This is not investment advice. The information provided is for educational and informational purposes only and does not constitute a recommendation to buy or sell any financial product.
A discount brokerage is a broker that offers low-cost execution without the research, the advice, and the personal service of a full-service broker. The discount brokerage earns a thin margin on each trade, and the discount brokerage relies on volume to make a profit. The trader pays a low commission or no commission at all, and the trader is responsible for the trading decisions.
What a discount brokerage is
A discount brokerage is a broker that offers low-cost execution without the research, the advice, and the personal service of a full-service broker. The discount brokerage earns a thin margin on each trade, and the discount brokerage relies on volume to make a profit. The trader pays a low commission or no commission at all, and the trader is responsible for the trading decisions.
The discount model has spread from the United States to Europe, Asia, and the rest of the world. Some discount brokerages are pure execution platforms, and some discount brokerages add a basic research package, a basic charting tool, and a basic customer support. The trade-off is consistent: lower cost, less service.
The main cost savings
The first saving is the commission. A full-service broker may charge €20-€50 per trade, and a discount broker may charge €1-€10 per trade. The saving is most visible for active traders who place dozens of trades per month. The saving is less visible for buy-and-hold investors who place a few trades per year.
The second saving is the spread. Discount brokers often have tighter spreads than full-service brokers, because the discount brokers pass on the raw market spread. The spread is the difference between the bid and the ask, and the spread is the broker's compensation for executing the trade. Tighter spreads save money on every trade.
The third saving is the platform fee. Some full-service brokers charge a platform fee of €20-€50 per month, and discount brokers rarely charge a platform fee. The platform fee is a fixed cost, and the platform fee hurts small accounts the most.
The trade-offs
The first trade-off is the research. A full-service broker provides analyst reports, market commentary, and trading ideas. A discount broker may provide basic news and basic data, and the discount broker usually does not provide personalized advice. The trader who needs research should subscribe to a third-party research service or should use free sources.
The second trade-off is the customer support. A full-service broker assigns a personal advisor to each client, and the advisor is available by phone or in person. A discount broker offers email and chat support, and the discount broker does not assign a personal advisor. The trader who needs help should look for a discount broker with a strong support reputation.
The third trade-off is the product range. Some full-service brokers offer a wider range of products, including international stocks, bonds, and alternative investments. Discount brokers may focus on the most liquid stocks and ETFs, and the discount brokers may not offer the full range. The trader who needs a specific product should check the broker's offering.
Who should use a discount broker
A discount broker is a good fit for self-directed traders who know what they want to trade, who do not need advice, and who want to keep the costs low. The discount broker is also a good fit for long-term investors who place a few trades per year and who want to avoid the high commissions of a full-service broker.
A discount broker is not a good fit for beginners who need guidance, for traders who rely on analyst research, or for traders who need a personal advisor. The beginner should start with a broker that offers educational content and a demo account, and the beginner can move to a discount broker once the beginner is comfortable with the trading process.
How to evaluate a discount broker
The first check is the commission schedule. The broker publishes the commission per trade, and the broker may offer a tiered commission based on the monthly volume. The trader should compare the commission across several brokers, and the trader should look for hidden fees such as inactivity fees, withdrawal fees, or currency conversion fees.
The second check is the platform. The broker offers a web platform, a desktop platform, and a mobile platform, and the trader should test the platform with a demo account. The trader should check the order types, the charting, the data quality, and the execution speed. The platform is the trader's main tool, and the platform should match the trader's style.
The third check is the regulation. The broker should be regulated in a recognised jurisdiction, and the broker should keep the client funds in a segregated account. The trader should verify the licence, and the trader should read the broker's risk disclosure.
Common questions about discount brokerages
Are discount brokerages safe? Yes, when the discount broker is regulated and when the broker segregates the client funds. The safety depends on the regulation and the broker's reputation, not on the discount model itself.
Can I get advice at a discount broker? Some discount brokers offer basic advice through a chatbot or a knowledge base, and some discount brokers offer premium tiers with a human advisor. The trader should check the broker's offering if advice is important.
What is the cheapest discount broker? The cheapest broker depends on the trader's volume and the trader's geography. The trader should compare the total cost, including the commission, the spread, the platform fee, and the currency conversion fee. The cheapest broker on one metric may not be the cheapest on the total cost.
Related resources
Where to start
If you are evaluating discount brokerages, the most useful first step is to make a shortlist of three to five brokers, and to compare the total cost on a representative number of trades. Our broker comparison lists the discount brokerages and the fee schedules, which together tell you what the broker offers before you open the account.