Broker Definition and Primary Types of Brokers

Broker - Broker Definition and Primary Types of Brokers

A trader's success in the financial markets largely depends on the choice of a broker, as factors such as reliability, commissions and a modern trading platform play an important role.

At the same time, different types of brokers have their own specialties, which you need to navigate to make the right choice.

In this article, you will explore the definition of “broker” and focus on what to look for when evaluating the quality and effectiveness of the various broker types.

What is a broker? Definition

A broker is a legal person or individual who acts as an intermediary when doing business on the financial markets. Private investors cannot trade without a broker as only brokers can trade on exchanges.

Brokerage activities in most countries are licensed and require confirmation of candidates' expertise. In the case of legal entities, a minimum share capital and other requirements may also be required.

The specificity of a broker's job is that he is obliged to act solely in the interests of his clients. In the stock market, to avoid conflict of interest, a brokerage firm is prohibited from holding its own open positions in stocks or other assets.

This is an important difference from a dealer who is also a member of the exchange but works for his own benefit and on his own behalf.

How does a broker make money?

How a broker makes money

For his work, the broker receives a reward in the form of a percentage of the trade, a fixed fee for each lot or a spread. In some cases, the exchange itself pays for the work of a broker.

In addition, large companies often act as investment banks, offering trading margin to their clients. In that case, they can earn a percentage of the borrowed money, stocks or other assets.

Other important functions of brokers

The broker's role is generally not limited to just executing trades. Companies can offer customers a variety of related services, such as:

  • Trading platforms and other proprietary software;
  • Consulting and analytical support;
  • Investment estimates and forecasts;
  • Risk Management Services.

The complete list of services can contain dozens of items.

How to choose the right broker?

Choosing a broker plays an important role in your investment and trading success. For a good broker, the following characteristics are important:

  • Reliability and official regulation;
  • A wide range of markets;
  • Comprehensive information and analytical services;
  • Size of commission or fees;
  • Speed ​​and quality in the execution of negotiations;
  • Various modern trading platforms;
  • Low minimum deposits;
  • Favorable conditions for margin trading;
  • Easy and fast deposits and hassle-free fund withdrawals.

Your investment goals should determine which type of broker you should choose. For example, if you are a long-term investor with significant capital, commissions will play a secondary role for you, while reliability, a wide list of markets and excellent analytical services will come first.

For new traders with limited capital, indicators such as commission size, minimum deposit and the ability to make trades using leverage will come first.

Why is broker regulation important?

The main parameter when choosing a broker is whether it is governed by a reliable regulator. Unfortunately, financial markets attract scammers (“follow the money”) that deceive customers disguised as brokers.

The existence of a license from a regulator authorized is evidence at first sight that the broker does not break his promises. It must disburse funds accurately and in a timely manner to clients and abide by the law and its Terms and Conditions.

We recommend giving preference to brokers regulated by agencies based in the US, UK, EU countries and other countries with a high legal culture.

Brokers with offshore licenses often operate without any controls and, on average, are less reliable. Strongly recommend not to work with brokers who are not licensed!

5 tips for selecting the best broker for your goals

They recommend paying attention to the following 5 tips when choosing a broker:

Check legal and other documents

On the official websites of the regulators, it is possible to verify through research if the company really has the license declared in that body. For example, we checked the company Robo Markets on the CySEC website. All necessary data were found in the search results.

Robo Markets License
Hidden, explicit and implicit fees

Be deeply interested in non-obvious fees. For example, in the Forex market, a swap is very important when transferring a position to the next trading day. Exchange sizes are often very different from platform to platform.

In the stock market, brokers charge commissions for margin trading, which can range in rates from 1,6% to 20% per annum. Also, some brokers charge withdrawal fees, inactive account fees, etc. It is important to study explicit and implied fees and commissions in advance.

Company history and analysis

Check out broker reviews on our website. This will help you better understand whether the broker is delivering on its promises.

