How to Choose The Best Discount Broker (2020 Review)

Investing is a great way to build wealth and there’s no better time to start!

Whether you are new to investing or you’ve been investing for years, welcome!

There are many different kinds of investors and many different brokers to choose from. 

We are going to show you the blueprint on how to choose the best discount broker.

Before we dive in, there are some basic terms that you should know. 

Let’s check them out!

What is a Broker?

A broker is an individual person, a firm, or a business that connects buyers and sellers. When there is a match between buyers and sellers and an exchange occurs, the broker gets a commission.

If you’re interested in buying or selling securities a broker is the fastest way to make that happen.

Brokers provide you with the service you need to invest locally or internationally. They are the connectors. They charge a small amount of money for their service through commissions, fees or being paid directly from the exchange

Key Points to Consider When Choosing a Discount Broker

Choosing a broker is a big deal and therefore it’s important to do your research. In this article we are going to walk you through the steps of “choosing the best discount broker”, but before we do that lets look at qualities that your broker should have.

#1 Security

When you invest your money somewhere, you want to bable to go to sleep knowing that it will be there in the morning.

It is very important to find a brokerage that has a high level of security and puts you first!

Don’t think about signing up for an online broker before you make sure there is a high level of security.

#2 Transaction Costs  

Transactional costs go hand in hand with online brokerages. 

At the end of the day brokers need to make money also, but that shouldn’t come at the expense of breaking your bank.

The transitional costs are directly related to the type of broker (full-service brokers and discount brokers).

Transactional costs are usually higher with full services brokers and that okay if that’s what you’re looking for.

# 3 Trading Platform 

Most trading platforms are easy to use and available on desktop and mobile devices.

Before you choose an online broker make sure you check out their trading platform and review it.

Is information easily accessible? Are the charts understandable and easy to use? Does the platform feel new?

A trading platform says alot about a broker and will be the main way you invest.

#4 Customer Service 

Customer service is a make or break when it comes to online brokers.

We understand that brokers arent perfect and occasionally make mistakes. That’s exactly the reason why we need a direct way to get in contact with them if problems arise.

The ability for a broker to help us with technical problems or any other problem for that matter is just as important as the transactions themselves.

Don’t compromise on customer service.

Okay, without any further ado, let’s dive into the types of brokers!

Types of Brokers

In this section we are going to look at the two main types of brokers: Full-Service brokers and discount brokers.

The best discount broker for you is directly related to your investment styles and financial goals.
Keep reading to understand the key differences in full-service brokers and discount brokers.  


Full-Service Broker vs Discount Broker

At the end of the day, both full-service brokers and discount brokers help you invest. The main differences between them are the features and advisory offered. 

Full-Service Broker

The name kind of says it all. 

Full-service brokers are brokers that provide investors with everything they need and more.

Full-service brokers include a large variety of services which include personal investment advice, tax tips, retirement planning, research tools and much more.

Although full-service brokers make life very comfortable and cozy, these personalized perks come at a cost. 

A full-service broker is most suitable for investors that don’t have the time to deal with investment decisions or their investment management. As mentioned before, a full-service broker is expensive, you also must be ready for the fees involved. 

Advantages and Drawbacks of Full-Service Brokers

Advantages

  • They offer guidance and advice
  • Large research and resource centers
  • Personal help achieving your financial goals

Drawbacks

  • Costs are higher
  • Usually require higher minimum investments
  • Handing over financial decisions to an advisor can be a negative

Discount Broker

Discount brokers are stockbrokers that buy and sell securities on behalf of their clients at a discounted or reduced commission rate (compared to full-service brokers).

For the most part, discount brokers are more hands-off giving the investor much more freedom to manage and choose investments.

Of course, there are exceptions with discount brokers. For example, Betterment and Wealthfront are two leading discount brokers that offer Robo-advisory service.

P.S If you’re debating between the two, we wrote a Betterment vs Wealthfront comparison review. 

Robo advisors are “financial advisors” that provide online investment management with minimal human involvement. 

Like full-service brokers, discount brokers also offer helpful tools. The top discount brokers provide research centers, useful data, and helpful tools for all investors.

Advantages and Drawbacks of Discount Brokers

Advantages

  • Access to Educational resources
  • Overall lower cost
  • They are unbiased 

Drawbacks

  • Customer service isn’t usually great
  • Usually isn’t personal guidance
  • Possible hidden fees 


Investment Styles 

The broker that you choose should derive from the type of investor that you are. For the most part, investors are broken down into two categories: Active Investors and Passive Investors.

Active Investor

An active investor is usually someone who has experience in the market. Active investors are also known as “traders” or “active traders”. 

Traders are usually looking to yield a higher return than the market by looking for quick gains.

Active investors or traders have usually experienced ups and downs of the stock market and should be seasoned investors. 

Inexperienced traders can cause themselves serious financial damage and should be careful.

Passive Investors 

Passive investors are investors looking to make money without being involved in their portfolios 24/7.

Index investing for example is a very common way passive investors meet their investment goals.

Passive investors aren’t trying to actively gain higher yields than the market. This is more of the “buy and hold” investment strategy.

The main idea is to buy securities and allow them to increase in value over time. 

Which Investor Are You?

There are many debates about whether it is better to be an active or passive investor. 

Truth is, there isn’t a better or worse. It really comes down to you and your investing style. 

Most investors find themselves somewhere in between the active and passive mindset.

E*TRADE and TD Ameritrade are great online brokers. They have different platforms for active and passive investors. 

Brokerage Fees

We haven’t found a broker that doesn’t charge money in some way shape or form for their service.

Although there might be different “names” for the fees or commissions, you should know that they are there. 

Why are There Brokerage Fees?

These costs and fees are all under the umbrella of “brokerage fees”. Whether you choose a discount broker or a full-service broker, there will be brokerage fees.

Investors must pay brokerages for the fact that brokers manage and hold your investment portfolio. These fees vary.

We put together a list of the most common investment and brokerage fees: 

  • Brokerage fee: This is a fee that investors must pay to their brokers for the fact that brokers hold and manage your investment portfolio. 
  • Trade commissions: A Trading commission is a brokerage fee that investors are charged for buying or selling securities. Trading commissions can be from stocks, ETFs, options, futures, and more.
  • Management/advisory fee: A management fee is usually fee derived from a percentage of the asset in your account. 
  • 401(k) fee: A 401(k) fee is a fee charged by brokers to maintain the 401(k) of the investor. This can also be a 401(k) rollover fee.

Knowledge is Power

In the 21st century knowledge is power, and that’s especially so when it comes down to investing and choosing the right discount broker.

Now that you know the difference between full-service brokers and discount brokers (and all the advantages and disadvantages), choose the right one for you. 

Investing is a lifelong skill and if you learn how to invest when young, you can set up your financial future. The point is to start investing, even if you have a little bit of money that you’re willing to invest. 

Most investors (especially novice investors) barely do their own research. The SEC (Securities and Exchange Commissions) is an independent agency in the U.S government and they were established to protect investors.

The SEC makes sure that publicly traded companies report their financial operations accordingly and make all relevant information public. 

With that said, as an investor, you should have all the information you need. The SEC makes it very easy for investors to do research on publicly traded companies and buy stocks. 

Once you choose your brokerage, don’t just buy stocks for the sake of buying stocks, do your research because knowledge is power.

Bottom Line

There are many things to consider when choosing the best discount broker.

The first broker does not have to be your broker for the rest of your life, don’t feel locked down.

Make sure that you do your homework on the online brokers that you’re interested in and compare the features that are most important to you. 

Good luck and happy investing!