What Is a Discount Broker?
A discount broker is a stockbroker who carries out buy and sell orders at reduced commission rates compared to a full-service broker. 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 individuals with a far above average annual income could afford a broker and access to the stock market.
However, the Internet has brought an explosion of discount online brokers that allow individuals with smaller capital to trade for lower fees and with less capital. In terms of the stock market, most discount brokers operate through online platforms. As a result, a discount broker is nearly synonymous with online brokerages.
- A discount broker is a stockbroker who carries out buy and sell orders with little or no commissions.
- Discount brokers do not provide the investment advice or guidance provided by a full-service broker.
- Discount online brokers compose a large section of the fintech industry.
Understanding Discount Brokers
Discount brokers carry out orders at less cost, but they typically just execute orders for their clients. These brokers do not offer personal consultations, advice, research, tax planning, and estate planning services for customers. The lack of these services, and because they do not spend money closing deals with high-net-worth individuals, means that discount brokers can offer lower fees. Additionally, most discount brokers operate their businesses online where the overheads are low. So low in fact, that beginning in 2019, many discount brokers even went so far as to forego commissions altogether for certain types of securities.
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 only engaged in 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.
Choosing Between Full-Service and Discount Brokers
Whether an investor 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—although, 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.