Discount brokers are everywhere. Not long ago, only a few companies offered the ability to trade stocks with low commissions. If you wanted to trade with a full-service brokerage, it might have cost $30 for each transaction. For this fee, you would talk with a broker assigned to your account, who would help you make trading decisions. Of course, the transaction fee and the promise of earning money encouraged these full-service brokers to suggest trading as much as possible.

Companies soon realized that they could offer a self-service model of stock investing, reducing overhead costs by eliminating the human broker, and passing that savings onto investors through reduced trading fees. In order to keep the volume of trades high, some discount brokers offer incentives to encourage more buying and selling.

SmartMoney recently looked into a number of discount brokers in detail in order to determine the best among a variety of categories:

For our 18th annual ranking of brokers — itself top-ranked by the Web site ConsumerSearch — we scrutinized a wide range of factors, from trading commissions and account fees to the cost of certain banking services and margin rates. In addition to parsing survey responses from the brokerages, we consulted with research firms and put brokers through our usual litany of customer-service tests.

Here is SmartMoney’s top ten discount brokers:

Others just missing the top ten include OptionsXpress, Zecco, and my current preferred discount broker, ShareBuilder. Who is your favorite discount broker?

See more details at SmartMoney.

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Is dollar-cost averaging (DCA) a sound investing strategy?

In theory, dollar-cost averaging allows you to invest smaller portions of your money over a longer period of time, reducing the chance that you pay a price too high for any individual investment. If your ideal allocation calls for $50,000 to be invested in the stock market through an index fund like VTSMX, rather than buying $50,000 worth of the fund in one day in a lump sum, dollar-cost averaging spreads that purchase in equal amounts out over days, weeks, months, or even years to reduce your exposure to daily fluctuations of the market. By investing the same dollar amount each time, you buy more shares when the price is lower and fewer shares when the price is higher.

In other words, if you buy $50,000 of VTSMX on January 1 and the stock market crashes on January 2 without recovering for six months, you might kick yourself for not having the cash available to buy when the price of the fund was more favorable in the months your investment on January 1.

Many brokers allow you to dollar-cost average or invest in a lump sum. Here are a few current special offers.

• Recommended: ShareBuilder offers a $25 bonus
• Recommended: Scottrade offers $7 trades
• OptionsHouse offers 100 free trades
• E*TRADE offers 100 free trades
• Zecco offers 10 free stock trades

The only good reason for dollar-cost averaging is you may not have that $50,000 ready at one time. If you rely on investing only from money left over from your paycheck every two weeks, you don’t have a lump sum available. Those who do have funds available might have already missed out by not investing earlier.

Investing in the stock market as soon as possible with whatever money you have available, in order to form your ideal asset allocation, beats dollar-cost averaging in the long run. Dollar-cost averaging would leave your ideal allocation unfulfilled by leaving a larger percentage of your total assets in cash, uninvested.

Overall, the stock market trends upward, even at the company level if that company is healthy. If you buy individual stocks of a healthy company, the price should move in an upward trend over the long term. Dollar-cost averaging will never be able to make up lost ground compared to investing an available lump sum because you will, on average, dollar-cost average your way into higher prices.

While there may be exceptions when looking at your investment performance in the short term, especially in an environment where stocks are stagnant or declining, but as a long term investing strategy, dollar-cost averaging fails. Small instances of luck will eventually give way to major trends. So far, almost every experiment I’ve personally attempted has shown that I cannot reliably time the market as well as I want to. I almost always would have done better by just investing as soon as possible rather than sitting with cash.

Psychologically, however, dollar-cost average has a more important role. Spreading out the short-term exposure to any specific day’s stock price can make an investment in the stock market feel less risky. If you’d otherwise be concerned about your investments that might fall 1%, 5%, 10%, or more in one day, dollar-cost averaging can help allay those fears. If you have those fears, you may want to reassess whether you’re comfortable with the risk of the stock market in the first place.

Here are some links for thought:

• The Wrong Reason to Dollar-Cost Average
• Do Not Dollar-Cost-Average for More than Twelve Months
• The costly myth of dollar-cost averaging
• Nobody gains from dollar cost averaging analytical, numerical and empirical results

Please share your dollar-cost averaging experiences, concerns, and thoughts.

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As a fan of index mutual funds for the long term, I’ve stuck with first TIAA-Cref and currently Vanguard for my IRAs. I started with TIAA-Cref because when I first discovered Roth IRAs, I didn’t have enough saved to qualify for Vanguard’s minimums. Both brokerages offer low-cost options for those who want to invest in index mutual funds for the long term.

If you are interested in more active investing, your IRA might be a better vehicle than a taxable brokerage account. In a non-retirement account, every time you sell after a stock’s price goes up, you could be subject to an income or capital gains tax. This payment to the government accompanies any transaction fees the broker might charge. Furthermore, if your investment pays dividends, you will owe more tax on that income.

All of these, except for the transaction fees, can be avoided by taking your trading to an IRA. These retirement accounts are tax-free until you retire, at which time only your withdrawals from taxable Traditional IRAs will generate a bill from the IRS. Tax laws could always change in the future, and I guarantee they will. Based on today’s tax laws, some investors could fare better by following this plan.

There is a downside: if you sell a stock in your IRA at a loss, you cannot use that loss to offset that year’s income in an effort to reduce that year’s tax liability. That feature is only available when trading in a taxable investment account.

Just about every discount brokerage offers IRAs allowing stock transactions. Here are a few suggestions.

Scottrade offers IRAs with no account maintenance fees or termination fees, and charges a commission of $7 per trade. A few years ago, I moved my taxable brokerage account to Scottrade from Wachovia when that bank began charging an annual fee, and although I haven’t had much activity, I haven’t encountered any problems with Scottrade.

Tradeking charges a low commission of $4.95 per trade and, like Scottrade, does not charge any maintenance fees. This is simply one of the least expensive options for trading stocks in a retirement account.

Zecco actually has TradeKing beat with $0 trades in some circumstances. With a $25,000 balance or 25 trades each month, you can qualify for free trades at Zecco; otherwise, each trade will cost $4.50, still slightly less than TradeKing. Unfortunately, Zecco charges an annual maintenance fee of $30.

What do you think about actively trading stocks in an IRA? Active trading is not the right approach to investing for most people. But if you’re going to make the decision to try your hand in the stock market, using an IRA could help you save money.

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