Cheap online stock brokers provide a valuable service to beginner and advanced investors. But what are the risks when you choose the cheapest broker online? The biggest concerns for most people are the things they need to give up by using a less expensive broker. With the advent of the internet and extremely low costs of operation, cheap brokers don't have to sacrifice much. Here are the main features you'll be missing out on by trading frugally.
1. No Physical Branches or Local Offices. More established brokers, or brokers that have come from a traditional background, still have offices scattered throughout the country. These branches provide a means for investors to talk with someone in person, pick up a check, or bring money into a local branch. For most online investors these buildings seem like antiquated relics of a more ancient system. If you are reading this, chances are you have direct deposit, have an online checking account, are part of an online social network, e-file your taxes, and correspond with blogs, Twitter, chat, and email. The idea of driving to an office, finding a parking space, waiting in a lobby, and talking with someone face-to-face sounds like a colossal waste of time. This isn't to say customer service isn't important. Customer service is still very good among discount stock brokers, they just do it differently.
2. No Massive Advertising Campaigns. If you are looking for the cheapest broker don't use Super Bowl Ads to find them. The ROI isn't there for that type of advertising. Savvy internet brokers advertise online. This article probably has advertising from said companies within viewing distance. They target the right audience with their advertising instead of using a bloated shotgun approach to advertising. The question is this, would you like to have your commission fees going toward Super Bowl Ads or would you prefer to pay less commissions and use a discount broker?
3. Limited Mutual Funds to Choose From. This is a big one. Mutual Funds are extremely expensive operate and maintain. They are also heavily marketed (much like lead was marketed heavily in earlier years even though it was killing people). Running these funds require expensive managers that drive nice cars and probably have hair plugs. Historically, mutual funds are among the worst investments in the long run. Low cost stock brokers have access to index funds which are much cheaper to operate and don't' require the aforementioned managers. Trust me, having a limited selection of mutual funds is a good thing.
4. Online Customer Service. The cheapest brokers will use technology to its advantage by only using email and chat. The service is still very good but you don't have the luxury of talking to a person on the phone. You will still be able to talk to someone quickly and have your questions resolved, you just won't be able to hear their wonderful accent on the phone. This is one of the biggest downsides to using low cost brokers.
What about safety? Are the cheapest discount brokers secure? Can you trust their website with your sensitive financial information? Yes, yes, and yes. Discount brokers use the same security and encryption as the big companies. Everyone in the financial secture uses encryption when personal infroamation is being transmitted. If you are still concerned look for the Https:// in the browser 's address bar if you need verification. The 's' in https:// means the page is secure and the data is being encrypted.
So there you have it. Using the cheapest stock brokers requires giving up some things but if you're okay with that then go for it. Your wallet will thank you.
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