I’ve noticed a trend lately. More and more, friends (both real ones and social media ones) are asking about investing. But not just what investments to buy. There has been a lot of talk about which company they should choose. And I’m seeing a lot of people respond that they should use a discount broker.
But just what is a discount broker? What are the pros and cons? That’s what we’re talking about today. So if you’ve been looking to start investing, or if you already invest but think the fees are too high, this post is for you.
Discount Broker Defined
A discount broker buys and sells investments for their customers, but at a reduced price in comparison to a full service broker. The types of investments they sell can be anything from mutual funds and ETFs to index funds to individual stocks and bonds. Different brokers will offer different investments, so make sure the type of investment you want is offered by the broker you choose.
The low cost of trades is one of the defining characteristics of a discount broker. How are they able to do this? Part of the reason is that unlike a full service broker, discount brokers don’t provide investment advice.
No Investment Advice?
Well…not like you’d get from a full service broker.
Most discount brokers have some sort of general investment advice on their website. It comes in several forms:
- the ability to research different investments
So you can use discount brokers to help you figure out how you want to invest and what you want to invest in…you just won’t have a person doing all of the research for you. Unless…
Some discount brokers will help you develop an investment plan for a price. You can often choose between managing everything yourself or getting more hands on guidance from a professional. But it’s not going to be like what you see in the movies. You aren’t going to be ushered into your broker’s mahogany-lined office, given a hot cup of coffee in a real mug, and asked about your dreams. Instead, you’ll fill out a survey online (or maybe talk by phone) and given a somewhat tailored plan.
How Much Do Discount Brokers Cost?
Typically discount brokers charge a few dollars in commission for each trade you make. A typical amount is $4.95-$6.95 per trade. Depending on how much you are investing, this might be a very small amount or a considerably larger amount. For instance, a $4.95 commission on a $50 purchase means nearly 10% of your money is going towards fees. But a $4.95 commission on a $1000 purchase is less than 0.5%.
Sometimes, instead of charging a per-trade commission, companies offer a monthly rate. The monthly charge might offer unlimited trades, or it might be a set amount. For instance, 20 trades for $20.
Then there are some other companies that are changing things up. A few companies now allow customers to trade commission-free. They make money by earning interest on the cash you leave in your account, and by selling additional services.
What Are The Best Discount Brokers?
That really depends on you and what you want out of the broker. Are you looking for a certain kind of investment? Do you want to trade a lot? Are you looking to buy options? Each of the discount brokers has some things they are better at, and others where maybe they aren’t so good.
Some of the most popular discount brokers right now are:
- Ally Invest (offers a managed investment service)
- E*Trade (the first online brokerage)
- Robinhood (free trades)
- Fidelity (excellent research)
This list is just a small sampling and none are what I use. If you want to see some comparisons, check out NerdWallet’s Best Discount Brokers 2017 and DoughRoller’s Best Online Discount Brokers for 2017.
Is A Discount Broker Right For You?
If you feel fairly confident in choosing your investments and understanding how to manage your money, you probably can just use a discount broker. You don’t need the hands on approach of a full service broker.
Or, if you don’t feel that confident in your own abilities but are willing to listen to some people online, you can just use a discount broker. What I mean by that is that there are certain investments that are recommended over and over in personal finance circles. I’m not going to list them here, because (as I’ve mentioned before) I won’t be giving any investment advice here. But they are easy to find if you go to any of the major forums that discuss investing, like Reddit or BogleHeads.
Important: no matter who helps you choose investments (online stranger or your dad’s best friend) you need to do some research yourself to make sure the investment makes sense. It doesn’t take a ton of research if you are choosing a highly diversified index fund, but you don’t want to put 100% of your money into that cool new company your neighbor says is going to be the next Apple. Just trust me – it’s a bad idea!
What’s the catch?
Nothing is perfect, right? There are a few things to consider before signing up for a discount broker.
- The aforementioned lack of personalized planning.
- Discount brokers may have a minimum account balance required before you can open an account.
- Low per-trade commissions can make you feel like you are getting a good deal…but if you trade often, make sure you aren’t sending large chunks of your money to pay for administrative costs instead of actually buying your investment!
My Take On Discount Brokers
I’ve been using a discount broker since I bought my first stock in 2007. They work for me, because I like doing the research myself and don’t want to spend money on services I don’t use.
I used to buy 2-5 stocks at a time, at a total cost of, say, $100, and pay a $7 commission. That was a fairly high commission rate.
Now, I execute purchases of index funds for hundreds or occasionally thousands of dollars and only pay $4 per trade, so my commission rate is a much lower percentage of my overall output. I’m buying a broader investment, for less money. And since 98% of my investing is automated, I don’t even have to think about it.
I make my decision in December each year of what I’m going to buy and how much I’ll spend on it. Then I log into my account and set it up. Within 30 minutes, I’ve done everything I need to do. Discount brokers are great for this kind of investing because I don’t need any handholding or advice. If that sounds like how you want it done, I highly recommend a discount broker.
If you want more advice, you can consider a managed account. Keep in mind the costs will be a much higher percentage of your portfolio. You can still look at the discount brokers that offer management services, or if you really want a full wealth management service you can look at a full service broker.
Good luck and happy investing!