In common sense, the concept of a broker is applicable to intermediaries in insurance, financial, trade, and other activities. The functions of an intermediary can be assigned to an individual or a legal entity.
Fresh traders may have a question - who is a broker and what functions he performs in the financial market. Services provided by brokerage companies allow you to get admission to trading in the stock, foreign exchange and other markets.
A broker can be any organization that provides intermediary, consulting and support services when performing various works, for example, paperwork. Brokers providing services in trading activities provide recommendations related to the execution of transactions. They make analytical reviews of the market situation. Many of them provide training and offer support for transactions for the purchase or sale of assets. The main purpose of registering brokers is to provide an opportunity for representatives of small and medium-sized businesses to simplify cooperation with major companies. In this case, with the help of an intermediary, it is more profitable to pay him a commission than to wait in line among a large number of applicants for cooperation with global companies. In simple words, a broker is a financial intermediary, without which it is almost impossible to trade on an exchange. Let's consider the main questions that novice traders may have in the process of cooperation with broker companies.
Why do you need a broker?
A broker is a market participant licensed to provide brokerage services. He acts as a professional agent between buyers and sellers of stocks, bonds, futures and options contracts, currencies, precious metals, commodities and other assets.
The function of a broker on the stock exchange is performed by a legal entity that provides intermediary services in the process of concluding transactions on the exchange and over-the-counter markets. These can be certified employees of broker companies, as well as individuals with a brokerage license.
It is important to note that brokers are different from dealers. The main differences are that the broker performs transactions on behalf of the trade participant and in his favor, and the dealer concludes transactions on his own behalf, and, accordingly, in his favor.
Moreover, one firm can simultaneously be both a broker and a dealer. In order to prevent conflicts of interest at the legislative level, these areas of activity are licensed separately. The division of activities within the firm is controlled.
Broker classification
Brokerage companies are classified according to their line of business. Brokers are:
- This category represents licensed exchange participants whose functions are to transact in various assets (securities, futures, metals, currencies and other derivative trading instruments called derivatives).
- These are licensed participants in the insurance markets. They mediate insurance deals on behalf of clients.
- This category of brokers is engaged in servicing operations related to the export and import of products and acts in the interests of clients.
- In the interests of clients, they provide services related to the organization of cargo transportation.
- Brokers of this category carry out activities related to the provision of the right to loans and credits.
Consider a category that is of particular interest to traders and investors. These are stock brokers, which are also classified into the following types:
- Brokers in this category provide intermediary services in the process of concluding transactions for the purchase and sale of shares, bonds and ETFs on stock exchanges. The largest of them are NYSE, NASDAQ (New York) and LSE (London).
- Commodity and raw materials. Brokerage companies are intermediaries on commodity exchanges. The most famous of them is the American CME exchange. Basically, futures are traded on it.
- The broker is an intermediary on the exchange on which the options are traded. The most famous of these is the Chicago Board Options Exchange (CBOE).
- Forex brokers. They provide intermediary services in the international foreign exchange market, in which the largest investment companies and banks cooperate only with institutional investors. There are also many intermediaries that aggregate liquidity flows from large market participants and provide access to private traders and investors.
Forex companies not only provide access to the foreign exchange market, but also execute transactions using their own dealing centers. Due to the negative reputation associated with frequent cases of fraud, they are called Forex kitchens. They play against traders, since they are considered the opposite side when making transactions.
The largest Forex companies can operate simultaneously in several markets, providing an opportunity to directly enter many exchanges around the world.
How to choose the right broker?
To understand how to choose a broker, you should be guided by the following criteria:
- Reliability of the intermediary, the ability to promptly execute transactions, preserve the trader's funds from various risks. As for this selection criterion, you need to pay attention to the following nuances:
- availability of a license to carry out brokerage services. Preference should be given to large companies, and it must be registered in the country of which the trader is a resident. You can also choose an international brokerage company licensed in countries with a highly developed legal system (Europe, United States of America, United Kingdom). Brokers registered offshore are considered less reliable. You can check the availability of a brokerage company's license on the regulator's website.
- the broker's deduction of funds to the deposit guarantee fund, from which, in the event of his insolvency, the trader can receive compensation.
- two-factor authentication, reliable information encryption systems and other types of account protection, helping to counter hacker attacks.
- Availability of trading instruments necessary for a trader. According to this criterion, it is worth stopping your choice on brokerage companies that allow you to enter many world markets. Compliance with these conditions enhances the flexibility of the investment strategy.
- The size of the commission. Who are brokers, how to choose them According to the criterion of the size of the commission, it is advisable to stop your choice on the basis of the trading strategy used. If a trader prefers passive trading, important indicators are the lack of payment for the account if he remains inactive for a certain time, as well as the availability of analytical support. For active trading participants, a broker that has a minimum commission, and also provides discounts as the trader's trading volumes grows, is important. Regardless of the choice of a broker, it is important to use fundamental analysis methods for successful and profitable trading. This is due to the fact that they study the factors that create price movement. These include the ratio of supply and demand, cash flows, the mood of the traders. You should also analyze the interaction of financial markets with each other.