Is Investing With a Discount Broker the Right Option for You?

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One of the first steps for someone who wants to start investing is securing a broker, without whom it is difficult if not impossible to buy or sell most stocks or other securities. But for many people looking to start investing, the costs and account minimums associated with a full-service broker are too expensive or involve too much of a financial commitment.

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Fortunately, you still have options in the form of discount brokers, who only provide the most basic service executing trades but usually do so at a lower cost than a full-service broker and frequently with a lower floor on the amount needed to start investing.

So, is a discount broker the best stock broker for you? Here’s a look at what discount brokers are so you can decide if it’s the right option for you.

Compare Stock Brokers: Discount vs. Full-Service

Finding the right broker for you has a lot to do with your investment needs. A full-service broker offers a range of additional services, including more comprehensive financial planning with personalized advice from a dedicated broker, something that can be essential in avoiding unnecessary taxes on investments and meeting your long-term financial goals.

Discount brokers simply execute your trades, but with that comes certain benefits. Discount brokers typically offer commission-free trading and usually won’t charge an annual fee, making their money from stock trading fees charged per trade. If a full-service broker is paid on commission, you might need to take their advice with a grain of salt as they could have financial incentives that aren’t completely aligned with your goals.

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If you’re interested in online stock trading, most online-only brokers are discount brokers.

Read: 6 Small Investment Ideas When You Have Less Than $500

Which Type of Brokerage Is Right for You?

When you compare stock brokers, the most important consideration is you. Even the top discount brokers will be wrong for some investors, and a full-service broker can ultimately mean paying more for advice and services you might not actually need.

If it’s important to you that you have the chance to sit down with a person and talk through your specific financial goals and investment plan, a discount broker might not be the best choice. Likewise, if you want someone who has done research and can suggest potentially successful investments to you, you won’t get that from a discount broker.

But given the relative ease of opening an account with a discount broker, it can be a very attractive option for a beginner to start investing. A range of resources are available online to help you DIY your investment education at no cost, and a discount broker will allow you to start small and advance at a pace you’re comfortable with. Even if a full-service broker is where you end up, you might still find utility in opening an account with a discount broker first so you can experiment with investing and learn more about what your needs are before making a larger commitment.

Read: What You Need To Know To Invest In Mutual Funds

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What Should I Look For in a Discount Broker?

Finding the best stock broker for you is much simpler if you do opt for a discount broker. Although finding the right fit with a full-service broker is essential to getting the most out of the relationship, a discount broker offers a much simpler, transactional relationship.

As such, when comparing the top discount brokers, investment fees are usually what matter most. The less money you spend executing trades, the more you’re investing. Even modest differences in fee structures can add up considerably over time. But it might not be as simple as “the lower the better.” Different fee structures might ultimately affect you differently, depending on the approach you take to investing, so accepting a higher fee could end up being a smarter move in the long run based on other factors.

You should also be careful to look at what sort of securities and types of investments you can make with each broker. Not every broker will execute every type of trade, so if you do have some ideas about the sort of investing you want to focus on, make sure that the discount brokers you’re considering will handle those trades.

And finally, don’t overlook the importance of the tools and resources your broker offers with their services. Although discount brokers aren’t in the business of giving advice or doing research, many options for online stock trading still offer a lot of educational tools or research resources on their websites. Those resources can go a long way in helping beginning investors find their footing.

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Popular Discount Brokers

Many of the top discount brokers are operated by familiar names of companies that offer a range of financial services and products. Here are some of the most popular options:

  • TD Ameritrade
  • OptionsXpress
  • E-Trade
  • Charles Schwab

Choose the Right Broker for You

The best broker, discount or full-service, is the one that meets your needs. Consider your goals, objectives and level of education on investing when evaluating brokers to choose the one that best complements your needs. When in doubt, keep researching and reading until you have a firm understanding of both investment principles and brokerages to make an informed decision.

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Last updated: May 20, 2021


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