Discount Brokers and Deep Discount Brokers

Indeed, when choosing a brokerage house, potential customers will find that there exists a wide range of services and fees. The spread in dollar costs can be substantial. But, so too, can the services provided. Therefore, it is important to understand the definition of each type of broker category, as well as the limitations and/or capabilities of the various classes. In this discussion, we will examine the differences between discount brokers and deep discount brokers.

Discount brokers are typically those brokers who offer a discount or savings on their fees. This category of broker, however, should not be confused with companies, such as bank departments, who make special offers to their clients. Discount brokers provide less services than a regular brokerage firm in return for reduced fees. Sales agents representing these types of companies are not permitted to provide clients any sort of investment recommendations. In fact, they are not even allowed to provide research material at all. The onus is on the clients to complete their research. For individuals and groups who are capable of handling their own fact-finding missions, then discount brokers are the perfect options for them. Being able to save money is indeed a bonus.

Discount brokers do not advise you on the mechanics of your trades. For example, they will not tell when to buy and sell, and what to buy and sell. They do offer many services like the full-service brokerages, but they do not solicit per se, meaning that you must know what you want, and when you want it. They keep their fees low by having no on-staff analysts and researchers. Further, discount brokers may or may not provide services for transferring funds from one account to another, and may or may not conduct trades in certain areas. For example, some do not trade in futures. Therefore, it is incumbent upon the client to ascertain the type of services rendered before choosing a discount broker.

Deep discount brokers are so labeled because they provide no services whatsoever. All they do is execute orders, period. The clients tell them what to buy and sell, when to buy and sell, and how to buy and sell. Other than completing the task on behalf of the clients, the deep discount broker does nothing more. Most often, they deal in stocks and options only, and charge a flat fee for their services, regardless of how big or how small. Because there are no services, and because everyone pays the same, the fees are cut dramatically, to the clients' benefits. For investors who are experienced, and can do everything else on their own, deep discount brokers would be advantageous to them.

Frequently, online sites fall into this classification of broker. For experienced individuals, and those that prefer to do their own trading, the websites exist because, legally, a licensed broker must execute the orders. The investors do everything themselves, and then send their orders to the brokers through the online system. Lastly, the fees are generally less than those of a discount broker.

To conclude the discussion, it is important to point out that your choice between full-service brokerage houses, and discount or deep discount brokers, directly impacts your bottom line or return on investment. For example, some online deep discount firms are advertising fees of seven dollars ($7) per trade. If a full service firm is charging a hundred dollars ($100) for that same transaction, then you can see that your bottom line is negatively impacted by a substantial amount. And, if you are making trades on a regular basis, the price differential can actually cause losses.