Novice Investing - Discount Brokers in The Hole

Date: Friday 29th 2008f August 2008 02:08:02 AM

Discount Brokers in The Hole - 09/26/2006

By: Novice Investing Staff

Discount brokers were the rage of the discussion during the late 1990s. Internet has cut the cost of providing stock trading service and trading commission has generally dwindles to the single digit. Before, expect to pay $ 100 per trade to broker dinosaurs with the like of Merril Lynch or UBS or other investment banks. It is common for discount brokers to offer $ 7 commission or even less. Still think that $ 7 commission is expensive? Now, one website is trying to change all that.

Frank Barnako of MarketWatch reported on his blog that Zecco.com is about to offer a zero trading commission, as well as offering news, charts, blogs and discussion forums. That is like a new version of Motley Fool with free trading cost. The ramification for the discount brokerage industry is also expected to be big. The site stated that they will be supported by advertising.

In our opinion, the discount brokerage industry is yet to be affected, at least for now. Sure, the $ 0 commission is nice but $ 7 commission per trade is also chump change these days. Further, when you bring it down to as far as zero, it will attract the not-so-serious investors into the mix and they create more trouble than it is worth. Serious investors will also question the security of the site. As with discount broker at its infancy, not everybody will rush to put their money to unproven site. Money is a touchy issue. Commissions can be free but people will trust it less when it is free.

Let's use another example. Ever heard of a free investment advise? Do you trust it more than paying $ 100 to some Merril Lynch's well-dressed broker? We bet that most people will choose the latter. While we believe that the idea is revolutionary, it will affect site such as Yahoo! Finance or The Motley Fool more than discount brokerage. If you look at the shares of the largest discount brokers such as E trade (ET), Schwab (SCH) or Ameritrade (AMTD), investors do not seem to be daunted by the emergence of free online trading. Just like big brokerage houses can survive the discount brokerage attack, we feel that Zecco will have the same effect.

In fact, we believe that Zecco is awaking the sleeping giant of Google Finance and Yahoo! Finance. What stops them from offering an additional free trading feature? Google had already offered a pay pal type of payment system with Google Checkout. With its army of engineers, investors will be drawn more to Google's security feature than Zecco. Of course, Google is yet to announce this kind of offering to the mass but it is known to offer new products every month or so. Thus, launching a free trading platform will not be tough for Google. The same goes for Yahoo!. Both sites, by the way, are also supported by advertising.

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Ameritrade Holding Corp. (AMTD) or any other securities.

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