When opening a brokerage account, some traders opt to go with the lowest cost outlet. While this can a great idea for a customer, other times it may lead to serious problems.

That is not to say that a customer should use a full service broker; rather, one should be leery and do enough research to understand what they will get out of the brokerage house.

Here are three benefits and three drawbacks to a low-cost trading account.

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Pros

Cheap

Obviously, when using a low-cost brokerage account, you spend less money on trades and other fees. Over time, fees and expenses will drag down the returns of an investor, but they are particularly counterproductive in a small portfolio. For new investors, using a low-cost account allows them to save some money and instead put more funds to work in stocks and mutual funds. The fees are also typically more upfront, particularly in a climate in which financial companies are figuring out how to charge you more.

Website

In a bid to save money, all major inexpensive brokers offer a nice website where a trader can get access to real-time information and make trades almost instantly. The sites usually have tutorials on basic investing terminology and even strategy. While the ins and outs of the stock market may seem daunting at first, there are plenty of other resources to learn managing money on your own, such as AXA Self Investor.

Big

Most of the inexpensive brokers have locations all over the country. This is a serious benefit to a person who likes to stop in when they have questions or concerns. Some full service brokers only have a handful of locations scattered throughout the major city in the country.

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Cons

Execution

When making a trade, you want a fast and flawless execution at the best price. Sadly, some lower-cost outlets will not provide the customer with the best price, and you can end up spending more money than if you just used a full-service broker. This is a huge disadvantage that often takes new traders by surprise.

Advice

When heading to an online broker with no frills, you will not receive much help or advice. Now, this may suffice for an experienced trader who knows the market. However, an investor who wants a little more out of the experience should head to a full-service broker who can hold their hand a little more.

Problems

When running into issues, an Internet broker may not offer much support. Sadly, some people run into trading problems only to see their low-cost brokerage abandon them in favour of higher net worth customers. An investor who does not need advice or hand-holding will probably do well with a cheaper broker. However, a higher net worth trader with more diverse needs may be better off going to a full service company.

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