Broker

What Is a Broker?

A broker is an intermediary that carries out buy and sell orders for investors. Instead of trading directly with another party, an investor places an order through the broker, who routes it to a market where it can be filled. Brokers hold client accounts, record holdings, and provide the platform or service used to trade stocks, bonds, funds, and other securities.

Brokers can be individuals, but most are firms. In the United States, a firm that effects securities trades for others is generally called a broker-dealer, meaning it acts as a broker for clients and as a dealer when trading for its own account. These firms are generally registered with the Securities and Exchange Commission and belong to the Financial Industry Regulatory Authority (FINRA).

How Brokers Make Money

Brokers have traditionally earned money in several ways:

• A commission, which is a fee charged per trade or as a percentage of the transaction value.
• Interest on cash balances, or on money lent to clients who trade on margin.
• Payments from market makers for routing orders, known as payment for order flow.
• Fees for account services, research, or advice.

Many brokers now offer commission-free trading on common stocks and exchange-traded funds, so they rely more heavily on the other sources of revenue.

Types of Brokers

Brokers generally fall into two broad groups. Full-service brokers typically offer personal advice, research, financial planning, and account management, and they usually charge higher fees. Discount brokers focus on executing trades through self-directed platforms at lower cost. Many firms offer both models, and some investors use one brokerage account while others use several.

Why Brokers Matter to Investors

The broker an investor chooses can affect costs, available investments, the quality of trade execution, and the tools and support provided. It helps to understand how a broker is paid, since compensation can shape the products or advice offered. Most brokers hold client securities through a custodian arrangement. In the United States, the Securities Investor Protection Corporation (SIPC) may protect customer assets if a brokerage firm fails, but SIPC does not protect against losses caused by changes in market prices.