What is a broker? Or who is a broker? Is a question that is normally asked in the investment business and there is a reason to why these two questions become an area of interest within the investment circles.
What is a Broker? (Definition)
A broker is at the core of the investment world and their contribution to the investment industry cannot be ignored. The broker is that individual or firm that handles the execution of either buy or sells orders on behalf of the investor.
The broker does this job for a small fee called a commission, the more trades the broker executes the more the firm makes money, and so the broker does not stand the risk of never making money whichever way the trade goes, if the investor loses money or makes money the broker already has made his or her fair share in the commission paid for acting as the go between the investor and the market.
Also to be a broker definition can also mean to be engaged in the act of handling the execution of a particular order either to buy or to sell and because of this transaction the customer in need of the service pays up a small charge to the broker or the firm doing this service.
A broker can also be found in another field, like the real estate business, the broker, in this case, handles several activities that are at the core of the real estate business.
The real estate broker plays the role of marketer, and he or she advertises the property that he or she wishes to sell on behalf of the owner. The broker also decides how the property is to be priced obviously considering their commission to be included in the property value.
They also work both ways, they act as an advisory team to the willing buyer, and they come in handy in helping the customer make the best decision before purchasing the property.
The brokers have professional regulatory bodies either in the real estate or the financial investment fields, and that is the reason why they are trusted to handle their business as professionals at the end of the day.
The brokers on the financial investment side have the following body that registers each broker and regulates their activities within their established set of rules.
The Financial Industry Regulatory Authority (FINRA) is the body mandated by the government to regulate the brokers and brokerage industry.
The brokers are meant to work within a given set of rules, and regulation of the most common rules is the suitability rule. This rule directs the broker to have a reasonable basis for offering a certain investment asset or product to the client.
The next rule is the know your client rule; this rule is what gives the broker confidence and assurance that they are dealing with a legit client who does not have any altercations with the government, and he or she is legible to invest.
To come to this conclusion the broker asks for particular information from the client; these are, tax status, financial standing, proof of residency, reasons for investing and many other questions to clarify the legitimacy for investing.
The broker should not be confused for a financial advisor at any one time; the broker does not offer any investment advice, the broker simply executes trades for the investor, and that is it, but the financial advisor is supposed to advice the investor and help them make sound investment advice and not only that, they are supposed to declare their fees to their clients.
The financial advisor is regulated by the Securities Exchange Commission as Registered Investment Advisors (RIAs), and this warrants more regulation and oversight because of their roles and their involvement with their clients.
There are two different types of brokers dependent on the services they provide to their clients, these services, and their salary remuneration is what separates the two parties. The broker is either a discounted broker or a full-service broker.
The separation was clearly defined when the internet came into the scene and opened up the world of investment where the rich flourished, and they made it like an invites the only club for a very long time.
The other reason why investing was quite the hustle is because of the charges attached to it by the brokers, and that gave it a more mystic like feel, and it sidelined a huge number of potential investors. The two types of brokers are the discount broker and the full-service broker.
The discount broker is one that can execute either a buy or a sell order for their customer for a small fee of anywhere between $5-$15 per trade depending on the brokerage firm the client is using or the number of trades the client has performed in previous years to allow him or her get a reduced charge per trade he or she executes.
This broker offers the low commissions because of the volume trades they get to execute on a single day, the more trades that get executed, the easier more money is made by the firm on commissions, and this is how they make their money.
The discount broker is paid on a salary basis and not on a commission basis. Since they offer no trading advice, they offer an online trading platform that the discretionary investor can use to transact their trading operations on.
This broker is the exact opposite of the discount broker; this broker offers a wide range of services; for example, a wide range of investment products, market research and analysis, investment advice, and lastly pension and retirement plans.
With all these services the fees they charge go higher, and this is more suited to the investor who does not know much about the field. The brokers here are compensated on a commission basis and for the number of investment products they have sold.