as no account minimum. Higher fees can cut into investment returns over time.
History of Discount Brokers
Discount brokerages have grown in popularity in recent years but online trading has its roots in the 1980s.
In 1984, Charles Schwab introduced The Equalizer, the first DOS-based portfolio management and trading tool. Shortly after, competitors entered the market, including TeleBroker, the first phone-based keypad trading application, and StreetSmart, a PC-based trading software program.
In 1992, E-Trade became the first online brokerage service provider. By 1995, E-Trade generated 80% of its revenues from trading commissions and the number of new discount brokerages joining the fray continued to grow. Larger firms, such as Charles Schwab and Fidelity began offering discount broker services. Over the last decade or so, they’ve been joined by newer startups.
Along with the introduction of new online trading platforms and expanded investment options, the discount broker industry has evolved from a pricing perspective. Many, if not most brokerages now offer commission-free trades, for instance.
How Do Discount Brokerages Work?
Discount stock brokerages put the investor in the driver’s seat. You decide which type of account to open with a discount broker. This may be a tax-advantaged account, such as a traditional or Roth Individual Retirement Account (IRA). Or you may choose to open a taxable brokerage account instead.
Once you open your account, you can then decide how to allocate it and how much to invest.
Recommended: Active vs Passive Investing: What You Should Know
With a discount brokerage, you decide how much to invest in each fund or stock. You also have control over how long you hold those investments and when you decide to sell. When you’re ready to execute trades, you may pay low or no commission fees to do so.
Discount brokerages can also open the door to new investment opportunities, beyond stocks or ETFs. For instance, you may be interested in investing in IPO stocks. With a discount brokerage account, you may have tools on hand to help you understand how the IPO process works and how companies set an IPO price. You can then compare IPOs and decide whether you want to invest, based on your investment goals and risk tolerance.
Discount brokers work well for newer investors and more advanced investors alike. They’re not as well suited for venture capitalists or investors with large portfolios who might be interested in crowdfunding options for investing or investors who want access to things like hedge funds and private equity.
Full-Service Brokers vs Discount Brokers: Key Differences
Brokerage firms help investors to execute trades of stocks and other securities. There are two main types of brokers to choose from: full-service and discount brokers.
Full-service Brokerages
Full-service brokerages assist clients with making trades. But they can also provide other services, including offering investment advice. For instance, a broker might recommend specific stocks or mutual funds to invest in. In exchange for this advice, investors pay fees on top of the commissions they may pay to complete trades.
Discount Brokerages
A discount brokerage differs in the scope of services provided and the fees investors pay. With discount stockbrokers, investors receive little to no direct personalized financial advice or analysis from investment professionals. Instead, it’s up to the investor to decide which securities to buy or sell.
Discount brokerage firms are effectively a link between investors and the market, as they help to carry out trade transactions. But they don’t have the higher fees associated with full-service brokerage firms.
Pros and Cons of Working With a Discount Stock Broker
Choosing a discount broker in place of a full-service broker can offer both advantages and disadvantages. While full-service brokers have a longer track record, discount brokers are making it easier for a broader group of investors to gain entry to the market.
Whether using a discount broker makes sense depends on what you need from a brokerage and what you’re willing or able to pay to build a portfolio. Here’s an overview of the main pros and cons to consider when comparing discount stockbrokers against a full-service option.
Pros of Using a Discount Broker
• Cost. Arguably, the best reason to consider discount brokers in lieu of full-service brokers is cost. Discount brokers charge lower commission fees to trade, and you’re not paying additional costs for their professional investment research or advice since you’re responsible for making investment decisions.
• Convenience. Discount stock brokerages make it easy to invest from virtually anywhere, since you can execute trades online or via mobile apps. If you come across a buying opportunity, for example, you can log in and complete the transaction in minutes without having to connect with a human broker first.
• Variety. Another advantage of using a discount stock broker is the selection of investments to which you have access. That may include not only stocks, mutual funds, ETFs and bonds but you may also be able to buy IPO stock, commodities, or options. Discount brokers make it easier to build a diversified portfolio in one place, with minimal costs.
• Self-directed trading. If you prefer making investment decisions yourself, a discount brokerage account allows you to do so. You can choose when to buy or sell and how much of your portfolio to allocate to one security versus another.
Cons of Using a Discount Broker
• No access to professional advice. While discount stockbrokers can be cost-friendly, they’re typically missing one big thing: professional advisors to guide you through the investment process and discuss potential investment risks. Whether this is a con for you depends on how comfortable you are charting your own course with investing.
• Customer support. Every discount brokerage is different in terms of the level of customer service and support they provide. Some may be more helpful than others, which is something to consider when choosing a discount broker.
• Not fee-free. While many discount brokers charge $0 commissions to trade U.S. stocks and ETFs, that doesn’t mean there are no fees for trading. You may pay fees to trade mutual funds, for example. Or the brokerage may charge an extra fee if you need to complete a trade by phone.
• Some limits: While discount brokerages give investors access to many types of investments, they don’t typically offer access to some riskier investments, such as hedge funds or crowdfunding.
What to Look for When Choosing a Discount Brokerage to Work With
If you’re interested in opening a brokerage account, researching your options is the first step. While picking the right brokerage won’t guarantee returns, it can make it easier for you to manage your portfolio and focus on your investments. When comparing discount brokers, here are some of the most important things to keep in mind.
• Cost. First, consider what you’ll pay to trade stocks and other securities at a particular brokerage. Also, be sure to check the full fee schedule to see what additional trading or account fees may apply.
• Investment selection. Next, consider what investments you can add to your portfolio with a particular discount stock broker. Some discount brokers may not offer certain options.
• Minimum investment. Depending on where you are on your investing journey, you may have a lot of money or a little to start trading. So consider the minimum investment required to open an account at different discount brokerage firms.
• User experience. If you’re going to be making trades online or via a mobile device, it’s important that the platform you use be easy to navigate. Check out websites and mobile apps for different discount brokers to see how they compare in terms of features and ease of use.
• Research tools. Discount stock brokerages may offer research and analysis tools to help you construct your portfolio. Consider what types of tools, (i.e. tickers, stock simulators, etc.) may be available to help with your investment decision-making.
• Customer support. Look at what type of customer support is available to help investors with a particular discount broker. The more ways you can communicate, such as email, by phone or live chat, the easier it may be to get help managing your account when you need it.
• Reputation. Finally, consider how well a discount broker stands out compared to the competition. Does it have a great reputation for low-cost trading, for example? Has it won any major industry awards? What are investors saying about the brokerage? Looking at a discount stockbroker’s overall reputation and track record can help decide if it’s a good fit.
💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.
Discount Brokers Make Investing Affordable
Opening an account with a discount broker can be a first step toward growing wealth. Because they’re generally a low-cost way to invest, you’re able to preserve more of your investment returns over time. These days, most brokers have had to adjust to account for discount brokers in the market, which is generally a good thing for investors.
But remember that discount brokers have their pros and cons, and that investors would do well to do some research before picking a broker. Each broker won’t be the right fit for each investor, so again, take the time to look into potential options before taking the plunge.
Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
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