What are Discount Brokers? Understand the Pros and Cons of Discount Brokers

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Synopsis:

Discount brokers have become extremely popular in recent times in India. They offer their services at a much lower rate than full-service brokers. At the same time, they also offer a fast account-opening process and mobile apps, which make trading hassle-free.

That said, discount brokers are not recommended for those investors who need personalised financial advice. Such investors should go for full-scale brokers, who provide a lot of financial guidance and portfolio management services to their clients.

What is a Discount Broker? Understand the Pros and Cons of Discount Brokers

If you have just started thinking about trading and investing, the first step you should take is to select a broker, who will provide you a platform to execute your trades. Now, there are several kinds of brokers in the Indian market.

One of them is called “discount brokers.” These are those brokers who execute your transactions and charge low fees. As their services are available at a significant discount, they are called discount brokers.

You may wonder as to why they offer a discount. The thing is we also have “full-service brokers” in the market who provide a lot of financial guidance and advice to their customers. Discount brokers do not offer such advice.

Their main function is to provide a hassle-free online platform for people to trade. Hence, they are called as such. Now that we have understood what a discount broker is, let us take a deeper dive into this topic.

Introduction to Discount Brokers

In recent times, discount brokers have become extremely popular in India. This is not surprising because such brokers account for a significant share of the market worldwide.

As we have already discussed, discount brokers charge their clients much lower fees than full-service brokers. At the same time, discount brokers do not provide investment advice and guidance to their clients, which full-service brokers provide.

Since discount brokers do not provide personalised financial advice, only experienced traders should opt for such brokers. Such traders only want an online platform to execute their transactions. They do not want detailed advice. However, if you are new to trading, you should go for full-service brokers.

That said, you should not think that discount brokers only provide an online platform to their clients and that is all. They do have a few more important features, which this blog will explain at length.

Key Features of Discount Brokers

You may be wondering whether discount brokers provide only affordable services to their clients. Several top discount brokers offer a lot more to their clients; their main features are explained below:

1. Low fees: The foremost feature of such brokers is that they charge much lower fees than their full-service counterparts. Some of them charge lower brokerage fees; some even flat brokerage fees by keeping it low. They either do not charge demat account maintenance charges or keep them low.

2. Simple account opening process: Many discount brokers in India have a very simple process for opening a demat account with them. A number of them require less paperwork to open an account with them. If you provide them with all the required documents, they can set up your demat account within a day.

3. Online platforms to trade: One of the key features of discount brokers is that they provide investors with an online platform to trade. On such a platform, they can invest in stocks, options, bonds, exchange-traded-funds (ETFs), mutual funds (MFs), and many other asset classes. By and large, investors can invest in almost all asset classes through discount brokers.

4. Access through mobile apps: As the penetration of mobile phones and the internet is increasing in India, traders are increasingly using their mobile phones and apps to trade, especially young traders and those who are comfortable with technology. To cater to their needs, many discount brokers offer mobile apps to their clients to execute transactions. No wonder then that several traders are using their services in India now.

5. Do not offer financial advice: As opposed to full-service brokers, discount brokers do not offer financial advice or portfolio management services to their clients. If you as a trader want your broker to advise you which stock to buy or sell or when to buy or sell it, then you should not opt for a discount broker. For such needs, you should select a full-service broker.

6. Basic tools and market data: While discount brokers do not provide personalised financial advice to their clients, they provide basic tools to research financial markets. They even provide market data, which helps investors keep track of movements in the market. However, such features may vary from one discount broker to another. Therefore, you should thoroughly check such features before selecting a discount broker.

Pros and Cons of Discount Brokers 

Pros of discount brokers

1. Affordable than full-service brokers: The main advantage of discount brokers is that their services are more affordable than those of full-service brokers. Therefore, they are ideal for experienced investors who do not need advice while making their decisions.

Cons of discount brokers

1. Not suitable for inexperienced traders: The greatest disadvantage of discount brokers is that they are suited only for do-it-yourself clients. What if a client needs advice or hand-holding? In that case, he should not go for a discount broker. For such clients, it is better to go for a full-service broker.

Who Should Choose Discount Brokers?

Discount brokers are ideal for those investors who have all of the following characteristics:

1. Concerned about costs: As the main feature of discount brokers is that they offer affordable services, they are most suited for those who are concerned about costs. So, cost-conscious traders should look out for such brokers.

2. DIY investors: Discount brokers are ideal for those who can manage their investments on their own. Therefore, they are not meant for those who need a lot of financial advice to make their decisions. Typically, beginner traders need a lot of advice. Hence, they should go for a full-service broker and avoid selecting a discount broker.

3. High frequency of trading: For those who trade a lot, it makes sense to go for a discount broker. If such clients go to a full-service broker, then they may have to shell out a lot for brokerage fees, as their frequency of trading is high.

How to Choose the Right Discount Broker?  

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Selecting the right discount broker is not that difficult. You need to check the following factors while making this decision:

1. Charges of a discount broker: While discount brokers offer lower charges than full-service brokers, there can be a significant difference between the charges of one discount broker and those of another. Therefore, charges are the first thing that you should check. You should be as thorough about this aspect as possible. Get all the information and only then make a decision.

2. Check which asset classes you can invest in: You should never go to a discount broker who allows you to make investments in only a few asset classes. For a diversified portfolio, you are required to invest in several asset classes. Therefore, you should ensure that a discount broker allows you to invest in stocks, bonds, derivatives, MFs, ETFs, etc.

3. Efficient trading platform: A discount broker may offer extremely low brokerage fees, but what if it does not offer an efficient trading platform? What if its trading platform is plagued by glitches? You certainly do not want that. Therefore, you should ensure that a discount broker offers an efficient and hassle-free trading platform.

4. Security measures: As you will be trading through a discount broker, you need to make sure that it has the required security measures in place so that your personal and financial data remains safe. For this, you should check what sort of licenses and validations a discount broker has in this regard.

Conclusion

Discount brokers offer many attractive features, like low charges, a fast account opening process, mobile apps, etc. However, they may not suit the requirements of all kinds of investors. Therefore, before selecting a discount broker, you should ask yourself whether you need one or not.

Once you have decided that you need a discount broker, then you should do a thorough analysis to select one for yourself. Remember that an inappropriate broker can affect your entire trading experience. That said, selecting the right discount broker for yourself can be an extremely rewarding experience.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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