Deposit and withdrawal of funds

Consider the ways of depositing and withdrawing funds that the broker offers, as commissions from payment systems can make up a significant part of your expenses.

be realistic

You should be very careful with brokers who promise guaranteed profits or an easy way to make money. this is usually done by scammers. A serious broker will always warn clients about the risks and provide all important information about their work in the public domain.

Broker types and definitions

For different classes of financial instruments, the broker's terms and conditions specifications may differ. There are several types of brokers.

stockbroker

A stockbroker is a company that offers access to a stock exchange of which it is a member. On behalf and in the interests of its clients, it carries out operations for the purchase and sale of shares, ETFs, mutual funds, bonds and other stock market assets.

The main advantage of working with a stockbroker is that you are trading real assets. If the broker buys shares on the client's order, the client acquires ownership of them, can receive dividends and participate in the management of the company.

In addition, many stockbrokers lend stocks and cash to clients, conduct a comprehensive assessment of bond investment attractiveness, and provide portfolio management services. A stockbroker is the most classic type of brokerage.

Forex broker

A Forex broker is an intermediary in the foreign exchange market. It has a fundamental difference from a stockbroker due to the fact that trading in the foreign exchange market is done over the counter.

There are a large number of exchange channels provided by major international banks and government authorities. Individuals cannot directly participate in these trades, therefore, the broker acts on their behalf and in their interests.

Forex brokers trade with liquidity providers (usually major international banks) and offer clients a connection to their exchange channels.

Given that the lot size in this market is usually high — 100 units of the base currency of the account — Forex brokers differ in that they provide clients with a large margin of leverage.

This allows clients with a small capital to enter the foreign exchange market, but carries a greater risk of losses due to volatility.

futures broker

A futures broker provides access to the derivatives exchange, where, in addition to futures, options, swaps and other complex financial instruments are traded. As a rule, major brokerages provide access to the futures market.

CFD Brokers

This type of broker offers trading on various global markets using Contract for Difference (CFD is the acronym for Contract for Difference). One CFD is a derivative, which is essentially a contract between a broker and a customer concerning the price of a financial asset.

The underlying asset can be the price of stocks, currency pairs, futures contracts, bonds, etc. Any instrument whose price changes can become the basis for CFDs.

The advantage of this broker is a small entry threshold and easy access to various financial markets. Thanks to the small lot size and high margin, you can start with as little as $1.

For example, if you buy CFDs on Apple stock, it means that if the price of the underlying asset on the stock exchange goes up, you win, but if the stock price goes down, you lose.

Everything is like in a normal market, with the fundamental difference that CFDs do not attribute ownership of the asset. You do not receive a share in the company and cannot participate in its management.

Since CFD brokers often offer higher leverage and are a stakeholder in trading, in many countries their activities are strictly regulated.

Discount brokers vs full service brokers

A discount broker is a company that specializes in online trading with minimal or no commission. Due to small commission earnings, discount brokers offer a limited list of analytical information and services.

A full-service broker offers a full range of services to clients from investment and advice, asset management, etc.

These brokers tend to have higher commissions as they have to maintain a large staff. As a rule, these companies do not focus on the mass market, but on customers. wealthys who need individualized guidance and advice.

universal brokers

The largest international brokers offer access to all or most major markets at once, such as stocks, bonds, commodities, derivatives, CFDs and Forex.

The only exceptions are binary options, which are poorly regulated and banned in many countries.

binary options brokers

Binary brokers offer trading services for binary options. This is a modern high risk trading instrument.

When trading, the broker is the second party to the contract regarding the rise or fall of the price of a certain financial asset in the future. If the client can predict the direction of market movement, he wins; if not, he loses the capital.

Experts note that the binary options scheme itself contains a lower probability of client gain.

These factors dramatically increase the risks of a complete loss of funds, so this type of trading should be approached with caution and you should never risk large amounts.

