What is a Discount Broker?
Today is the boom time for discount brokers. Many new entities are entering this domain and existing enterprises are coming up with their discount broking arms. A discount broker is a stockbroker who performs quintessential trading activities at reduced rates. They provide a basic trading interface to clients and offer them to open Demat & Trading Account to trade in the share market. Most of them are online-based.
Understanding Discount Brokers
The evolution of technology has revolutionized the way trading is conducted. Penetration of the internet has given a major impetus to discount brokers, most of whom operate through online platforms. More and more discount online brokers have come into the foray that enables individuals with smaller capital to trade at lower fees. One of the main reasons why discount brokers can afford to operate at lower fees is because they don’t target working with high-net-worth individuals (HNWI). Their affordability lies in their online business activities, which translates to lower overhead costs. Furthermore, they don’t offer services like customized research and planning, personal consultations, or tax planning to their customers. Online brokerage is almost synonymous with a discount brokerage. They are attracting young and tech-savvy individuals, who form the new generation of traders.
Whom to choose between Full-Service and Discount Brokers?
Let’s consider a situation wherein you have money at your disposal for the stock market, but you aren’t sure which stocks to invest in. You are toying with the idea of seeking help but then again you know that it may incur additional advisory costs. So, what is to be done in such a scenario? Should one go for full-service or a discount broker?
This is a never-ending conundrum, especially among people who are new to the markets. To make this simpler, let’s take a closer look at the two and decide which one to go for.
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Full-Service Broker |
Discount Broker |
Meaning |
They are traditional brokers offering a wide gamut of services to their customers like investment advisory, wealth and portfolio management, and customized research. |
They offer Demat & Trading accounts online and have a minimal physical presence. They provide a basic trading interface to trade and manage by the investor him/herself |
Differences |
- Have physical branches and provide online and offline services.
- The transaction cost charged is higher. Generally, a turnover-based brokerage is charged
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Do not have many physical branches and thus do not offer many offline services.
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Discount brokerages charge lower transaction costs. A flat brokerage model irrespective of turnover is applied.
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Now that we’ve understood the meaning and seen the differences between the two, you must have realized that as an investor, it’s up to your preference and your available capital that you should make a choice. If you have substantial capital to invest and are there in the market for the long-term, you will surely go for full-service brokers. Whereas, if you possess a small amount of capital and do not wish the commission to diminish your returns, you will go for discount brokers. To conclude, we could say that the choice is driven entirely by your needs and preferences.
Pros of Discount Brokers
With the advent of technology, discount brokers have gained quick popularity in the investor community. Undoubtedly, they come with benefits that have led to their success. Here are some of them.
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Lower commission charge – This is one of their most distinct advantages. They charge low commission rates for their services. A flat fee model is offered by them where per order brokerage is charged irrespective of turnover.
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Fully digital service – They provide full digital service from account opening to placing orders, fetching reports, etc. Since they are online-based, they tend to utilize technology that is much more advanced and user-friendly.
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Learning materials & guides- Discount brokers, being popular among young and tech-savvy investors, make more effort to educate investors on the basics of trading and investing through videos & webinars
Cons of Discount Brokers
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Most discount brokers are online-based, therefore someone who prefers to trade in branch and discuss the investments with a Relationship manager might not find the model of discount broking attractive
- Customer service is minimum – As they offer services online, they don’t provide any relationship managers.
- Portfolio services aren’t provided by discount brokers either. It might be available through additional subscriptions.
How to know if a discount broker is right for you or not?
The answer to this isn’t a very straightforward one. Whether to go for a discount broker or otherwise is dependent on many factors. You need to make a thorough assessment of your financial situation, investment know-how/capital, and objectives. Other than that, you need to also consider the time factor. You need to have enough of it to monitor your investments and take decisions in a rational way. Keeping all the factors that distinguish a discount broker from a full-service broker in mind, and the other factors mentioned previously, it’s up to you to decide if you wish to go for a discount broker or not.
Is your money safe with a discount brokerage firm?
Discount broking has become nearly synonymous with online broking. Discount brokerage undoubtedly provides low-cost access to investments that reduces sunk cost over time. Due to low cost and easy-to-use platforms offered to investors, people have shown an inclination toward discount broking companies. So yes, people have trusted discount brokers and have saved and invested their money with them. All said and done, even though the low fee may seem alluring, safety should be of primary concern when choosing a broker. It’s advisable that you do thorough research on your preferred discount broker to ensure that you can trust the broker with your money and securities.
Conclusion
The global pandemic has played a role in discount brokers gaining an upper hand over its counterpart, full-service brokers. Both have their pros and cons. However, current trends show that tech-savvy traders prefer discount brokers over full-service brokers. If you are still in a dilemma, we would suggest you review your investment capital and how much knowledge you have of the financial markets. If you wish to do high-volume trading and have the required knowledge, it would be better if you went for a discount broker as this will help you in saving in the long run. Happy Trading!