Course 202: Using Financial Services Wisely
Discount Brokers
In this course
1 Introduction
2 Full-Service Brokers
3 Fee-Based Planners
4 Discount Brokers
5 Market and Limit Orders
6 Buying on Margin
7 Shorting
8 The Bottom Line

To avoid the pitfalls of full-service brokers and the costs of fee-based planners, using a discount broker is often the best option. Discount brokers differ from their full-service counterparts in that they offer bare-bones brokerage services, and typically do not offer advice. Investors with discount brokers don't have to worry about aggressive sales tactics or the conflicts of interest we discussed above. Instead, discount brokersallow investors to make their own decisions regarding what to invest in.

Most importantly, the commissions that investors pay to discount brokers are significantly cheaper than the commissions charged by full-service brokers. Whereas a full-service brokerage may charge a commission in the hundreds of dollars per trade, a discount broker's commissions are often a fraction of this. And with the advent of the Internet, Web-based discount brokers make it easier than ever for individuals to maintain their own stock portfolios. Although discount brokers make investing easier, picking which broker to use can be difficult. In the following sections, we'll tell you what to look for when choosing a discount broker.

When looking for a discount broker, cost should be a major focal point. We've already established that discount brokers are significantly less expensive than full-service brokers, but there is a wide range of price options within the discount broker arena as well. For example, commissions can range anywhere from $30 to less than $10, depending on the broker. Obviously, the less you have to pay in commissions, the better. But there are also many other factors you should consider. Many brokers charge lower per-trade commissions for "active traders." For example, a brokerage house can require that investors make more than 20 or 30 trades a quarter or month before they qualify for the lower commissions. We've said it before and we'll say it again: All else equal, frequent trading will eat away at your returns over the long run.

Peripheral Services
Brokers sometimes charge higher commissions because they offer investors a variety of other useful services. For example, many brokerages offer third-party research for stocks.

Although we think most investors are capable of making their own investment decisions, even the most experienced investors will eventually have a question or two about their accounts. This is why it's important to look for a broker that provides good customer service. Some companies have satellite offices in neighborhood strip malls, while others may provide 24-hour phone support. It's certainly worthwhile to look into a broker's customer service before making a decision.

A more recent trend is for brokers to also provide other financial services, such as retail banking (checking and savings accounts) and loans. These services may be attractive for those looking for a "one-stop shop" for all their financial needs. The range of these services can vary, but they are also worth looking into.

After you've opened an account with your broker of choice, you have a variety of investing options and strategies at your fingertips. At Morningstar, we believe that a long-term investing strategy is the best way to achieve financial success, but it is important to understand some of the mechanics and options involved in trading and investing in stocks.

Next: Market and Limit Orders >>

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