What is a Broker?
A broker is a person or a company that acts as an intermediary between buyers and sellers. Brokers exist not just in the financial markets, but in the real estate market, the commodities market, the art market -- even the boat market.
How Does a Broker Work?
Brokers are often paid a commission, which is a percentage of the customer's purchase or sale price, though some receive a flat fee per transaction or a mix of the two.
There are many types of brokers in the financial world. For example, a commodities broker specializes in trading commodities, a floor broker handles orders on the floor of a stock or commodities exchange and a full-service broker offers brokerage services and sells other financial products such as insurance, tax planning or research conducted by other members of the brokerage firm. A discount broker essentially executes trades on behalf of customers and does little else. Brokers are not the same as research analysts, who analyze and make recommendations about certain stocks.
In the financial world, brokers must have Series 7 and Series 63 licenses; other licenses are often required for specific types of brokers. For example, some brokers must also obtain a Series 3 license if they want to trade certain financial products such as futures and commodities. To obtain a Series 7 license, the applicant must pass the Series 7 exam (also called the Qualification Examination for General Securities Representative), which primarily covers the seven critical functions performed by registered representatives: seek business for the broker/dealer, evaluate customer needs and objectives, advise clients, manage customer accounts and account records, explain the securities markets and the factors that affect them, execute orders for clients and monitor client portfolios. The National Association of Securities Dealers administers the test.
Why Does a Broker Matter?
Brokers are some of the most important people in any liquidity and efficiency in the .because they bring buyers and sellers together and thus create
However, investors should remember that broker commissions eat into returns, so investors should shop for a broker that provides an appropriate level of service. For instance, the extra cost of a full-service broker may be worth it for people who don't have the knowledge or inclination to stay on top of complicated investing or financial planning. Likewise, new investors or those with complex portfolios might find more comfort in full-service brokers. Investors who hold their investments for a long time are usually less bothered by higher trading commissions because they don't trade that often.