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A stock broker is a company, individual, or entity that is authorized to buy and sell stocks or other financial instruments.
Brokers’ main function includes buying and selling orders on a trader’s behalf. Through innovation and a byproduct of us residing with the technology era, more and more traders are beginning to open brokerage accounts with online brokers.
In the past, many brokers accrued money through charging a commission on every trade but as competition has strengthened and technology has advanced, many brokers nowadays offer commission-free trading.
For brokers that don’t charge commissions, more often than not a broker generates money through accrued earned interest on uninvested cash dispersed throughout investor accounts.
Generally, investment accounts possess a small sum of capital, in which the broker moves into a deposit account that begins earning interest, where the broker later keeps the accrued interest.
In most cases, brokers are required to register with a regulatory or governing entity, such as the Financial Industry Regulatory Authority (FINRA), to provide financial services to traders.
Held to high-standards, brokers seeking regulation must operate within the suitability rule standard of conduct while also enforcing a KYC (know your customer) policy to create a more transparent trading environment.
In trading, brokers are generally categorized into two categories.
Brokers that charge commission and execute a diverse range on a trader’s behalf are known as discount brokers.
With discount brokers, trade recommendations or market insights aren’t given while most brokers operate via salary opposed to commission.
Popular examples of discount brokers include Robinhood, Charles Schwab, and Interactive Brokers.
Brokers that offer market research, investment advice, retirement planning along with an extensive selection of investment products are known as full-service brokers.
The most prominent of these include Morgan Stanley, Cantor Fitzgerald, and Goldman Sachs.