Comparison of brokerage accounts

To summarize the information provided, we have prepared a comparative table of the different types of brokers, which indicates the market risks, a list of instruments.

type of brokers stockbroker Forex broker futures broker discount broker CFD Broker binary broker
Market ridge Video Video Video Video Alto Very high
Leverage Low Alto Video Low Alto Alto
Markets Stocks, ETFs, mutual funds, bonds Coins Derivatives stocks, derivatives Stocks, currencies, derivatives Stocks, currencies, derivatives
Fees Video Video Video Low Video Video
Regulated Yes Yes Yes Yes Yes No

best forex brokers

The Forex market is characterized by high liquidity because the daily trading volume exceeds $6 trillion. The best Forex brokers offer all the obvious benefits of Forex trading.

eToro

Etoro_logo.svg

$ 100.000
Free Demo

Visit Now!Visit Now!
*Your capital may be at risk
Investing in Forex, CFD and FX options involves substantial risk of loss and is not suitable for all investors.
The eToro team is a US and EU licensed broker specializing in three interrelated areas such as:

A platform of social negotiation advanced allows you to copy trades of successful traders without commission;

has its own cryptocurrency exchange that allows you to trade with increasingly popular digital assets;

It has its own Forex and CFD trading platform with low commissions and a wide selection of trading instruments.

The eToro trading platform is simple and easy to use; the same goes for your demo account. The minimum initial deposit is just $50.

XM Group

XM-Logo-1

$30 Bonus
Free account

Visit Now!Visit Now!
*Your capital may be at risk
Investing in Forex, CFD and FX options involves substantial risk of loss and is not suitable for all investors.

The XM broker is regulated in the EU (CySec), Australia (ASIC) and Belize (IFCS). The availability of licenses in different regions of the world allows the broker to have the largest customer base.

The broker is characterized by maximum loyalty towards new traders. The initial deposit starts at just $5. A demo account and a micro account are available to users where you can try your luck with minimal risk.

A total of 55 currency pairs are at the service of traders with minimum spreads of 0,1 pips. Also, you can trade CFDs and stocks on all platforms.

best binary brokers

Binary options trading is very popular among beginners, but it is poorly regulated. In this regard, the reputation of brokers is of particular importance. We have gathered the binary options brokers that have the best ratings.

At the same time, different types of brokers have their own specialties, which you need to navigate to make the right choice.

Observation:

If you decide to trade binary options, you must carefully weigh all the inherent risks. It is not worth investing more than the amount you are willing to lose.

IQ Option

iQoption-review

$ 10.000
Free Demo

Visit Now!Visit Now!
*Your capital may be at risk
Investing in Forex, CFD and FX options involves substantial risk of loss and is not suitable for all investors.

The IQ Option broker is one of the binary brokers most popular international IQ Option offers trading on 25 currency pairs as well as stocks, commodities and ETFs. The minimum fee is $2 and leverage is up to 1 in 500.

The trading platform is extremely simple, which makes it very convenient for beginners. A demo account is also suitable for practice.

Binary.com (Deriv)

This broker has a very low minimum fee which is just $0,51 with a minimum deposit of just $5. This allows almost any trader to do a test run. The platform has a huge depth of contracts, from 10 seconds to 1 year.

Summary about brokers

A wide variety of brokers are represented on the financial markets. The choice can be very complicated. We work hard to simplify this choice and make trading as safe and profitable as possible.

 

At the same time, different types of brokers have their own specialties, which you need to navigate to make the right choice.Frequently asked questions about brokers

 

What should you primarily focus on when choosing a broker?
First, you must insist that the broker has a license from a trusted regulator. In addition, the size of commissions, a wide range of markets, the presence of relevant information and analytical applications, devices and services are also very important.
Should I trade with a discount broker?
It all depends on your goals. For active traders, a discount broker is the ideal solution. For big investors with big capital and a passive income strategy, the accompanying analytical services are of great importance, so they can use the services of full-service brokers.
What should a beginner look for?
For beginners (and anyone else), the first rule is to protect yourself. Therefore, it is imperative that the broker has a demo account and a low minimum deposit limit. A cent/micro account would also be helpful.
Are there brokers that provide access to all major markets?
Yes, some of the biggest international brokers provide access to hundreds of markets in dozens of countries. These are Stocks, Futures, Forex, Bonds, etc.
5 / 5 - (5 votes)

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