While the majority of discount brokers primarily follow the same model -- with investors opening an account, paying $5 to $20 per trade, and executing their trades at the exact moment they want to -- a select few companies have setups that fall outside this traditional model. These brokers have both advantages and disadvantages in comparison with the traditional discounters, and need to be studied a bit closer if you're interested in exploring those options.
We review three alternative brokers here, and are interested in hearing about any others as they pop up. Drop us a note on our discount brokerage discussion board if you know of another brokerage that offers services significantly outside those available at traditional discount brokerages.
DRIP Programs
ShareBuilder.com and BuyandHold.com are for those who favor the Direct Reinvestment Plan and/or Direct Stock Purchases. (See What Are Dividend Reinvestment Plans (Drips)? for details if you are unfamiliar with Drip investing.)
The advantages to Drip investing come mostly in the area of very low commission costs, and for those who are starting out with small amounts to invest and want to make frequent purchases (dollar-cost averaging). For instance, weekly additions to the market would make for 52 individual trades and make much better sense if you are using a Drip.
Drip programs allow you to reinvest dividends into more shares of stock and allow you to purchase stocks in fractional amounts -- meaning that if you want to spend $100 buying shares of Microsoft, you can do so regardless of what the price of one share of Microsoft may be. So if Microsoft is selling at $75 a share, you'll buy 1.33 shares of it with your $100; if the stock is selling at $125 a share, you'll get 0.8 shares of Microsoft. ShareBuilder.com allows you to pay a commission of $2 per regularly recurring transaction -- for example, monthly additional purchases within your account -- or $5 for a one-time (non-recurring) investment.
But beware. Not all Drip programs work the same. At ShareBuilder not all stocks are available for the lowest fees, and those that are not included in the company's service cost $19.95 per trade. Also, like Drip investing generally, the share purchases are not made according to your schedule, but instead are made only once a week. In order to keep the transaction costs low, ShareBuilder aggregates all of the purchases of all of its customers and goes out to the market and makes one big buy each week. For a short overview of ShareBuilder's service, read its Quick Q&A.
BuyandHold.com offers essentially the same services as ShareBuilder, with a slightly different fee schedule and more frequent execution of trades. It has the same advantages of allowing you to buy fractional shares, invest regularly, and reinvest dividends, and you can open an account with as little as $20. BuyandHold.com makes its purchases on the open market twice a day -- collecting the orders from all of its customers and executing the trades once in the morning and once in the afternoon. Details about BuyandHold.com's services can be found at its tour page, and it also has an informative FAQ on Drip tax information.
(Full Fool disclosure: At the time of this writing, BuyandHold.com is an advertiser on the Fool site.)
And Now for Something Completely Different...
The bizarrely named FOLIO[fn] has started a service that gives investors the opportunity to create up to three portfolios of as many as 50 stocks each, and to pay one flat fee for maintaining the account. Currently the fee is $295 per year, which includes all the trades you want to make. FOLIO[fn] advertises itself in part around the proposition that building up your own "mutual fund" of 50 stocks is cheaper with Folio than the annual fees that you would pay to buy and own a regular mutual fund. The marvelous mutual fund cost calculator on the FOLIO[fn] site certainly demonstrates that owning mutual funds is not necessarily a cost-effective way to invest (unless they are passively managed index funds). But does that make FOLIO[fn] the best brokerage for you? That depends.
The advantage of the FOLIO[fn] offering is a flat fee for anybody who would otherwise spend more than $295 in trades during the year. This would apply to anyone making about two trades a year in a full-service brokerage account, or between 15 and 60 trades in a discount brokerage account, depending on the cost per trade. You can trade all 50 stocks in your portfolio once a day every day if you so desire, getting completely out of the market on one day, and completely back into it the next day, all with one mouse click. (Not that we advocate that kind of crazy short-term thinking and market timing. We're just pointing out that it is possible.) Or you can readjust the balance of your portfolio every day to reflect how you want your money to be allocated.
FOLIO[fn] also offers the opportunity to buy fractional shares in dollar amounts in the same way that BuyandHold.com and ShareBuilder do. There are a number of other ways in which the Folio account differs from the traditional discount brokerage account, as further explained in our discount brokerage center (where FOLIO[fn] is an advertiser).
One disadvantage of the FOLIO[fn] account is that not all publicly traded stocks are included in the one flat-fee price. If you want to buy a company that is outside of the FOLIO[fn] selection, you'll need to pay a separate fee of $15 to make that trade. FOLIO[fn] does include about 2500 of the most popularly traded stocks in its flat-fee structure, covering the needs of most investors.
To keep costs low, FOLIO[fn], like Sharebuilder.com and BuyandHold.com, aggregates the orders of all its customers and makes its trades during two windows every day. If you want your trades executed right away, you pay an additional $14.95.
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