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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Discount Broker

What it is:

A discount broker is a stockbroker who charges a reduced commission to buy and sell shares for clients.

How it works (Example):

Discount brokers are one of two general categories of brokers, the other being full-service brokers. Whereas a full-service broker offers personal consultations, research, and advice as well as estate planning or tax planning services, a discount broker typically just executes trades for customers. This, combined with the fact that discount brokers don't manage as many products and don't spend as much money soliciting business from high net worth clients, is why discount brokerage clients pay lower commissions than those with full-service brokers. Many discount brokers operate online.

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Why it Matters:

The extra cost of a full-service broker may be worth it for people who don't have the knowledge or inclination to stay on top of complicated investing or financial planning. And investors who hold their investments for a long time are usually less bothered by higher trading commissions because they don't trade that often. But commissions eat into returns, and so it is often worth investigating the array of tools and online products offered by discount brokers before engaging a full-service broker.

Investors who trade frequently especially 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.

[InvestingAnswers Feature: 5 Ways to Keep Your Broker Honest]

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