Published in: Buying Stocks | Feb. 4, 2019
By: Dan Caplinger
Image source: Getty Images.
Brokerage accounts are the gateway between investors who want to participate in the financial markets and the investment professionals who have direct access to those markets. With dozens of different companies vying for your business, it can be challenging to pick the broker that will work best for your needs, but it's helpful to narrow the field by dividing brokers into broad categories and concentrating on the group that fits best with what you want.
One major distinction in the brokerage world is between full-service brokers and discount brokers. With differences in the level and types of services as well as the costs of doing business, choosing between a full-service and discount brokerage can have a big impact on your investing experience as well as how much you have to pay to invest. Below, we'll look more closely at these two types of brokers, presenting pros and cons you can use to make an informed choice.
What many people don't realize today is that discount brokers haven't always been around. Until the 1970s, Wall Street was largely regulated, and that made full-service brokers the only game in town. They were also extremely expensive, with simple stock trades often costing hundreds or even thousands of dollars per transaction. That largely limited investing to wealthy individuals, and brokerage companies wooed those clients in efforts to create close professional relationships. You could expect to know your brokers personally and even socialize regularly with them, and in return, they'd give you the investment advice and guidance that you needed in order to invest well.
Nowadays, full-service brokers still exist, but they've had to learn how to compete better in a more cutthroat industry. You can find a variety of investing options at full-service brokers, including both traditional commission-based investing as well as fully managed accounts where you give the brokerage company full discretion to trade your account on your behalf. This often appeals to busy people who don't have the time or inclination to manage their own investments.
Find the best stock broker for you among these top picks. Whether you're looking for a special sign-up offer, outstanding customer support, $0 commissions, intuitive mobile apps, or more, you'll find a stock broker to fit your trading needs.
The problem, though, is that full-service brokers come at a high cost. Commission rates aren't quite as bad as they once were, but you can still expect to pay a lot more per trade at a full-service broker than at a discount broker. Those who take advantage of management services often pay a percentage of their total assets in fees each year, and with typical full-service offerings costing from 1% to 2% or more, you're looking at thousands of dollars in annual management expenses just for a $100,000 account.
For some, that might seem well worth the cost not to have to worry about investments. But as you'll see below, investing with a discount broker isn't as hard as you might think, and many have resources that can help you invest better without missing out on the rest of your life.
The rise of Charles Schwab in the 1970s revolutionized the industry by introducing the concept of a discount broker to the investing world. Now, there are dozens of reputable discount brokers, and they tend to share these favorable traits in common:
way that they provide these services. You'll find sophisticated trading platforms with ample access to useful research tools with some discount brokers, while others sometimes have more confusing trading interfaces that require climbing a steep learning curve before you can feel comfortable that you're using them properly.
Yet it's important not to overlook just how big a cost advantage discount brokers have over their full-service counterparts. Most discount brokers let you buy and sell stocks for less than $10 per trade -- a tenth or less of what you might pay at a high-priced full-service broker. Some even give you access to certain investments with no commission at all -- providing valuable services at no cost. That means you get to keep all the money that would otherwise go to cover brokerage fees.
In the end, either type of broker can help you reach your investing goals, but it's important to select the choice that will match up best with your particular temperament. If you find yourself in the following categories, then you might want to give discount brokers a try:
By contrast, if the characteristics below better fit your situation, a full-service broker's worth a closer look:
If you're just getting into the stock market, the first thing you'll need is a stock broker. Browse our pick list to find one that suits your needs -- as well as information on what you should be looking for.
For most investors, a discount broker will be the better choice. Given how expensive typical full-service brokers are, you have a big financial incentive to learn what you need in order to use a discount broker efficiently and effectively. Not only will you save on costs, but you'll find out what you ought to know in order to be smarter about managing your money.
Over the long term, there's been no better way to grow your wealth than investing in the stock market. But using the wrong broker could make a big dent in your investing returns. Our experts have ranked and reviewed the top online stock brokers - simply click here to see the results and learn how to take advantage of the free trades and cash bonuses that our top-rated brokers are offering.
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