The internet has changed the way we interact, the way we work, and the way we educate ourselves. But one of the biggest industries to be affected by the coinage of the internet is the stock market. With the evolution of the internet, literally, anyone can find live stock quote feeds within seconds.
Those who were investing prior to discount brokers had to either be sitting on a trading floor themselves or making call-in trades to their banks or full-service brokerages. There were two problems with this. Brokerages charged a fortune for commissions, and there was the possibility your trade would be delayed.
Discount brokerages changed the investing landscape in the early 2000’s
New to the party, discount brokerages like Questrade and Interactive Brokers completely changed the investing persona of being solely for the rich and famous. There were no more $45 dollar commission charges to make a single trade. A young investor could finally enter the market with $1000 and not have to worry about a single commission eating up an unrecoverable amount of their portfolio. There were no more delays in making transactions. If a stock was liquid enough, your transaction would be completed in microseconds for the best possible price.
These brokerages were able to offer substantially cheaper commissions than the banks simply due to overhead. This paved a new path for investors to follow. Self-directed investors started catching on to the fact that you don’t need to pay these banks ridiculously high fees to manage your money.
The advantages of a discount brokerage
1. They give you the tools to succeed.
Online brokerages over the last ten years have started to bring a lot more to the table other than just cheap commissions. In order to acquire more clients, discount brokerages allocated a ton of their budgets to developing new tools and guides to help make the transition easier.
2. ETFs are becoming all the rage.
The amount of investors who are swapping from individual stock picking or even going as far as pulling their money out of their mutual funds to invest in ETFs is literally skyrocketing. ETF purchases are up 56% from 2016 and for good reasons. Except for the rare occasion that your advisor is consistently beating the market, the fees banks and advisors charge just don’t justify the service.
Why pay a bank anywhere from 1% to 2.5% of your portfolio to manage your money when you can simply purchase commission-free ETFs from a brokerage and gain immediate market diversity, and exposure for a fraction of the cost.
3. It’s easy.
Getting set up with an online brokerage is easy, and ETFs make the whole self-directed investment option even easier. You don’t need to be a stock picking guru anymore. ETFs have exploded to the point where there almost isn’t a single sector you cannot gain exposure to by purchasing them.
Instead of fretting over the best telecommunication stock to add to your portfolio, just buy a Telecom ETF and gain exposure to the whole industry. You may want exposure to Canadian utilities, Canadian oil and gas stocks, and the steel industry in the United States. Instead of picking out 15 different stocks to carve a balanced portfolio, make 3 ETF purchases and boom, you’re done.
Reason’s the switch may not make sense for you
Now, it’s easy to simply look at commission costs and decide you want to switch from your bank to a discount brokerage. But there are a few things to consider, and it may not always be as cut and dry as you think.
1. You don’t have the time or the knowledge.
Life is hectic. Some people just don’t have the time to learn about the intricacies of the stock market and have a constant eye on their investment portfolio. There is no shame in leaving your money with a professional who can make the hard decisions for you. It comes at a cost, but you’re better off paying high fees and making a return rather than going in with no knowledge and suffering a loss.
With all that being said, robo-advisors are gaining their fair share of the market these days and you can have your ETF portfolio managed at a much cheaper price than a full-service brokerage. You aren’t quite ready to manage your own investments, but you are willing to accept the fact you are paying your current firm way too much.
2 Your current investments are locked in or have exit fees.
Now, many online brokerages have offered to pay transfer fees to get your money from one institution to the next, but this may not always be the case. If your current advisor’s fees to pull money out are too high, or your money is locked in for the foreseeable future, it may not be practical for you to switch to a discount brokerage.
You should at least consider using this evolution of investing to your advantage. Taking control of your own investments, or at least sending it to an online firm that can do it for you isn’t a decision you make overnight. Figure out what you’re paying right now to have your money allocated where it is and decide whether or not you have the confidence to do it on your own. These new waves in online investing are going to be here for a while, and you can make the switch at any time.
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About The Author: Daniel Kent
Dan Kent is the CEO of Stocktrades and a self-taught DIY investor. Established in 2016, Stocktrades is a Canadian based website aimed at global and Canadian investors, teaching the intricacies of the stock market and more.
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