Buying Stock On the Cheap

Buying Stock On the Cheap

If you know what you know, there’s no need to pay full commission.

Discount brokers now account for about a third of individual stock trades. No wonder. While full-service brokerages provide customers with investments advice and other services, discount brokers stick to making trades and offer fewer services, passing the savings on to you. Cost-conscious investors can take a huge chunk out of the commissions they pay on stock trades by using a discount brokerage firm. But you have to know what you want and you have to be comfortable making your own investment decisions.

There’s no question you can save a bundle using a discount stockbroker to execute your trades. According to the 1995 Discount Brokerage Survey, published by Mercer, Inc. in New York, the average commission among the 10 cheapest discount brokers to trade 100 shares at $50 per share was $29.60. The big three regular discounters – Charles Schwab, Fidelity and Quick & Reilly – have an average commission of $52.70 for this trade, while full-service brokers typically charge $103.

It’s difficult to say which discount brokerage firm offers the best deal, because they set their prices differently. Rates often are based on the total dollar value of a transaction, the number of shares purchased or simply a flat fee for each type of transaction. Sometimes, small commissions and fees for non-routine trades are added on. Large dollar volume trades or trades ordered using a computer or touch-tone phone get further discounts at some firms.

What all this means is that some firms will be cheaper for some trades, and more expensive for others. The American Association of Individual Investors, advises that you choose a broker by first comparing the commissions they charge for the kinds of trades you are most likely to make. Call several discounters directly, or use one of the annual surveys published by Mercer or AAII. Mercer’s is easier to use, because it lists the 30 cheapest discounters in descending order by cost for each of 22 typical trades, while the AAII lists them alphabetically , and for only tree sample trades. But AAII’s list is much more inclusive, covering all 88 discount brokerage firms. Mercer also ranks 110 bank brokers by state and all the independent brokers.

After you have chosen several candidate firms, AAII recommends that you ask for a commission schedule and description of services, fees and bonus discounts. Keep in mind that some firms charge a flat fee to open a new account and charge high fees to wire funds and for copies or reports and bounced checks.

Buying Stock On The Cheap. Image: Megan Jorgensen (Elena)

The Big Three Discounters, and some of the others, try to compete with the full-service firms by offering research information, investment recommendations, 24-hour touch-tone service, asset management accounts (with check-writing privileges and ATM Cards), and margin accounts for trading other instruments, such as options, bonds and certificates of deposit, as well as extensive branch networks.

That said, you shouldn’t expect a lot of hand holding. Andre Scheluchin, managing editor of Mercer’s survey, warns investors to keep in mind that discounters have set rates and offer little maintenance of your account. If you want more attention, and more control over the price you pay, then you’re better off with a full-service broker. And, Scheluchin notes, it is not impossible to negotiate a cut in commission with a full-service broker, so you may only pay a little more than with a discounter.

If you want to check out a brokerage before doing business, background information is available from the National Association of Securities Dealers, or from the Central Registration Depositary of your state security agency, listed in the blue pages of the phone book.

No Broker Required. If you make an initial purchase directly from the company offering the stock, you can do away with the brokerage commissions altogether. The American Association of Individual Investors, reports that 17 companies sell stock directly to investors, at commissions of only a few cents a share. Most of these are sold nationwide: Arrow Financial Corp.; Atlantic Energy Corp.; Barnett Banks Inc.; Central Vermont Public Service (not available to residents in certain states); COMSAT Corporation; Dial.Corp.; DQE Co.; Exxon Corp.; First Alabama Bankshares Inc.; Johnson Controls Inc.; Kellwood Co.; Kerr-McGee Corp.; Mobil Corp.; SCANA Corp.; Summit Bankcorp (N.J.) Texaco Inc.; U.S. West Inc.

The top ten deep discounters in 1994: Wall Street Equities; Brown & Company; K. Afhausen and Company; Lombard Institutional; National Discount Broker; R.J. Forbes Group; Pacific Brokerage Services; Kennedy, Cabot & Company; Recom Securities; Barry Murphy and Company.

SIPC: Securities Investor Protection Corp, insures securities and cash up to $500,000. Plus sign indicates coverage beyond $500,000 at no extra charge.

SWEEP: Automatically invests cash balances in interest bearing money market fund until these funds are reinvested. Money market funds usually offer better interests. Than cash balance accounts.

INT: Pays interest on customers’ cash balances. Amounts in parentheses, if any, indicate minimum amount above which interest is paid, if a discount firm offers a sweep account, we do not include information on cash balance interest.

NLMF: No-load mutual funds can be purchased through the firm. Charges may apply, and available funds vary.

IRA: Self-directed IRAs can be set up. Charges may vary.