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A low-cost brokerage can be considered to be a special case of a discount brokerage which functions in a similar way to a dividend reinvestment plan.
Low-cost brokers are generally less expensive for an investor who invests in small amounts (say, fixed dollar amounts) and who is not particular that the stock trade must happen in real time.
One way that could lower cost for these brokers is by executing orders only a few times a day by aggregating orders from a large number of small investors into one or more block trades which are made at certain specific times during the day. Such block trades are also sometimes referred to as window trades.
Window trades help lower costs in two ways:
- By matching buy and sell orders within the firm's order book the overall quantity of stock to be traded can be reduced thus reducing commissions.
- The broker can split the bid-ask spread with the investor when matching buy and sell orders - a win-win situation in most cases.
Since investor money is pooled before stocks are bought or sold, it enables investors to contribute small amounts of cash using which fractional shares of specific stocks can be purchased. This is usually not possible with a regular stock broker.
Low-cost brokers also provide real-time trades, but these are usually (but not necessarily) charged a higher commission. |
