What is a broker?
In a nutshell
A broker is an individual or firm that acts as an intermediary between investors and security exchanges who only accept orders from licensed brokers and traders.
Brokers need the approval of investors before executing a transaction and have to undergo rigorous licensing exams before they become licensed brokers.
Brokers exist in many industries such as real estate, insurance, and stocks. They are usually compensated for their services via a commission (percentage of the sale) or a fixed fee.
Types of brokers
Full-service brokers
A full-service broker/financial adviser offers both financial advice (e.g., investment advice, mortgages, pensions, tax advice, etc) and trade execution (actually executing trades on your behalf).
Discount brokers
A discount/execution-only broker only executes transactions on your behalf. They don’t offer advice/planning. As a result, they usually charge a lower commission than full-service brokers.
Examples of brokers
- A stockbroker can help individual investors buy shares from the stock market. They can offer just advice or both advice and execution.
- A forex broker buys and sells currencies on your behalf.
- Real estate agents act as an intermediary between property owners and buyers.
- Insurance brokers act as intermediaries between individuals/companies and insurance (firms offering insurance products).
- Mortgage brokers act as intermediaries between banks and individuals looking to buy property. They can also advise prospective homeowners on the best mortgage options.
Other notes
- Brokers often work on commission so they have a strong incentive to make profitable investments for you. The more money you make, the more money they make.