Financial brokers explained: definition, types, and roles

Market trader analysing data
Rebecca Cattlin
By :  ,  Former Senior Financial Writer

What is a broker?

A broker is an intermediary between two parties in a transaction – most commonly between individuals and institutions that have restricted access. They buy and sell assets, which is known as execution, and will charge a fee for doing so.

The term can apply to both a firm and an individual agent – but anyone acting as a broker will need to be registered with their relevant regulatory authority.

What is the role of a broker?

In finance, the role of a broker is to execute trades on behalf of an investor. Depending on the services they offer, there are two main categories of brokerages:

  1. Full-service brokers – which provide execution services, as well as investment advice and solutions
  2. Discount brokers – which provide execution-only services, usually at a reduced rate and via self-service platforms

Types of broker

There is a huge range of types of brokers that can be broken down by asset and product type.

What is a stockbroker?

A stockbroker is an individual or business that manages and executes the buying or selling of shares on behalf of an investor.

Stockbrokers are an intermediary between investors and securities exchanges. As most exchanges only do business with their members, not individual investors, anyone looking to buy or sell a stock will have to go through a brokerage to get access to the order book for prices.

While stockbrokers used to operate over the phone, or in branches with physical locations, the majority of stockbrokers now are electronic. Some will offer platforms for investors to enact their own orders, while others still require a broker to have the final go-ahead.

What is a forex broker?

A forex broker is someone who buys and sells currencies on behalf of individuals – whether they’re holiday makers or retail traders. They offer prices directly from banks, facilitating liquidity for individuals in a network that’s dominated by larger institutions.

Given that the standard lot size for a forex trade is 100,000 units of currency, most individuals will have to use a forex brokerage to access leverage. Leverage enables you to take a position for just a fraction of the market value. For example, a leverage of 10:1 means that a position worth £100,000 would only require a £10,000 deposit.

While leverage can give you magnified returns, it would also magnify your losses, so it’s important to understand the risks involved. 

Most forex brokers provide access to currency markets via an online trading platform.

What is a commodity broker?

A commodity broker is someone who executes orders to buy and sell commodity contracts on behalf of clients, on markets such as oil, soft commodities, gold and silver.

The main parties needing access to commodity markets are hedgers, which can be both the seller of a contract – farmers and mining firms – or buyers, such as manufacturing firms and airlines. But increasingly, individuals are also using commodity brokers to speculate on prices.

Most commodity trading takes place via options and futures contracts, which trade on various exchanges depending on the commodity type.

What is a CFD broker?

A CFD broker is an organisation that provides access to contracts for difference, a type of financial derivative which enable traders to speculate on an underlying asset’s price without ever owning it.

CFD trades are also leveraged, which means your profit and loss can be magnified.

City Index is a CFD provider. Learn more about us

What is a broker fee?

A broker fee is how brokerages make money. They are typically compensated through a commission on each trade, whether that’s buying or selling the underlying asset.

Brokers that don’t charge a commission, or charge a lower commission, will make money in different ways. That might be through partnerships with an exchange or market maker, or by earning interest on uninvested cash left in an account.

What is the difference between a broker and a dealer?

The main difference between a broker and a dealer is in who the execution of transactions is for. A broker executes trades on behalf of another party – an individual or institution – whereas a dealer executes trades for their own business.

Quite often, both roles exist within a financial services firm. The broker is the client-facing role, while the dealing team hedge the brokerage’s exposure to the market and manages risk.

What is the difference between a broker and a trader?

The difference between a broker and a trader comes down to the intention behind their transaction. A broker is a middleman between a client and the markets and charges a fee for their services. Whereas a trader is someone who makes money off attempting to predict market movements.

In theory, a broker’s client could be a trader, but usually, traders are more active and look to buy and sell assets themselves using analysis methods and tools.

Related tags: Insights Stocks Forex Commodity

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