This article is part of our Better Investor series, in which The Motley Fool goes back to basics to help you improve your returns and be more successful with your investing.
You don't know how good you have it these days.
When I began investing a little more than 20 years ago, I had little choice but to go through a full-service broker to buy a Euro Disney corporate bond. As a recent college grad with little money to throw at the market, I was lucky not to be laughed out of the building. They graciously processed my small transaction, and we never saw each other again.
It's just as well. I didn't know much, but I knew I didn't want to spend the rest of my life paying chunky commissions on stock and bond transactions and being steered toward pointless high-load mutual funds.
I quickly opened an account at Charles Schwab (NYS: SCHW) , where I was armed with a few tools to make investing decisions on my own. Back then, stock-trading commissions were as little as $35 a trade, and I could shave 10% and pay just $31.50 if I was willing to place my orders through a touch-tone phone.
These days, investors pay less than $10 on most Web-placed trades through Schwab and its discount broker rivals. Most of the discounters offer commission-free access to select exchange-traded funds, smartphone apps for trading on the go, access to international exchanges, and a marketplace of no-load funds available without transaction fees.
Again, you don't know how good you have it these days.
Taking the first step
You don't need to be rich or a seasoned trading veteran to open a discount brokerage account. All you need is to take a little time to go through the available discounters to find the one that's right for you. Our broker comparison table is a great place to start, showing a handful of sponsored alternatives in side-by-side fashion.
How much money do you need to open an account? A lot less than you probably think. Most brokers are happy to take only a couple thousand dollars to open a cash account, and retirement accounts typically have much lower initial minimums.
How do you do it? Most discounters have simple online applications to get you started, though you're always welcome to request a hard-copy application to fill out and mail back like I had to when I first started.
Different brokers have different specialties, and that's where your due diligence kicks in. How important is mobile trading, stock options, and online banking? Are you cool with buying and selling through mouse clicks and smartphone taps, or do you need a warm voice at the other end of the transaction? Is there a local branch nearby? Are there any tempting promotional offers to get you started?
These are the questions that will help you narrow down your choices.
Made in the trade
These are challenging times for the industry, and that's good news for you unless you want to invest in the actual discounters themselves.
Market leaders Schwab and TD Ameritrade (NAS: AMTD) posted lower operating profits in 2010, as the challenges of slashing commission rates, offering up more perks, and supporting competitive money market rates in a low interest environment ate into profitability. E*TRADE (NAS: ETFC) improved on its operating income in 2010, but that was largely the byproduct of the edgy discounter's ongoing turnaround.
The good news -- for investors -- is that all three are projected to post improving profitability in 2011 and 2012.
You have more choices than you think
Sector consolidation has whittled down the number of independent discount brokers. Schwab recently bought optionsXpress, and TD Ameritrade picked up thinkorswim.
However, you don't have to limit your search to traditional choices. Some of the larger mutual fund companies -- including Fidelity and Vanguard -- also run popular brokerage outfits. You can also find privately held brokers like Scottrade and Firstrade that don't have to report their financial results to impatient Wall Street analysts every quarter.
Even some of the full-service firms and conventional banking giants are coming around. Merrill Lynch -- now owned by Bank of America (NYS: BAC) -- rolled out Merrill Edge last year, offering free trades to Bank of America customers with sizable accounts under certain conditions. Credit card giant Capital One (NYS: COF) announced earlier this year that it would buy out ING Direct.
There aren't as many brokers as there are investment options out there, but a little due diligence now will pay off when you do kick in with your stock-based due diligence later.
Welcome to the world of discount brokering. Now get started.
What's that? You're still unsure about whether or not you should get a new broker? Get thee to our Discount Broker Center to learn more and compare some sponsored commission schedules.
Stay tuned throughout our Better Investor series and get the advice you need to succeed with your investments. Click back to the series intro for links to the entire series.
At the time this article was published Longtime Fool contributor Rick Munarriz calls them as he sees them. He does not own shares in any of the stocks in this story. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.
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