Is a broker a person or a company? How do they work? Why do we mention them a lot when trading the financial market? If this is your first time to hear these word then I believe these are some of the question that would have be going through your mind. But I will try to answer all this question in this article so first, let’s defined who or What Is a Broker?
Who or What Is a Broker?
The word “broker” might be hard to categorize whether it’s a single individual or a company, but they all achieve one goal which is to serve as a “middle man”.
A broker serves as a middle man between you and the financial market. Let me give a thorough break down on how this works.
READ: What is Forex?
Break down on who or What Is a Broker?
In the past, before the introduction of internet, only wealthy people could buy stocks (then stock was one of the most popular financial asset to own). To buy a stock then, you either approach your bank who can serve as your broker and account manager or you go to any broker also known as brokerage firms.
These brokerage firms have a sit or have a way to either buy or sell any financial asset or instruments on the exchange floor, but most times they do own a sit or communicate with someone who own a sit.
If you want to find a stock to buy, you either go through the newspaper and find a stock that you think its price will go up in the future or contact your broker for advice which usually cost a fee monthly. When you want to contact your broker, you do that either through a postal mail or telephone. Asking your brokerage firm to buy a stock on your behalf can be hectic and before this can be possible you will need to have an amount ranging from $10,000 to a $100,000 or more on your account which the broker will use to open a position on a financial asset.
One of the disadvantages with brokers then was, in other to get a broker, you need to have a huge amount in your bank or broker account and the price at which your broker will place a trade will be different from what you would expect.
Let us fast forward to this modern era (the internet age)
CHECK OUT: How to Read a Forex Quote
The Internet Era
With the introduction of internet, everything changed from how brokers operate to how orders were executed on the exchange floor. At this present age, we have brokers called “discount broker”. You might be wondering if these brokers are different from the usual broker, yes they are.
Remember that before, in order to have a broker you must have had thousands of dollars deposited with your broker as margin but with discount brokers you only need to have few hundred dollar (though I do not recommend that to be profitable) and this is possible through leveraging.
The internet era changed a lot of things in brokerage firm, that weren’t there before. For example, many years ago in order to know about the performance and news and even the price of a stock, one has to read through the newspaper, but now we have mobile apps from most broker that gives up-to-date news on various stocks and the prices with financial advice on whether to buy or not and we do not need to send a postal mail or make a telephone call in other to buy stock. Most software company offer free platform which gives real time quote for the various stocks, so one just need to click the BUY or SELL button to have his or her position opened on a particular stock.
How Brokerages Firm Operate In This Internet Era
With the introduction of internet, communication between client and brokers have increase dramatically, take for example most brokers are considered as STP which stand for Straight Through Processing, this is a way which brokers send their clients open positions directly to the market unlike then when there were “in-house trading”.
In-house trading was very popular then because it was difficult for most brokers to send their clients order directly to the market, so they had to find a way to offset their orders in their trading room.
The market now becomes a decentralized place, where numerous financial participant exchange financial assets all thanks to technology.
Discount Brokers now offer leverage to their client. Unlike before where only a few could trade the stock, now numerous people can now participate and make profit.
Each country’s stock exchange has several brokers that buys and sell stock within the exchange. This broker are a bit different from the ones I discussed above. In terms of the nationality of the kinds of client they accept and the type of stock they operate in (usually local stocks and not international)
Choosing The Right Broker
Trying to choose the right broker can be difficult, as some do have some countries which they do not offer their services. Another major factor when choosing your broker, is the regulatory body that regulate there day to day activities. The more power the regulatory body has, the more the broker tends to offer a good services. In this article Do brokers Trade against their clients? I talked about brokers that trade again client, I recommend you read it.
Brokers are needed to be able to trade in the financial and with the help of the internet, brokers can do a lot more of what they couldn’t do before. There are brokers that offer a full service to client that is give them financial advice and insight data about a stock.
Today, brokers allow client to trade more than stock, they let client chose between a wide range of financial instrument ranging from bonds, treasury bill down to currencies and commodities even energy asset are not excluded such as gas and a lot more.
Please comment below, if you are looking for a broker than I advise you visit this link CLICK HERE to choose between the brokers, I have chosen for trades and if you find this article fascinating please share using the share button.