Ever since this type of trading became the standard practice, brokers have been vying for their own piece of that pie. The competition has always been fierce, even in the days when you had to do everything over the phone, but as hard times call for hard measures, a special group of brokers has emerged: the discount brokers.
These people specialize in a very peculiar type of clientele: people who do not require advice or assistance – all they do is buy or sell as the client demands. By waving most of the responsibilities of regular brokers, along with associated costs, discount brokers have taken the financial world by storm.
What can a discount broker offer you?
What can one expect of a discount broker? Well, since the low commissions are the main reason people employ their services, one might expect that any of the activities they normally do will cost a fraction of what other brokers demand in exchange for their services. Anything else is just an added bonus, really. Good customer service and convenient trading are most welcome, although they too are a relatively rare sight these days.
How to choose the right discount broker
Here is what to look out for when searching for a discount broker.
1. The quality of the trading platform
First of all, there is their trading platform. Whereas most discount brokers offer several platforms, they usually stem from one or two basic types, and the “additional” platforms are basically modified versions, adapted to the needs of a specific type of clients, like VIPs.
When it comes to platforms meant for ordinary users, their uncanny similarity comes to mind. Since no discount broker is going to reinvent the wheel, the basic functions are all there: usually, the orders are placed in a similar way, along with stop-limit orders and specify the duration of the order – either until cancelled or it gets cancelled automatically at the end of the day.
For better or worse, it is not until you get to higher tiers that differences in platforms become evident. Additional charting tools, price quotes and various technical indicators are only available to larger players and only on certain platforms.
2. The commission structure
However, where even discount brokers vary among themselves is the commission they charge. Despite already outperforming most brokers out there, discount brokers also compete against each other, so anything over $10 per trade can be deemed “expensive”. In fact, considering the recent increase in the level of service they offer, it comes as no surprise that investors who make small, occasional trades would favor the most affordable brokers they can get.
This increase in the quality of service is in all likelihood spurred by the competition; whereas back in the day all a discount broker had to do to get ahead in this type of business was to be the cheapest, nowadays their offers are easily matched by competitors who also throw in market analysis or research tools. Of course, “back in the day’ was in the ’80s and even then there were signs of what is to come. Now that most of the legwork is done by computers, raising stakes is as logical as it gets.
3. The fundamental research and analysis available
Even a discount broker should be able to provide some sort of fundamental research, if nothing else by compiling data and reports from trusted sources, like Reuters. Also, a discount broker with no charting whatsoever could not possibly survive in this business, as the lack of technical analysis would turn away most clients in an instance. However, this does not mean the service rendered will exceed some basic candlestick charts and other rudimentary instruments.
The best type of broker in this regard is the one whose charting tools allow for plotting stocks and adding technical indicators in order to get a better understanding of where the price action seems to be going. If they accounted for the possibility of corporate events, even better. Finally, most discount brokers offer at least some financial statement data in order to assist their clients.
This or that?
Naturally, discount brokers are not superior to other brokers in every aspect. Even in the commissions department, there are deep discount brokers who charge even less. Other than that, regular brokers offer a lot more services, albeit at a cost. It all comes down to what your necessities.