What is a broker & what does it do?

The term "broker" is used in various spheres, such as in real estate, insurance, mortgage, etc. However, we mostly hear this word when talking about finances and trading on the financial markets. One needs a broker when they want to trade in the market or invest in stocks because a person cannot go to a security exchange without an intermediary. Therefore, transactions can only be concluded by legal entities that have a license — banks, investment and brokerage companies.

What is a broker?

A broker is an independent organization or a person that manages financial transactions on behalf of another party. It is an intermediary between a client and a service producer, to make it simple. Nowadays, all brokers can be divided into different types by multiple parameters. This article explains brokerage companies regarding:

• the service they provide;
• the market they perform.

In spite of the difference in work of the different kinds of brokers, they all have some similarities, like a fee for their service and online platforms for clients to perform their trades.

What is a full-service broker?

Some decades ago, a broker was a personal advisor who would share his opinion about what to buy and sell according to the situation on the market. So, people are fully dependent on this type of companies. Nowadays, they are called full-service brokers.

So, full-service brokers, or financial advisors, have a large team of financial analysts who monitor the markets and supply their clients with recommendations. Besides, they have banking divisions to provide some clients access to special financial products, such as limited partnerships, various exotic and alternative investment opportunities.

Thus, full-service brokerage firms offer their clients a full range of services. That is why their fee is higher than other brokers’ fees.

What is a discount broker?

Unlike a full-service broker, discount brokers operate for more independent clients, who do their own market research and take full responsibility for their financial planning. By allowing customers to manage their own trades, discount firms take lower or no commissions at all.

Other perks of discount brokers that attract many people, especially beginners, are minimum deposits, free learning tools, and more. Besides, the Internet has made investments and learning about it more accessible and more manageable.

The 21st century with its unbelievable leap of technology, has boosted online trading and investment. Nowadays, it is very common for brokerage companies to have at least one online platform allowing people to execute their trades.

What is a forex broker?

A forex broker is a company that provides 24-hour access to the Foreign exchange market, one of the largest financial markets operating currency pairs. Forex organizations find the best available prices in the security exchange and execute clients’ buy and sell orders. Of course, such companies do not work for free.

So, a forex broker provides financial services by giving clients access to a trading platform to execute trades, such as buying and selling foreign currencies.

Generally, trading with a forex brokerage firm includes:

• no commission (but the spread is paid),
• high leverage (high risk/high reward),
• free trading tools such as charts and research.

What is a stock broker?

Stocks are traded on stock markets, which are like supermarkets, where companies list their stocks, and brokers help people buy and sell them with online platforms. So, a stock, or investment broker, is a financial company whose clients buy and sell stocks in a brokerage account. Unlike forex brokerage firms, stock brokers work fixed hours. They also take fees for their services.

How to choose a broker?

Nowadays, there is a wide range of financial companies alluring new clients with big profits and financial success. However, you should be very careful considering which brokers’ services to use. Here are some very important things every person should pay attention to when choosing a brokerage company.

• An honest and reliable broker has permission from a regulator to operate in a specific country. This information should always be displayed on the company’s website.
• Reliable brokers have to be honest and share with their customers all information, including risk. Exaggerating and providing misleading information is not acceptable. Trustworthy companies receive recognition from people and get awarded by respected financial experts.
• Costs and fees. Make sure a broker does not require any extra payment, like annual fee, inactivity fee, fee for subscription to their trading platforms, etc.
• To have more chances to turn trading into your favour, choose a broker with a wide range of financial assets, i.e., currency pairs to trade.
• It might be a good idea to stick to a broker that offers free courses, how-to guides, webinars, video tutorials, glossaries, etc.
• Demo account. This is a very helpful option to test the Forex market with virtual money using a real market environment. Trading on a Demo account is an excellent way to gain experience without risk and even a deposit.

FAQs

• What is a broker? In the financial world, a broker is a company or person who operates financial transactions on behalf of another party. So, it is an intermediary between a client and a service producer. A person cannot go to financial markets without a broker because transactions can only be managed by legal organizations that have a licence — banks, investment and brokerage companies.
• What is a full-service broker? A full-service broker is a financial advisor who checks the financial markets and gives you advice on buying or selling. As a rule, they take a fee for their services, which is higher than the fee of other types of brokers, like a discount broker.
• What is a discount broker? A discount broker works for those people who need only a platform for executing the trades. These brokers do not do market research for the clients and give no recommendations.
• What is a stock broker? A stock broker allows clients to use the online platform to buy and sell stocks. Just like other companies stock broker take a fee for their service.
• What is a forex broker? A forex broker provides access to the foreign exchange market, one of the largest financial markets operating currencies. The fascinating thing about the forex market is that it is accessible 24/7. Moreover, these companies do not take a fee, they earn on a spread, a difference between the purchase and sell price.
• How to choose a broker? You might consider several things when choosing a broker. The first thing to check is its licence and reputation — trustworthy brokers always highlight their licences and received awards on their official websites. The next step is to ask about costs and fees. Some brokers apply fees to their clients, like inactivity fee, annual fee, or subscription fees. If you are a beginner in trading, educational materials might be very helpful. So, give your preferences to those companies providing tutorials, guides, and free courses. Seasoned traders, and newbies, might also consider Demo accounts as an advantage point, as it allows testing your knowledge and unfamiliar strategies. Finally, mind the variety of trading instruments. The wider the range of assets, the more chances to make profitable trades.