A discount broker is a stockbroker who carries out buy and sell orders at a reduced commission rate. However, a discount broker does not provide investment advice or perform analysis on a client's behalf, unlike a full-service broker. Before the emergence of better communications technology, only the wealthy could afford a broker and get access to the stock market. However, the internet has now brought an explosion of discount brokers that allow individuals with smaller capital to trade, at a smaller fee. In terms of the stock market, most discount brokers operate through online platforms. As a result, discount broker is nearly synonymous with online brokerages.
Understanding Discount Brokers
Discount brokers carry out orders at cheaper costs, but they typically just execute orders for their clients. They do not offer personal consultations, advice, research, tax planning, and estate planning services for customers. Aside from not providing extra wealth management services, discount brokers can offer lower fees because they do not spend money closing deals with high-net-worth individuals. Plus, most of them today operate their businesses online, resulting in low overhead.
In the securities industry, discount brokerages provide clients with their own accounts to enter orders for execution. These investors usually do not interact with a live broker. If they do, the communication is minimal and are only done for trade executions. The services provided by discount brokers are aimed at self-directed traders and investors, and the electronic trading platforms are built in a way that is beneficial for active traders with charting and position monitoring services.
- Discount brokers execute orders on behalf of their clients, but they do not generally provide any advice or analysis.
- Discount online brokerages have been a boon for small investors looking to get stock market exposure for smaller portfolios.
- When using a discount broker, you need to be certain your approach is right for you as there is no one else analyzing your decisions on your behalf.
Choosing Between Full-Service and Discount Brokers
Whether one opts for a discount broker or a full-service broker depends on their investing knowledge, market experience, financial goals and current financial status. Since commissions typically take a healthy chunk out of investment and trading returns, some individuals opt to go for products offered by discount brokers instead.
Full-service brokers are a better option for investors who need professional investment advice or require support to stay on top of their financial planning outside of investing. Discount brokers are particularly useful to investors and traders who actively buy and sell securities on a frequent basis. Investors who frequently trade benefit from the lower commissions discount brokers charge. Investors who don't need advice, have small portfolios, or just want their trades executed are also usually better off using discount brokers.
Discount Brokers in Other Industries
Discount brokers can also be found in the real estate and other financial services fields. Discount brokers in the real estate industry help individuals buy and sell properties. These discount brokers also have access to the same home listings as full-service real estate agents and help clients to access that directly for a fee, but they do not take the client through the purchase as a traditional realtor would. Discount brokers may also sell insurance products – though again, they do not provide professional financial advice. In general, if you know exactly what you need and want, you can probably find a discount broker that will do as you instruct for less money than an advice-oriented broker would charge.