Discount Brokers (often now simply called 'online brokers') are streamlined, no-frills financial firms that allow investors to buy and sell securities like stocks and bonds for a significantly lower commission than a traditional full-service broker. Think of them as the budget airline of the investment world; they get you where you want to go, but without the complimentary champagne and in-flight meals. The core 'discount' is achieved by stripping away expensive, hands-on services such as personalized investment advice, portfolio management, and extensive proprietary research. Instead, they provide an 'execution-only' service, meaning their primary job is to efficiently carry out the trading orders you place. This low-cost, self-directed model has revolutionized investing, tearing down the high-cost barriers that once kept ordinary people out of the market and putting the power directly into the individual investor's hands.
For a long time, Wall Street operated like a private club with fixed, high commissions. That all changed on May 1, 1975—a day known in the industry as “May Day”—when the U.S. Securities and Exchange Commission (SEC) deregulated brokerage commissions. This was the Big Bang for the discount brokerage industry. Entrepreneurs, most famously Charles Schwab, seized this opportunity. They unbundled the services, offering just the trade execution at a fraction of the old price. The internet boom in the late 1990s was the second explosion. It allowed discount brokers to move their operations online, further slashing overhead costs and making trading instantaneous for anyone with a computer. This led to a fierce price war, with commissions dropping from dozens of dollars per trade to just a few, and eventually, in many cases, to zero. This evolution made it not just possible, but easy and affordable, for the average person to build and manage their own investment portfolio.
Understanding the trade-off is key to using a discount broker effectively. You're giving up some services in exchange for rock-bottom costs.
The main event is cheap and easy access to the markets. With a typical discount broker, you can expect:
The cost savings come from what discount brokers don't provide:
For followers of value investing, the discount broker is not just an option; it's the natural and logical choice. The philosophy pioneered by Benjamin Graham and championed by Warren Buffett aligns perfectly with the discount model.
Warren Buffett famously said, “Performance comes, performance goes. Fees never falter.” High fees are a “leaky bucket,” constantly draining your investment returns. A 1% or 2% annual fee might sound small, but over decades, it can consume a massive portion of your potential wealth due to the negative effect on compounding. A value investor, who thinks in terms of decades, is pathologically allergic to unnecessary costs. By minimizing or eliminating trading commissions and advisory fees, discount brokers allow more of your money to stay invested and working for you, which is the secret sauce of long-term wealth creation.
Value investing is fundamentally a do-it-yourself discipline. It requires you to do your own homework: reading financial statements, understanding a business's competitive advantages, and calculating its intrinsic value to buy it with a margin of safety. A value investor trusts their own analysis above all else. Why would you pay a premium for someone else's opinion when you've already done the hard work yourself? A discount broker is the perfect partner for this mindset—it's a simple, low-cost tool that executes your well-researched decisions without interference.
While many now offer zero-commission trades on stocks, not all discount brokers are created equal. Here’s what to look for: