Prior to the advent of the internet, only the wealthy had access to the investment markets, because of the high cost of brokers who were tasked to execute the trades. All of that has changed, however, due to the 21st century technology that enabled most stock trades to be executed automatically. The best discount brokers offer the portal to this economic infrastructure at a fraction of the cost of a traditional broker. However, these brokers are still plagued by myths and misconceptions, and we’re going to tackle them in this article.
Discount Brokers are NOT Fiduciaries
If you have experienced working with an investment adviser, they may have been bound by fiduciary responsibilities. This means that they have to put your needs ahead of their own. That also means before they make recommendations, they will have to know your risk tolerance, goals, and other financial information. A fiduciary has to have your back much more than other pros.
Discount brokers, however, are not fiduciaries. If you buy 500 shares of a highly volatile stock, they probably will not advise you of the risks that come with such an investment.
Education is General
Discount brokers have user summits and branch level educational events. If you want to learn to trade options, they might have an introduction to options class or seminar that you can attend, free of charge.
However, you still may not have the knowledge or experience to be an options trader, even after the class. The more trading you do, the more money these brokers make, and because options, bonds, and other products come with higher commissions, they will probably be happy seeing you trying something new.
Might NOT really be a Discount
If you moved from a broker-dealer to a discount-broker, you will probably see a substantial discount if you frequently trade. On the other hand, if you only have a small amount of money to invest, those trading commissions can rack up quickly.
Making a trade on $100 worth of stock at a discount broker can easily cost 7 percent or more, of that $100. To keep the trading commissions low, you have to keep your positions diversified but don’t have so many stocks that you have to buy and sell frequently, if you have a low balance in your account.
They are NOT all the Same
There’s no denying that there are a lot of discount brokers to choose from and each offers a different level of service. If you’re the type of person who doesn’t need any human contact, the cheapest of the discount brokers may work well enough for you. If you sometimes want to have an in-depth market discussion with a broker, you will have to pay a little more per trade.
Some of the full-service brokers are now offering stripped down services that enable clients to trade online, with the help of one of their full-service brokers. Overall, you cannot just assume that all discount brokers are the same.