By DK Aggarwal
With the advent of technology and the quick success of online broking, discount brokers have become popular among investors, catching the traditional broking industry off guard. Now, discount brokingis nearly synonymous with online brokering.
Brokers who carry out buy and sells orders at reduced commission rates are called as discount brokers. Undoubtedly, working with a discount brokerage can provide cheap access to investments, ensuring bigger profitsover time. However, they do not offer personal consultations, advice and research to customers. They do not provide any expert guidance.
Actually, the services provided discount brokers are aimed at self-directed traders and investors, whereas established brokers offer extensive tutorial materials at their offices or on their websites or through one-on-one customer service.
Here are some pros and cons of using the services of a discount broker:
Lower cost: This lower cost is usually the result of lower commissions, and itâ€™s the primary benefit of using discount broking.
Unbiased service: Because they donâ€™t offer any advice, discount brokers have no vested interest in trying the customer to buy or sell a particular stock.
Access to information: Established discount brokers offer extensive educational materials at their offices or on their websites.
No guidance/research: Because youâ€™ve chosen a discount broker, you have no access to expect guidance, but the broker should make this clear to you at the word go. However, if youâ€™re a knowledgeable investor, the lack of advice can be a blessing in disguise in a way â€” as it would ensure no interference.
Hidden fees: Discount brokers may shout about their lower commissions, but commissions arenâ€™t their only way of making money.
Minimal customer service: If you deal with an internet brokerage firm, find out about its customer service capability. If you canâ€™t transact business on its website, find out where you can call for assistance with your order.
Lower margin against shares: Unlike traditional players, discount brokers do not provide margin money against shares, mutual funds and fixed deposits.
In discount broking, there is an absence of professional investment and financial planning service. It may look like a fairly quick and convenient way to build wealth, but there are many hidden risks that may not be evident at the very first. Portfolio analysis is the vital part of investment, and you donâ€™t have access to such services from a discount broker. Regular brokers will continue to rule the roost in the private wealth management, as discount brokers have absolutely nothing to offer to ultra HNIs and other big-pocket clients.
To conclude, whether you go for an established broker or a discount broker would purely depend on oneâ€™s personal needs and preferences. However, an early-stage equity investor must consider the above pros and cons before taking the decision.