The Pros and Cons of a Deep Discount Broker


Deep discount brokers are exactly what they sound like: "no frills" access to trading and investing.

Fortunately for us, the same technology that enabled the creation of these brokers (the internet) has lowered fees across the board, making it easier for other not-so-low cost brokers to offer the same type of benefits.


What are Deep Discount Brokers?


The term "deep discount" refers to the extremely low level of commissions and fees charged to place trades.

When the first "super" low cost broker opened up shop, it was easy to see the "no frills" approach verses other retail brokers such as E*Trade or TD Ameritrade.

The commissions and fees were far below other discount and full service brokers.

These low costs were not without drawbacks. Service was spotting, transaction times were slow, customer service was nonexistent.

The saying "you get what you pay for" still applies, as the level of service, information, tools, and customer service are typically on the low side, relative to higher priced broker. But the difference is MUCH smaller than it was just a few short years ago.


Why Use Deep Discount Brokers?


10 years ago, brokerage houses also acted as information warehouses, and part of the commission and fees gave you access.

With the growth of the internet, more and more investing information can be found for free (such as this site).

So investors and traders (you) no longer have to pay high fees and commissions in return for access to information.

In the end, you benefit from the lower commissions when you trade and invest.


Factors affecting Costs


Low cost alone cannot be your only consideration.

Investing data and information may be more abundant, but that does not make it easier to trade.

In fact, more information just makes it harder to find "correct" information, making profitable trading more difficult!

When these brokers first arrived, they quickly realized that customers demand a certain level of service from all brokerages, regardless of costs.

Therefore, these firms needed to offer an acceptable level of service if they wanted to stay in business.


Brokerage Choices


Deep Discount Broker - Scottrade.com

Deep Discount Broker - SogoTrade.com

Deep Discount Broker - Sharebuilder

Deep Discount Broker - FirsTrade


Is a Deep Discount Broker Right for You?


As always, the answer is: It depends!

This type of investment broker is the right choice when you're highest priority is reducing costs. For instance, if you plan to be a day-trader (something I DO NOT recommend unless you have more than 1,000,000 to play with), then you can definitely take advantage of the low costs.

Or, maybe you're ready to move on from paper trading, and have a favorite investing strategy or two, but only want to use a small amount of money.

When you review your performance, you might see that commissions and fees are more than the amount of money you will make, percentage-wise. Again, a deep discount broker is probably the best choice.

A discount broker makes sense if you're monitoring the performance of each trade and trying to make adjustments (as discussion in the How to Start Investing Safely page). You may not know which strategy is right for you, and need the extra tools provided by a discount broker.



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