What is a Broker?
Many people often wonder what a broker is. The short answer is that a broker is a person (or organization) who buys and sells things on the stock market for someone else. That “someone else” is usually an investor, and investors usually do not buy and sell on the market directly. Instead, investors submit an order to the broker for a particular amount of stock, bond, or trade. The broker then does the actual buying, selling, or trading according to the order, for a commission or fee. In other words, a broker is like an agent for the customer. They charge the customer for the service of buying and selling on the market.
While buying and selling orders on the market is the primary purpose of a broker, modern brokers also offer a wide array of services and benefits to entice investors to sign up with them. Examples of these kinds of bonuses include research tools, market intelligence reports, and personalized advice. Offering these kinds of additional services help the brokerage to maintain customers over the long term as well as sell new services and products that the brokerage firm offers.
The stock market is a complex, highly-regulated, and intricate system that requires a certain amount of expertise. For this reason, only the extremely wealthy could afford a broker in the past. While the stock market is now more complex than ever, many aspects and functions of a traditional broker have been automated and moved online. That means trading on the stock market is now more accessible than ever through discount brokers. It also means that getting personalized advice is more expensive than it used to be.
- A broker is a person (organization) who buys and sells things on the stock market for someone else.
- A broker charges a commission for their services.
- Discount brokers perform the function of buying and selling on the stock market without additional services.
- Full-service brokers provide all of the “Buy and sell” services the discount brokers do as well as customized investment solutions and advice.
- Financial investment advisers register as RIAs through the SEC while brokers register with FINRA.
Full-service brokers versus discount brokers
In addition to a full range of investment products and execution services, full-service brokers offer a wide variety of services including retirement planning, market research, and investment advice. Since they offer more services, full-service brokers charge higher commissions for their trades. Individual brokers receive a commission based on the amount of trading they complete (trading volume). They also receive a commission if they sell any additional investment products to clients. Recently, many brokers have begun offering fee-based investment products. These are investment accounts that are managed by one of the brokers. That means the investor gives their money to the brokerage with full authority to manage the investor’s portfolio without needing the investor to decide on every single buy or sell order.
Discount brokers are also able to execute orders that they receive from their clients. They are called discount brokers because they charge a significantly reduced commission for each trade (usually between $5 and $15 per trade). They are discounted because as brokers, they do not provide investment advice and the individual brokers receive a salary instead of commission. Almost every discount broker offers some a type of online trading platform for their self-directed investor clients.
Real estate brokers
The term “broker” can also refer to real estate brokers who are licensed professionals in the real estate industry. Their job (usually) is to represent the seller of a property.
When representing a seller, a real estate broker is expected to:
- Show the property to potential buyers
- List and advertise the property
- Identify the property’s market value
- Notify their clients when an offer is made
- Advise their clients about offers
A slightly less common situation is where the real estate broker represents a buyer. In the real estate broker is expected to:
- Negotiate with the seller
- Manage property inspections and negotiate repairs
- Prepare a purchase agreement
- Prepare an initial offer
- Locate properties and sort them for the buyer to review
Stock Market Brokers
Financial brokers are required to register with the Financial Industry Regulatory Authority (FINRA). There are two main rules that brokers are required to follow as a standard of conduct. One of those rules is called the “suitability rule,” and it requires that the broker have evidence and reasonable grounds for recommending any investment to a client. The second rule is known as the “know your customer” process. The “know your customer” process identifies steps that a broker must take to identify their client and their client’s goals. This information then establishes the “reasonable grounds” necessary for the recommendation. In other words, every broker must make a reasonable effort to identify all of the relevant information on the client’s current financial situation and their future financial goals.
Registered Investment Advisors
The code of conduct required of financial brokers is significantly different from the code of conduct that Registered Investment Advisors (RIAs) must follow. RIAs are held to a strict fiduciary standard. That means they must always act and advise in the best interest of their clients. RIAs are required to register with the Securities and Exchange Commission (SEC).
Real Estate Brokers
The federal government does not license real estate brokers in the United States. Instead, licensing is issued by each state as each state defines the relationship between broker and client differently.
What Are The Brokers in the Real world
- IQ Option
IQ Option provides a wide range of financial instruments to their clients, including options, mutual funds, exchange-traded funds, stocks, bonds, and other fixed-income investments. In 2018, IQ Option serviced over 11 million accounts totaling over $1 trillion in assets. IQ Option charges a flat rate of $6.95 per trade.
eToro operates in almost every financial market and manages a total of $3.3 trillion in client assets. With over 300 physical locations in 46 states, client’s of the eToro Corporation pay a flat fee of $4.95 purse stock trade.
A pioneer in the discount broker space, Plus500 services over 3 million accounts with $285 billion in client assets. They offer an array of educational resources along with a flat $6.95 trade commission.
- Interactive Brokers
The Interactive Brokers Group (IBKR) offers the lowest commissions available at $0.005 per share, with a minimum of $1 per trade. Globally, Interactive Brokers can interface with almost every electronic exchange. This allows it to trade in futures, options, and equities. In addition to the low commission rate, clients are given access to a wide array of investing tools.