We've written frequently about the benefits of low-cost brokerages. We've also given the tsk-tsk to traditional full-service brokerages such as Merrill Lynch
If you're wondering what "a heck of a lot" is for a trade, consider this. According to a Bloomberg.com article in July, buying 1,000 shares of a stock via telephone with Merrill Lynch can cost at least $120. The article also states that other firms sometimes charge even more. Compare that kind of rate with discount brokerages such as TD Ameritrade
Trading online with full-service brokerages can bring down the fees -- Merrill was charging as little as $30 per online trade recently, for example. But even that seems steep compared with the alternatives.
Consider also that it's best to keep your trading costs to a low percentage of your overall investment. So if you're investing $1,000 in a stock and you pay a $30 commission fee, you're forking over a full 3% of that investment's value. We recommend trying to keep that percentage at 2% or lower. If you pay $120 to invest $1,000, you're paying 12% in commissions -- that's nosebleed territory. And that's not necessarily even the most you'd pay. The Bloomberg article referenced a retiree in Florida who has paid $200 to Merrill Lynch to trade 300 shares. If that order was for $5,000 worth of stock, the $200 would still amount to a hefty 4% of the trade.
So should you quickly transfer your money out of a full-service brokerage and into a less expensive one? Not necessarily. Take some time to assess your situation. Is your brokerage earning its fees? If you're getting personalized service, such as a broker recommending what you should buy and sell, is that service making up for the steep trading fees? Some ethically challenged brokers might be having you trade in and out of various holdings fairly rapidly as they rack up commission fees. If it's stock research you're after, many less expensive brokerages offer that as well these days.
Consider all of the factors that are important to you. You might even find that you want to switch from one discount brokerage to another -- perhaps because one has local branches or a wider range of available mutual funds or check-writing services.
It's up to you to decide where you're best served. Just know that you don't have to pay $300 or $120 or even $30 per trade, unless you think it's worth it.
We have lots of info available at our Broker Center, where we use a handy table to compare several inexpensive brokerages.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool has a full disclosure policy.
