What Is a Broker? Definition, Examples and How to Find One

A brokerage account is an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs. Whether you’re setting aside money for the future or saving up for a big purchase, you can use your funds whenever and however you want. A margin account allows you to borrow money to start trading. The broker acts as a lender, and the borrowed funds allow for larger trades and more advanced trades, such as short-selling a stock.

brokerage services definition

Because securities exchanges only accept orders from individuals or firms who are members of that exchange, individual traders and investors need the services of exchange members. These companies also offer stock quotes, research on economic conditions, and market analysis. Highly trained and credentialed professional brokers and financial advisers are available to advise their clients on money matters. A downside to the self-directed approach with an online brokerage is that when the market gets tough, there’s no one around to keep you from reacting emotionally and making poor investment decisions. For instance, big market dips can drive unseasoned investors to sell their investments, which is often a suboptimal choice.

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Without a broker, the financial market itself would not exist. These examples are programmatically compiled from various online sources to illustrate current usage of the word ‘brokerage.’ Any opinions expressed in the examples do not represent those of Merriam-Webster or its editors. Real estate brokers in the United States are licensed by each state, not by the federal government. Each state has its own laws defining the types of relationships that can exist between clients and brokers, and the duties of brokers to clients and members of the public. The broker must make a reasonable effort to obtain information on the customer’s financial status, tax status, investment objectives, and other information used in making a recommendation. Registered investment advisors (RIAs) are the most common type of independent broker found today.

brokerage services definition

If you’re still unsure, step back and consider, for instance, whether you’re an engaged investor who follows the markets daily. Do you take a conservative (income-focused) or aggressive (growth-focused) approach to investing? Understanding such topics can help you choose a firm as well as decide on whether to open a taxable brokerage account or a tax-advantaged retirement account. By contrast, an advisor fee account involves flat annual fees ranging from 0.5% to 2% of the total account balance.

What is a brokerage account?

It’s important that you work with a company or person you can trust, because it’s your money and you are investing in your future. You will owe taxes when you receive income from investments held in your brokerage account, such as dividends or interest, or when cash in your account earns interest. If a stock you own pays out cash dividends or qualified dividends, the proceeds may be taxed. In cases of securities lending, collateral is often required by the prime brokerage. This allows it to minimize the risk it experiences as well as give it quicker access to funds if needed.

The brokerage may demand an immediate deposit of funds from an investor if the value of their account drops below a specified level due to market behavior. There are multiple types of brokerage accounts and brokerage firms, giving investors the opportunity to select the model that best suits their financial needs. Brokers that do not charge commissions make money off investor assets in other ways — most often by earning interest on uninvested cash in investor accounts. Most investment accounts hold a small amount of cash, and a broker sweeps that cash into a deposit account that earns interest.

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A typical stockbroker may make a salary and a commission on trades managed and has an average salary of around $74,000. Brokers provide that service and are compensated in various ways, either through commissions, fees, or through being paid by the exchange itself. Investopedia regularly reviews all of the top brokers and maintains a list of the best online brokers and trading platforms to help investors make the decision of what broker is best for them. Full-service brokerages, also known as traditional brokerages, offer a range of products and services including money management, estate planning, tax advice, and financial consultation.

brokerage services definition

This account limits your options to the basics such as purchasing stock. For example, short-selling a stock is not possible within cash accounts. Cash accounts can be either discount or full-service accounts. These brokerages act as broker-dealers and financial advisors.

Brokerage Account Flexibility

It will also lay out all the terms, including fees, minimum account requirements, minimum transaction levels, and any other details needed between the two entities. Stockbrokers are licensed professionals who manage client investments and administer financial advice to clients, and they are required to pass the Series 7, Series 63, and Series 65 exams to attain licensing. Brokers working at financial firms also need to be registered with the Financial Industry Regulatory Authority (FINRA).

brokerage services definition

They also charge different rates depending on the volume of transactions a client does, the number of services a client uses, and so on. Provides to hedge fund ABC constitute prime brokerage services. Using a full-service broker will come down to whether you are willing to pay more for a service that delivers more. Discount brokers will always charge less, but they provide much less in terms of advice and research. Full-service brokers can create an intricate investment portfolio with their expertise, something discount brokers typically can’t provide. When considering a margin loan, you should determine how the use of margin fits your own investment philosophy.

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They can consider a regional firm that falls between full-service brokerage firms and discount brokerage firms on the cost scale. Such companies include Raymond James, Janney Montgomery Scott, and Edward Jones. Robo-advisors are accounts where they, and not the account holder, select the investments using algorithms and without human participation. Moreover, those investments are usually restricted to mutual funds or ETFs. The cost can be around 0.25% of assets under management (AUM) per year. Required minimum amounts to open an account can range from $0 to $500 to $5,000 and up.


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