Which Discount Broker is Right for Your Investments?

The discount broker opened doors for a new generation of investor, and really paved the way for all the smartphone-based trading platforms that you see today.

This type of broker offers low commissions on trades (compared to a full-service broker), but with better service and trading tools than their deep-discount counterparts.

What is a discount broker?

This type of broker, like any other, makes money by charging you commissions and fees. The more you trade, the more they make.

The term "discount" refers to the fact that they originally offered a discounted commission and fee structure verses full service brokers.

The amount that you pay for each trade (a.k.a. commission) will depend on how often you trade (buying and selling) and the size of your account balance (or portfolio size).

Fees are assessed over and above commissions. The most common fee that you'll run into is when you borrow money from your broker to invest...called "margin".

Why Use a Discount Broker

This type of investment broker sprang up as the internet became an accepted business tool. More and more people began going online to check balances, monitor accounts, and other activities associated with managing money online.

Smart executives realized that online trading would be big business. They could steal customers away from their full-service competitors by offering access to the markets at a lower cost.

Since the internet allowed companies to lower their internal costs, they could then offer lower the prices offered to retail investors (you and I).

This is the reason that that low cost trading accounts became successful. Investment brokers saw a niche market for low cost trades (i.e. traders who were willing to pay less in commissions in exchange for less research).

They also decreased the level of service on items such as customized advice, reporting, and/or access to certain investment instruments.

This allowed them to stay profitable, even though the commissions and fees charged were lower.

As the market matured, firms slowly increased their level of service, or lowered their fees further.

For example, Fidelity has some of the best tool and research options available, which came with a high commission price in the past. Now we see Fidelity upping the ante, with a commission structure on par with brokers such as TDAmeritrade and E*Trade.

Some companies, such as TradeKing, only lack banking services (in terms of types of investments), but have half the commissions of E*Trade or Ameritrade.

Are they the right choice for you?

If you do your own research and don't need a lot of help, then a discount broker is a good choice. You'll have access to a higher level of customer service, better tools, and a larger selection of investment instruments.