Brokerage Basics: Discount or Old School?

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Picking a stockbroker can feel like a “merely” logistical choice (with a truly dizzying array of options). In stock trading, as with all business, however, logistics goes a long way in determining ultimate profitability! Ultimately, there are many excellent options for a broker: this post is all about focusing this choice on the factors that truly matter for the profitability of your investments.

We can’t review every stock trading service here. So we’ll focus on a few big companies that are representative of two big categories of broker:

  1. Traditional Full-Service Brokers: the only way for most investors to own and trade stock in the past, this model centers on networks of brick-and-mortar stores which employ brokers serving local markets (they also offer online trading options). This allows investors the chance to interact with their broker in person. Akin to retail outlets for the financial industry, these brokers often also offer other financial products in addition to stock trading services. Representative firms include Edward D. Jones, Merrill Lynch, and TD Ameritrade.
  2. Discount Brokers: this model has mounted an increasingly robust challenge to full-service brokers in recent years. By forgoing the extensive physical storefront infrastructure, they boast a far leaner cost structure than more traditional firms—which translates into lower fees for customers. They likely can’t offer any in-person consultations, however. Robinhood is a prominent example of the discount brokerage approach.

More services can be nice, but they also have a cost: this decision is all about evaluating whether the additional offerings are worth the added costs. You should make note of one fact: the brokers employed across the country by full-service brokerages aren’t purely disinterested analysts. For better or worse, they’re virtually all paid by commission.

This site is quite useful for doing a nitty-gritty comparison of the fees brokers use to recoup these costs. At a high-level, basic stock trades cost between $4.95 and $6.95 at major full-service. If you’re a buy-and-hold investor who rebalances your portfolio once or twice a year, these fees will likely be relatively inconsequential to your overall portfolio returns. An active day-trader, however, could see his/her margins annihilated by these sorts of costs. Other non-trading fees can include:

  • Account maintenance fee: once per quarter or year.
  • Account inactivity fee: These fees can be added to an account that is inactive over a predetermined period of time.
  • Data feed/Charting Fee: Pricing data feeds from the broker, and/or a charting platforms, are often sold at an additional charge.
  • Miscellaneous fees: Other miscellaneous fees include phone brokerage services, account statement requests, etc.

Sites like Robinhood are offering $0 trades, while alternatives like offer unlimited trades for a flat monthly fee. So what’s the catch?

Until recently, Robinhood couldn’t trade options (though they’ve begun implementing that functionality in 2018). You can’t short sell. Though users have access to ETF’s, they cannot trade mutual funds or bonds. Margin-trading cannot be conducted without paying for a Gold Account, which also comes with an added account minimum. Unlike many brokers, dividends are credited to a user account’s cash balance rather than automatically reinvested (again, not a big deal for day traders, potentially a major pain for buy and hold investors who will need to manually re-invest dividends).

We start to see the limitations that lead full-service brokers to charge fees in the first place come into view: after all, revenue for a site like Robinhood depends upon selling its users on Gold (and interest earned on cash balances). Still, a platform like Robinhood comes with the fundamentals—including real-time market data—needed to execute a profitable stock trading strategy. They don’t offer in-depth research tools, but those are easier to find for free than ever before through services like Google Finance.

There’s no one right answer—it all depends on the strategy you plan to employ. News Quantified users employ strategies ranging from daily trading to finding ideal entry points on longer-term plays. Services like Robinhood may be perfect for the user who forgoes short-selling and relies on News Quantified for their research. Users who use News Quantified to magnify profit opportunities with margin trading will need to invest in a more premium brokerage.

We can’t tell you what brokerage to pick, but we’d love to show you how our platform combines news analytics with real-time stock market data to greatly simplify the process of finding highly profitable stock plays. You can learn more in one of our totally free training sessions—just sign up using the button below:

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