Advantages and Risks of the Discount Broker

Using a discount broker has become a very popular method of investing in the financial markets today. When you use a discount broker, you are going to get some benefits but there will be some potential problems also. Here are some of the advantages and risks of the discount broker.

Advantages

The biggest advantage that you are going to get with this type of broker is that the commissions are going to be cheaper. Whenever you regularly purchase stocks or other securities, you do not want to have to pay any more than you have to. When you work with a traditional broker, they will typically have a large commission fee that you have to deal with. This fee could be based on a percentage of the total transaction size. Large commissions can seriously eat into the amount of money that you earn in the market. If you are the type of person that likes to invest a regular amount of money on a set interval, you want to be able to do this as cheaply as possible. For example, let's say that you want to use a dollar cost averaging strategy and invest $100 every month. With a traditional broker, you might have to pay $20 or more just to make a purchase. This means that 20% of your investment is going straight to the broker.

Another advantage that you could get by going with a discount broker is safety. Most of the time, if a broker can afford to lower commissions, this means that they are making up for it in bulk. Typically, the better discount brokers are going to be very large brokers. This means that your investment is going to be safer than if you went with a small brokerage that is relatively unknown.

Risks

Although you will be able to save some money with a discount broker, there are a few potential drawbacks also. For example, with many discount brokers, they are going to leave all of the investment decisions up to you. They do not care what you buy or sell as long as you are buying and selling. If you need help, you may not be able to get as much individual attention as you would with a full-service broker. In many cases, they are simply going to give you an online trading platform to work with and some generic expert information that is on a website for everyone to read. If you call in for help, they may not be available to help you when you need help.

With a discount brokerage, you might also risk giving up some services and features that you would be able to get from a traditional broker. You might not be able to invest in as many different types of securities with a discount broker. Many of them are only going to focus on the most popular types of investments. This is going to limit your options and it could seriously impact your returns in the long term.

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