Selecting A Discount Broker:
What You Should Know
If
you're a do-it-yourself investor, the last thing you want to do is turn
over your hard-earned money to a broker, especially when you're conducting
your own financial research and making your own investment decisions. One
way for do-it-yourself investors to avoid the high costs of a full-price,
full-service brokerage is to enlist the services of a discount brokerage.
"Discount
brokers basically will make stock trades for you at a lower price than a
full-service shop because they have cut out all the fat," says Selena
Maranjian of the Motley Fool in the September issue of Better Investing
the monthly publication of NAIC, a national, non-profit organization of
investment clubs and individual investors. "There are no immaculately
dressed individuals holding your hand, no colorful research reports touting
the latest public offerings that all the institutions have already turned
down and no stock recommendations. Normally, it is just you, the telephone
or computer and the sweat of your research brow that stand between you and
a stock trade."
As
with any investment decision, be sure to research before you act. Begin
by asking yourself the following questions before selecting a discount brokerage:
Is
the broker insured? Like full-service
brokerages, discount brokerages are covered by the Securities Investor Protection
Corporation (SIPC). If yours isn't, get out.
Does
the brokerage meet my specific needs? Make
sure your discount broker is able to manage the securities you want to trade.
If you want to buy and sell foreign stocks, but your discount broker doesn't
offer this service, you'll be disappointed.
How
is the service? Low costs mean
nothing if your broker's phone is always busy or the Web site is constantly
down. Ask your friends and family how satisfied they are with their brokers,
or visit Online investment sites to see what other investors have to say.
In
addition, look for hidden costs. Some discount brokers keep their commissions
low by charging high fees for everything else. Request an information packet
from your prospective discount brokerage that lists all fees and charges
that you'll incur for account inactivity, electronic transfers and software.
Don't
forget to examine how the discount brokerage does business. Will you have
to trade Online, and, if so, will you have access to a computer every time
you want to conduct business? "The use of a brokerage should be convenient
for you, or else all the money saved in commissions will be paid back in
full aggravation," says Maranjian.
For additional
advice on selecting a discount broker, including why you should review a
sample account summary, as well as a year-end statement before selecting
a discount brokerage, read this month's Better Investing.Editor's
Note: For information on Better
Investing and NAIC visit the Web site at www.betterinvesting.org or call
(877) ASK-NAIC.