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Brokerage

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Brokerage

A brokerage firm, or simply brokerage, is a financial institution that facilitates the buying and selling of financial securities between a buyer and a seller. Brokerage firms serve a clientele of investors who trade public stocks and other securities, usually through the firm's agent stockbrokers.[1] A traditional, or "full service", brokerage firm usually undertakes more than simply carrying out a stock or bond trade. The staff of this type of brokerage firm is entrusted with the responsibility of researching the markets to provide appropriate recommendations and in so doing they direct the actions of pension fund managers and portfolio managers alike. These firms also offer margin loans for certain approved clients to purchase investments on credit, subject to agreed terms and conditions. Traditional brokerage firms have also become a source of up-to-date stock prices and quotes.

Discount brokers

Main article: Discount brokerage

A discount broker or an online broker is a firm that charges a relatively small commission by having its clients perform trades via automated, computerized trading systems rather than by having an actual stockbroker assist with the trade. Most traditional brokerage firms offer discount options and compete heavily for client volume due to a shift towards this method of trading.[2]

Other ways to lower costs for these brokers is by executing orders only a few times a day by aggregating orders from a large number of small investors into one or more block trades which are made at certain specific times during the day. They help lower costs in two ways:

  • By matching buy and sell orders within the firm's order book, the overall quantity of stock to be traded can be reduced, thus reducing commissions payable to others by the brokerage firm.
  • The broker can split the bid-ask spread with the investor when matching buy and sell orders - a win-win situation in most cases

Since investor money is pooled before stocks are bought or sold, it enables investors to contribute small amounts of cash with which fractional shares of specific stocks can be purchased. This is usually not possible with a regular stockbroker.

See also

References

External links

  • SmartMoney 2012 Broker Survey
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