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What are the Pros and Cons of a Discount Brokerage?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 01 December 2016
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Working with a discount brokerage can provide cheaper access to investments. This can lead to better decisions and bigger profits. At the same time, investors are not going to be able to get as much detailed service as they would with a full-service brokerage.

The biggest advantage of working with a discount brokerage is that the investor can save money on transactions. When working with a regular brokerage, investors often have to pay large amounts of money in commissions to the broker. These commissions might be based on the volume of the trade or they might be a flat fee. If an investor trades frequently, these high commissions can add up quickly. By working with a discount brokerage, an investor can save significant amounts of money and increase profits.

When an investor knows that he or she has to pay a large commission, it can also lead to bad investment decisions. For example, if the investor opens a trade, he or she knows the trade will have to make up for the commission before any profit is realized. The investor could hang onto a trade too long to make up for the commission and end up making a mistake. This can cause an investor to stay in a trade too long and lose money.

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Another advantage of working with a discount broker is that the brokerage will not be as likely to push specific investments on the investor. Full-service brokerages often try to promote specific investments so investors will provide them with more commission. Discount brokerages know they will be able to make money on volume because more investors will trade more frequently.

Even though an investor can save money by working with a discount brokerage, he or she will not be able to get the same level of service provided by a full-service brokerage. Most discount brokerages encourage investors to do their own research and come up with their own investment decisions. A full-service brokerage is going to be able to sit down with an investor and come up with investment goals. The full-service brokerage will then help the client choose individual investments.

Another disadvantage of working with a discount brokerage is that the investor may not have access to as much information about investments. Full-service brokerages often provide investors with great tools that can be used to analyze investments. Many discount brokerages do not provide access to these types of tools.

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Moldova
Post 3

I know that the discount brokerage fees are lower with a discount stock brokerage firm but I prefer to work with a stockbroker. I really have a lot of difficulty deciding what to invest in, and I rather have someone offer their expert advice and pay them a little in order to get the best returns.

Maybe if I had more time I could do some research on my own, but I don’t. I rely on my stock broker and he has done a great job for me in the past, so I have no reason to change.

It is nice having someone keep an eye out on your portfolio for you like that.

suntan12
Post 2

@BrickBack -I agree with you and I think that the best discount brokerage services come from the mutual fund companies themselves. I love the support and the company that I buy from offers very small operating expenses within its mutual funds.

I normally buy index funds anyway because I like the diversification as well as the low expenses. I use a dollar cost averaging method and invest into my account monthly. This way the investment is automatic and my account builds.

BrickBack
Post 1

I actually prefer using discount brokerage services. I like that the fees are lower and I normally have a good idea of what I want to invest my money on.

As a matter of fact, many of these companies offer online risk assessments that allow you to determine what mutual funds or stocks are best for you. You can also look at the beta rating of a mutual fund. It will tell you how risky the mutual fund is.

For example, a beta of a 1.0 means that the mutual fund offers average levels of risk, but if the mutual fund has a 1.25, then the mutual fund has an above average level of risk.

You

can also do a discount brokerage comparison online to see which company is best. I think that best discount brokerage will offer a secure website and lower than average fees on trades.

A lot of them usually have a flat rate for their trades ranging from $4 to $8 per trade. Some of them offer you a better deal if you set up a direct deposit for automatic investing. That is what I do for my discount brokerage accounts.

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