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How to Choose an Online Discount Broker – Part 2 – What is a Discount Brokerage?

Where’s the Beef?

One of the easiest ways to think about shopping for an “account” is by thinking of going to the grocery store.  If you were to walk into the grocery store and ask a clerk for “groceries” they would say something like: “well you’re in the right store, but can you be more specific?”

When trying to open an investment account with a financial institution, you may be met with the same response if you tell them “I would like to open an account”.  They’ll promptly ask you to please be more specific.  Just like the grocery store, discount brokerages have different types of accounts, and knowing the difference between “registered” and “non-registered”, “cash” or “margin” is as important as knowing the difference between produce and poultry.

So, let’s get to know this “store” called the discount brokerage by first explaining what it is and why you would even go there.

Oh, That’s What it Does…

A discount brokerage firm is a financial institution that enables individuals to purchase and sell (trade) various securities such as stocks, bonds, mutual funds, exchange traded funds (ETFs), options, currencies and/or precious metals like gold and silver.

If you wanted to directly purchase and sell (trade) securities without going through a stock broker or via another intermediary, you will likely have to pick a discount brokerage firm in order to do that.  In contrast, “full service brokerages” have advisors and brokers that do all the “trading” for you.  Sometimes “discount” brokerages are called “direct” brokerages because the person doing the buying and selling is the client and not a broker, whereas a full service brokerage firm has individuals employed to make trades on behalf of clients. Discount brokerages attract everyone from the highly active day trader to the very passive long term investor as clients.

The one common thread amongst all their clients is that the clients place the orders to buy and sell themselves.  Even though the system is equipped to handle direct order placement (i.e. clients can place their own trades usually from their own computers) most discount brokerages offer “broker assisted” trades where you can call a broker at their firm to help execute the trade – for those times when you want to feel all “wall street” and yell buy or sell into your phone from the golf course or yacht.  Save for one firm in Canada, all the others will charge substantially more for broker assisted trades so beware you budding tycoons.

Look Before You Leap

In our next article we will take a look inside the “store” of a direct brokerage firm to see what products they offer.  For now it is important to highlight that even though it is fairly easy for most people to place their own trades, not everyone is cut out for doing so.  Despite the substantial savings in price, sometimes the fear of going it alone outweighs the “savings” of a few dollars.  There are all different personality types when it comes to managing money and investments. Some people dive right in a little too enthusiastically and others would rather watch safely from the shores instead of handling any “investment”.  Before deciding to jump into the financial pool, it’s a good idea to decide how committed you are to learning to swim, especially knowing there are sharks in the water.

Read the previous article in this series.

Read the next article in this series.

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