What is Discount Broker?

Explanation

In the securities market, a broker helps clients buy and sell securities in the proper exchange. Before the advent and advancement of discount brokers, only the people who are affluent were able to afford a broker so as to access the stock marketStock MarketStock Market works on the basic principle of matching supply and demand through an auction process where investors are willing to pay a certain amount for an asset, and they are willing to sell off something they have at a specific price.read more because of high brokerage charges. But with the introduction of discount brokers and them charging only a fraction of fee as compared to the full-service brokers and other counterparts, there is wider access to the markets allowing the modest investors equally as the wealthy investors

It was possible because of the development of the internet and online services like electronic trading.

But the investor needs to be vigilant about the investment strategyInvestment StrategyInvestment strategies assist investors in determining where and how to invest based on their expected return, risk appetite, corpus amount, holding period, retirement age, industry of choice, and so on.read more while opting for a broker to carry out the buy and sell orders because the discounter would not offer any planning, advisory, expert guidance, and research services.

The investors usually do not communicate with the broker because clients are provided separate accounts for order execution.

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How Does a Discount Broker Make Money?

Since these brokers need not provide high-value advisory services for high net worth individualsHigh Net Worth IndividualsA high net worth individual possesses liquid assets worth $1 million to $5 million. They are also referred to as HNWIs. In order to qualify for HNWI status, the individual’s liquid assets must be readily available in their bank or brokerage accounts. The assets must be accessible and easily converted into cash.read more, the cost of operations would be very less. They charge commissions and flat fee irrespective of the trade volumeThe Trade VolumeThe volume of trade is the overall measure of the number of securities, shares or contracts traded during a particular trading day. read more. The charge may seem to be very less when compared to the traditional brokerage values, but due to high liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more, many traders may invest without the proper perspective of the markers, thus making money for discount brokers.

Difference between Discount Broker and Full-Service Broker

A full-service broker is a stockbrokerStockbrokerA stockbroker is an individual or company qualified enough to trade securities in the financial markets on behalf of financial institutions, individual and institutional investors, and organizations. They can work either independently as a professional trader or broker-dealer or associate with a brokerage firm.read more who/that provides investment advisory services, portfolio construction, and the like services in addition to carrying on trade and facilitating the carry of transactions.

List of Discount Brokers

  • Fidelity InvestmentsRobinhoodCharles SchwabR K S VSAS OnlineZerodhaWisdom CapitalAngel BrokingICICI DirectKotak Securities

Advantages

  • Lower cost is one of the greatest advantages of discount broking, which is one of the major reasons why discount broking would be preferred.Investors with low capital previously did not have access to the markets. After the introduction of a discount broker, they could invest by paying low fees and brokerages.There is no fear of biased service as they do not offer any investment advice. They have no hidden agenda or interest vested. They just offer the service of buying and selling, i.e., executing a trade.There would be no interference in investment decisions.

Disadvantages

  • The customer service is very minimal, and there is very low or no interaction with the live broker.The commission is not the only way the brokers make money. There exists a concept called hidden costs.Discount brokers do not have the policy of providing margin money against fixed deposits mutual fundsMutual FundsA mutual fund is a professionally managed investment product in which a pool of money from a group of investors is invested across assets such as equities, bonds, etcread more and shares.There is an absence of investment advisory, consulting, and research service, which makes it suitable only to investors who have done their own research.

Conclusion

In short, a discount broker is an entity or a person (in case of an individual) who offers trading services and execution of trade at low costs, sometimes even the smallest fraction of the original fee. Still, it is not involved with the provision of any advice, consulting, or research-related services.

It may seem like this is the easiest way of creating wealth, but it is not so. There are many hidden risks involved that may not be evident at first. In any investment, portfolio investmentPortfolio InvestmentPortfolio investments are investments made in a group of assets (equity, debt, mutual funds, derivatives or even bitcoins) instead of a single asset with the objective of earning returns that are proportional to the investor’s risk profile.read more service is the major key that is not offered by a discount broker. Whether to opt for a discount broker or not would be purely at one’s discretion depending upon one’s needs and preferences while taking the pros and cons into the picture.

This article has been a guide to what is a discount broker. Here we discuss a list of discount brokers and how they make money in firms along with advantages and disadvantages. You can learn more about financing from the following articles –

  • Full Form of ICICINet Worth CalculatorPre IPO DefinitionInsurance Agent vs. Broker