The stock market brings together traders interested in buying and selling shares. Brokers play the key (and profitable) role of matching the demand side traders with the supply side traders. This guide discusses the role of the stockbrokers and explains why they are significant for the stock market to function.
What are stockbrokers?
Stockbrokers provide a range of services to traders within the stock market, but primarily they execute market orders. In addition, brokers facilitate access to the market for investors. They provide trading accounts through trading software and also offer over-the-counter trades.
Additionally, brokers take the role of financial intermediaries. They facilitate the transfer of funds from clients’ bank accounts to their trading accounts and vice versa. Other roles that stockbrokers play include providing options that investors can trade and providing market research for use by their clients. Today, stockbroker as a title refers to individuals working for brokerage firms that execute market orders. The term stockbroker can also refer to the brokerage firms themselves.
Types of stockbrokers
A stockbroker’s role in the stock market is broad, and the scope of what they do can cover a broad range of possibilities. Below we categorise brokers into three categories:
As the name suggests, this kind of broker offers the widest range of services to clients. Notably, the brokers offer all manner of services that an investor would expect from them, hence the name full-service brokers. One aspect of full-service brokers that distinguishes them from others is that clients get personalised attention. In addition, the brokers have dedicated departments that provide market research and investment banking services to the clients. This includes in-house analyst recommendations tailored for each client. Oftentimes, the brokers are large companies that have physical offices and an official address. As you might expect, these brokers charge a healthy commission for this service.
These brokers offer huge discounts on trades by charging low commissions. They do this by having lower overheads through offering a narrower range of services compared to full-service brokers. For instance, they provide a self-service trading platform instead of personalised advice services. Further, discount brokers offer research tools, so that traders can do their own research and make their own trading decisions. These brokers still have physical offices and handle their business with the same professionalism as full-service brokers.
The proliferation of the Internet has given birth to a new legion of brokers. Unlike full-service and discount brokers, online brokers do not have a physical relationship with their clients. Instead, they use direct-access platforms to conduct business with their clients. The biggest advantage of online brokers is their speed of service delivery. With their access to multiple exchanges, electronic communication networks, and dark pools, online brokers offer traders the opportunity to jump in and out of positions fast.
The commission charge for every trade with online stockbrokers is very low. Online brokers offer heavy-duty trading platforms that enable point-and-click trade executions. Due to the wide variety of benefits, these brokers are the most preferred by active traders today.