The Discounters

You can save as much as 90% on commissions by dealing with a discount broker. But you pay some penalties for these price cuts. So, should you use a discount broker?

If you do, you will have plenty of choice. There are more than 100 independent discount brokerage firms plus perhaps 3,000 discount offices associated with banks. You can find discounters through ads in newspapers and financial magazines, and you can reach them over toll free phone lines.

The appeal of discount brokers goes well beyond thrift. More and more of them offer special customer services, and a few even supply that most touted of fall commission services stock market research. But don't be misled by the assumption that all discount brokers are alike. Indeed, Mercer Financial Services, a company that follows the discount brokerage industry, points out that there is a surprising range in commission prices among the discount firms. In a trade involving 500 shares at $ 10 a share, for example, the average discounter would charge $64 but the most expensive discount rate would be $ 100, possibly more. The fee nevertheless falls short of the $160 commission an average full commission brokerage would charge.

Whether or not you decide to use a discount broker should depend on your investment behavior. If you are fairly new at investing and don't know your way around Wall Street, a traditional broker is also the right choice for you. He will advise you what to buy, what to sell and when to buy or sell it. just one winning stock recommendation from a full service broker's research staff could more than make up for his higher commission. If you want cut rate commission but feel hesitant to end your relationship with a full service broker, try asking for a discount. Your broker probably can offer as much as 30% off the typical full fee on any substantial transaction.

On the other hand, you might do well to move to a discount broker if you feel confident enough to make your own stock market decisions. In choosing the discounter, it is paramount to select a company that can weather precipitous ups and downs in the stock market. If a firm has at least seven years of service, then it already has survived two market downturns, and you are probably safe.

Your chief consideration may well be commission rates. Generally they vary with the kind of trading you do.

So called value brokers charge rates that are a percentage of the dollar value of each transaction. This usually works out best for you if you deal in low priced stocks.

Then there are the so called share brokers. They offer bigger discounts when you trade large numbers of shares. Share brokers work to your advantage if you buy or sell 500 shares or more and if you deal in high priced stocks.

To cite a couple of examples of the wide variances in commissions charged by discounters:

If you wanted to buy 100 shares of a $10 stock, Marquette de Bary in New York City would charge you $25. But Whitehall Securities in New York City would charge $50. That's about the same as a full commission broker.

If you wanted to buy 500 shares of a $50 stock, Whitehall's commission of $63 would be less than half the fee charged by Marquette. And a full service broker might charge about $400.

The major discount brokers are licensed to do business in most states and have nationwide toll free numbers that you can find in newspapers and financial publications. All have Securities Investor Protection Corporation insurance of at least $500,000 per client and are subject to the same regulations as are traditional brokers. In sum, discounters are safe.

Many offer specialized services that set them apart. For example, Charles Schwab & Co. insures the value of its securities up to $2.5 million. And when you phone in an order to buy or sell, Schwab will execute it immediately. Before you hang up, you will learn the price you paid or received. That is information you normally don't get as fast from regular brokers.

When picking a discounter, choose on the basis of not only the size of the commissions but also the scope of the services. You should be free to trade more than just stocks, or to buy stocks on margin that is, to borrow up to 50% of the cost from your broker. You also should expect a discounter, like a full service broker, to pay you interest on cash in your account and to give you stock quotes during market hours.

In the past, discounters have provided impersonal service. Now they increasingly offer you the choice of dealing with one representative or a team of them. Many discounters will take custody of your Individual Retirement Account or Keogh plan. And a few offers the combination of credit card service, margin trading and free checking available in a full fledged asset management account. So read the financial press closely to see the various deals and extras being dangled by discounters, and shop around.