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Discount Stock Brokers - Why Pay For Bad Advice?

Aug 17, 2007
In the days before discount brokers, only the wealthy invested in stocks. After all, before discount stock brokers, commissions on trades were typically over $100.

In order to get your commission down to 1 percent, as recommended, you'd have to buy $10,000 worth of stock at a time.

The Father of All Discount Stock Brokers - Charles Schwab

Luckily, there came Charles Schwab, first of the discount brokers. His namesake company slashed commissions down to around $40 per trade, which made it more affordable for middle class people to invest.

As more discount brokers entered the field, Charles Schwab cut rates even further. Schwab was always looking for ways to streamline operations, cut costs, and pass the savings on to customers. These strategies are what made them the greatest of all discount stock brokers in the pre-internet age.

Dot-Com Boom - A Real Boom for Discount Stock Brokers

Without Charles Schwab, the person and company, stock trading probably would have forever remained the domain of the rich.

But as Schwab ushered in an entire crop of discount brokers, these new firms were always looking for ways to innovate. One of these up-start firms was E-Trade, the first of the internet-based discount brokers.

By not even having physical offices or human "brokers" sitting behind desks, E-Trade was able to cut costs even further. As other discount stock brokers went online, competition intensified and the cost of trades continued to go down.

Soon, everyone with an internet connection and a little extra money was checking out the online discount brokers, opening accounts, and making easy money during the fabled dot-com boom.

Now You Have Your Pick of Discount Stock Brokers

There are now dozens of online brokers to choose from. E-Trade, Ameritrade (now known as TD Ameritrade, after acquiring rival TD Waterhouse), and Charles Schwab have been joined by new brokers such as Options Xpress, Fidelity, FirstTrade, ScottTrade, and Sharebuilder.

Although the number of web-based brokers might seem staggering at first, the good news is that the crowded market place is great for the consumer. The price of trades with discount brokers has been pushed down to around $7.

A few discount stock brokers charge more than this, but in doing so, they offer extra perks. Competition has led many discount brokers to offer nearly full-service level features.

What About the Offline Discount Stock Brokers?

The bad news, if there is any, is that brick-and-mortar discount brokers have become pretty much a thing of the past. After all, it's extremely difficult to compete with the low prices of the online brokers when you have to maintain an office in the real world.

Most offline brokers are "full-service brokers," meaning you pay them to give you advice. For interested investors, this advice certainly isn't worth paying for. In fact, the average full-service broker knows a lot less about the market than you probably do if you're reading this.

Take Edward Jones, for example. It's advertising campaign is designed to send the message that "investing is hard" and that "only professionals should do it." Yet if you look online, you will see that Edward Jones aggressively markets its offices as franchise opportunities.

A kid right out of college with well-heeled parents could open an Edward Jones in your neighborhood - do you want to pay for his advice?

If you're uncomfortable making tough investment decisions, look into some diversified mutual funds. If you want to be in stocks, you probably don't need a full-service broker to hold your hand.

Investigate the different discount stock brokers and find the one that's right for you.
About the Author
William Smith the author provides much more financial information on many subjects as well as the secret to his success in the market along with 5 Free power stock picks emailed daily so grab your Free subscription on his website at Discount Stock Brokers (All is Free)
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