What is a broker?
- A broker is your gateway to the markets, executing your buy and sell orders.
- Brokers earn through commissions, spreads, or payment for order flow, so know how yours gets paid.
- Full-service brokers offer advice and planning at higher cost; discount brokers keep fees low and put you in control.
- Brokers must register with SEC and FINRA, and are held to a best interest standard when recommending investments.
- Watch for churning, where a broker trades your account to generate commissions, and always check your statements.
What is a broker?
A broker is a firm that executes buy and sell orders for you on financial markets. It holds your account, routes orders to exchanges, and settles trades. Without one, you have no practical way to buy a stock or ETF.
You tell the broker what to buy or sell, and it handles order routing, clearing, and record keeping on your behalf. Your instructions must be precise, because the broker executes exactly as you direct, not according to its own view of the market.
How is a broker different from a market maker?
A broker acts for you; a market maker trades against the flow. The broker takes your order and finds the other side, sometimes a market maker. Different jobs, same market.
The market maker quotes prices and stands ready to fill your order on demand. Your broker must register with the SEC and join FINRA before it can take your orders, giving you a regulated counterparty rather than an unvetted middleman.
Your broker must act in your best interest when recommending investments, a duty Regulation Best Interest makes explicit. It does not bet against you like a market maker, so its incentives align with yours on the trades it suggests.
What does it mean when a broker is also a dealer?
A broker buys and sells for you as your agent. A dealer buys and sells for its own account as principal, taking the other side of your trade. Many firms do both, so regulators call them broker-dealers.
When a dealer fills your order from its own inventory, you pay a markup built into the price instead of a commission. Markup is still a cost, just a quieter one. Know which hat your firm wears on each trade.
The dual role is why the same firm can charge differently on different orders. Your best interest duty covers the recommendation, while the markup covers execution. Both matter, and only you can see the whole picture.
An order routed to a dealer who acts as principal can cost more than one matched to a public buyer. That is why asking how the firm handles your order matters more than the headline commission rate.
How do brokers get paid?
Commissions, a fee per trade, used to be universal and are now often zero at retail brokers, though you still pay in other ways. The change reflects intense competition for your business, not a suddenly free service.
Some brokers earn the spread on order flow, getting paid by market makers to route your orders their way rather than to the best price. That is payment for order flow. It is not free, and you should know it exists.
Know where your broker's money comes from, because it shapes whose side it is on in each trade. Others charge subscription fees or margin interest when you borrow, a quieter but still real way to be paid.
Watch for churning, when a broker trades your account too much just to earn commission at your expense. That is a conflict of interest, so review statements regularly to catch it early.
Full-service or discount broker?
Discount brokers execute your trades cheaply and offer self-service platforms, tools, and research so you can handle the work yourself. You make the decisions and take responsibility for them. For most do-it-yourself investors, this is the efficient choice.
Full-service brokers bring a human, a financial advisor who recommends investments and builds plans for you, at a higher price, a percentage of assets. That suits people who want guidance.
Full-service brokers may also offer estate planning, tax advice, and access to IPO shares beyond plain trades. But watch for churning, where they trade your account to generate commissions rather than serve your goals.
Your pick depends on how many decisions you want to make and how much you will pay for guidance. Both get trades done reliably; they differ in the wrapper around service and cost.
How do you choose a broker?
Weigh fees first: commissions, spreads, account minimums, and inactivity charges quietly cut returns. Discount broker fees often run about $4.95 to $20 a trade, so compare firms. Many are negotiable, so read the account agreement before you commit cash.
Verify account protection like SIPC coverage, which guards your securities if the broker fails, up to its limits. Check that the firm is licensed with FINRA and the SEC, and use FINRA's free BrokerCheck tool to spot any disciplinary history before you fund an account.
Ask how your broker gets paid, including any payment for order flow. That tells you whose side it is on. A broker that hides its revenue sources is a red flag; a clear relationship summary is a good sign.