Should you use a discounter to make your stock trades?
Boston — To look at some of the ads, one would think anybody who was not trading stocks through a discount broker was the kind of person who would use $20 bills as kindling in the fireplace.
''Stop throwing away your money!'' they command.
''Tired of paying high brokerage commissions?'' they ask. ''Save 50 to 70 percent when you trade stocks.''
Arguments like these are hard to ignore, and they have not only led to the expansion of the discount brokerage business, but to its spread into banks and savings-and-loans. A survey last fall by Discount Brokerage Advisory Service of New York found banks signing up more than 10,000 new discount brokerage clients a week.
For many people, though, the decision about whether to use a discount or full-service broker is more than just a dollars-and-cents argument.
''The easiest criterion is to ask yourself if you are now making your own investment decisions,'' says Glen King Parker, chairman of the Institute for Econometric Research in Fort Lauderdale, Fla. ''If your (full-service) broker is making the investment decisions and you're satisfied with his decisions, then don't change. . . . If you're paying that broker $3,000 in commissions but he made $100,000 for you last year, stay with him.
''I like to say that if the stockbroker recommends one good stock a year, he's probably worth what you're paying,'' Mr. Parker added.
He said some people make their own investment decisions but rely on a broker to provide information on various companies and industries, plus business and economic trends.
If this is so, Parker says, ''the first step is to find out what you're paying in commissions. The average person doesn't know what he's paying,'' because these costs are usually spread throughout the year and vary according to the size of each transaction.
Once investors do add up the commissions, they may find it costs less to buy all the information they need to make their own investment decisions. Subscriptions to the Wall Street Journal, Barron's, Business Week, Forbes, Fortune, and a few specialized investment newsletters put together may add up to less than was being shelled out for brokerage commissions.
All this assumes, however, that the investor has the time and experience to do his own research and make his own buy-sell decisions.
Full-service brokers, with their full-service research, buying tips, and commissions, do make sense for ''someone who doesn't understand very well how the market works,'' says Ellis M. Ratner, executive vice-president of Discount Brokerage Advisory Services. He recently assisted Mark D. Coler, president of the firm, in writing ''70% Off! The Investor's Guide to Discount Brokerage'' (Facts On File, New York, $24.95).
Full-service brokers may also be useful, he concedes, for someone who doesn't have the time or who lacks self-confidence about making investment decisions, or who simply finds the assistance of a broker ''comforting.''
Many people, of course, use both a discount broker and one or more full-service brokers. This is not dishonest, it just makes good sense in certain circumstances, says Edward I. O'Brien, president of the Securities Industry Association. For example, an investor may want to ''fill out a position'' where he holds 90 shares of a stock and wants to add 10 shares to make it an even 100. Or an investor consults with a broker on some stocks, but in a particular case ''knows exactly what he wants to do.''
Some people will use a full-service broker to help them make buying decisions , but use a discounter to sell the stock, says Roger Servison, senior vice-president for marketing at Fidelity Investments in Boston.
As to the reported practice of getting recommendations from a broker, then executing those trades through a discounter, some people may be able to get away with it for a while, but it can be stopped pretty quickly by the full-service broker, Mr. Servison says. It doesn't take long before the broker realizes his or her recommendations are not resulting in trades. That is when he stops making recommendations.
The decision about which discounter to use - for those who have chosen to go this route - can be as complicated as deciding between a full-service and discount broker.
Certainly price is an important factor. While a typical full-service broker might charge $64 to trade 100 shares at $30 each, one can pay from $25 to $40 for the same service.
In their ads, the discounters will often try to show how much cheaper they are than other discounters. Of course, space in the ads prohibits listing all the competitors, but even if this were possible, it would not be done. Fact is, the exact discount commission depends on several factors, but primarily the size of the trade and the price of the share being purchased.
As an investor, then, your first task is to examine trading patterns. Do you tend to buy less-expensive stocks in small quantities, or do you buy higher-priced blue chips in big amounts? Commission schedules are based on the size and price of trades, and while one broker may be quite expensive in one area, it could be one of the cheapest in another. The only way to find out is to call or write for as many commission schedules as you have the time and patience to wade through.
Be sure to tell the brokerage the price and number of shares you plan to trade. More-active investors often work with two or three discount brokers where they get good service. Then they can choose the cheapest one, depending on the size and price of their trade.
Several other considerations enter into the decision about which discounter to use, including whether the brokerage is in your hometown or a thousand miles away (toll-free telephone numbers have reduced the importance of this); whether it is a small broker that only trades stocks or a large one that also offers IRAs, Keoghs, money funds, asset-management accounts, and tax shelters; or whether it's doing business in a bank.
You can often get a better rate dealing with a discounter directly; but by using a bank or thrift you can have all interest, dividends, and proceeds from stock sales transferred directly into the bank account, where it will be protected by federal deposit insurance.