How Do Brokers Help You Trade?

A stockbroker or a brokerage firm is a common term that you will hear when investing in the stock market. They are important intermediaries in the share market, without which you cannot trade securities. As an investor or trader, you require a stockbroker who executes trades on your behalf.

The role of brokers or the implication of choosing one, however, extends well beyond just executing the trades. It also affects your returns, as brokers charge a brokerage fee, if high, lowers the returns. In this beginner trading guide, we will understand what is a stockbroker and what does a broker do.

What is a Stockbroker?

A stockbroker is a professional or a company that assists you in buying and selling securities or financial products on a stock exchange. Exchanges do not transact with individual traders and, therefore, brokers intervene to facilitate trading.

Investors do not have access to stock exchanges directly. Exchanges deal with individual traders only with licensed and approved participants. Brokers are those intermediaries that connect the traders and financial markets.

When you choose to make a trade, your broker accepts that order and forwards it to the exchange, and ensures that it is carried out in accordance with the market rules. Your order would never get to the market without a broker.

What do Brokers Do in the Stock Market?

Brokers open the door to the trading platforms, trade on your behalf, and take care of the technical and operational aspects of trading. They ensure that your orders are made properly and confirmed once done, and they are reflected in your account. Simply put, brokers transform your trading decisions into market actions.

What is the Fundamental Role of Brokers in Trading?

Whereas traders are concerned with making trading decisions, brokers are concerned with ensuring that the decisions are actually implemented in the market. Here is the key role of brokers:

1. Access to Financial Markets

Stock exchanges only communicate with authorized and licensed members. This is the reason why individual traders are not able to access markets directly. Brokers address this issue by providing the infrastructure to trade. They also provide you access to different investment instruments, such as stocks, ETFs, bonds, and other financial products. They provide:

Trading platforms to access markets and place buy and sell orders.
Market data and price feeds.
Order placement and tracking solutions.
Secure systems that are directly linked to exchanges.

2. Executing Trades

When you place a buy or sell order, your trade does not go to the stock exchange. It first goes to your broker. Hereafter, the trade follows the following flow:

You submit a buy or sell request on your broker's platform.
The broker forwards such an order to the concerned stock exchange.
The exchange pairs your order with an appropriate counter-order.
After the trade has been executed, the broker confirms the trade and updates your account.

Brokers ensure that your order is properly directed in accordance with market rules and that it is executed at the best available price according to your instructions. Your trade would never get into the market without a broker.

3. Offer Tools and Resources

The majority of brokers offer research reports, market data, charts, and analysis tools. These assist traders in making informed decisions and knowing the market trends. Here is everything that a broker offers you to make informed trading and investing decisions:

Market data and real-time stock prices
Analyst reports, earnings forecasts, and market commentary
Technical analysis tools, like price charts, moving averages, and trend indicators
Price alerts, news updates, or portfolio notifications

Different Types of Brokers in the Stock Market

Here are the different types of stock brokers that exist in the stock market, and you can choose from depending on your investing needs:

1. Full-Service Brokers

Full-service brokers offer a broad spectrum of services, such as trade execution, market research, portfolio management, and financial advice. These brokers, however, levy higher brokerage charges, but for a good reason, as they often offer dedicated advisors who understand your goals, risk tolerance, and create personalized investment strategies. Key features of full-service brokers are:

Individual investment counsel and advice.
Availability of in-depth research reports and analysis.
Portfolio planning, retirement planning, and tax strategies.
Brokerage charges are higher than online brokers.

These brokers are ideal for investors seeking a more personalized approach and professional advice, particularly novices who appreciate advice and market knowledge.

2. Discount Brokers

Discount brokers are low-cost firms that execute buy and sell orders for investors and focus on low fees rather than personalized advice. Discount brokers are more focused on making trades at reduced charges and do not provide comprehensive advisory services. Key features of discount brokers are:

Lower brokerage fees and commissions.
Little or no individualized investment advice.
Simple research instruments and trading systems.

They offer essential trading services but lack in-depth research, portfolio management, and dedicated support. They offer essential trading services (stocks, ETFs, etc.) but lack the in-depth research, portfolio management, and dedicated support.

3. Online Brokers

Online brokers are digital platforms that allow investors and traders to buy and sell different financial instruments like stocks, mutual funds, and bonds using the online platform. You receive direct control over your traders at lower costs than traditional brokers. Key features of online brokers are:

E-trading and m-trading.
Live market information and research applications.
Reduced charges than the traditional full-service brokers.
Learning material for beginner investors.

It is ideal for technologically advanced traders seeking to have control over their trades and choose a self-directed style.

4. Traditional Brokers

Traditional brokers are professionals or brokerage firms that provide extensive financial services to investors and traders. Unlike online brokers, these brokers have physical offices and usually offer personalized advisory services. Key features of traditional brokers are as follows:

One-on-one client support
Complex trades and market research support.
Increased charges because of individual services.

These are ideal for investors who appreciate human advice and do not want to use exclusively online platforms.

Difference Between Online Brokers vs Traditional Brokers

Both brokers help you access the stock markets and make trades, but offer a different level of comfort and the type of support you want. For choosing the right broker, know these differences between online brokers vs traditional brokers:

How to Choose the Right Broker

Here are the steps you can follow for choosing the right broker that best serves your investment needs:

Establish Your Trading Objectives: Brokers are different and appeal to different trading styles. For choosing the right broker, you must first establish your trading objectives.
Know the types of brokers: Different brokers provide different services and benefits. Choose a broker that can better cater to your investment objectives.
Compare Brokerage Charges and Fees: Brokerage charges impact your returns directly. Higher brokerage charges reduce returns and vice versa. Besides brokerage, you must also check:
- Per-trade fees
- Percentage-based commissions
- Platform or service fees
Assess Trading Platforms and Tools: Trading becomes easier and less prone to errors when it is on a good platform. Features to look for:
- Live market information and quotes.
- User-friendly interface
- Charts, research tools, and alerts.
- Mobile app availability
Evaluate Customer Support: Choose a broker that offers different modes of customer assistance for easy resolution.
Test Market Access and Investment Opportunities: Test the market access to ensure that you have access to everything you want to trade through your broker. You must have access to local and foreign stocks, ETFs, mutual funds, bonds, and commodities.
Account Minimums and Requirements: There are brokers who have minimum deposits or account balances. Check whether the minimums are within your budget.
Test on a Small Account: Begin with a small investment to test the trade execution, platform performance, and customer support before investing more.

The first thing that you must decide when selecting a broker is whether to use an online broker or a traditional broker. They both have the same basic purpose, which is to assist you in trading, but they do so in extremely different ways. The next thing you must do is to choose the right broker, as it will have a direct impact on your trading style, objectives, and experience.

What are Brokerage Charges?

Brokerage charges are the fees that the broker charges you as a commission for executing transactions. They are deducted from your investment amount or trading proceeds. Brokers can charge as follows:

Per-Trade Fees: A fee charged on each buy or sell order. This is easy and foreseeable, particularly to occasional traders.
Percentage-based Commissions: A commission that is based on a percentage of the value of the trade.
Platform or Service-Related Fees: There are brokers who impose an additional fee to access more advanced tools, research reports, or premium trading platforms.

Conclusion

Brokers will be with you at every stage of the trading experience, whether it is buying or selling stocks or monitoring your portfolio. They also offer the instruments and platforms to make informed trading decisions. Choosing the right broker allows you to execute trades smoothly and improve your overall investing experience.

You must, however, consider brokerage charges and the other fees before choosing the broker. You must also take into consideration the reputation of the broker. A right broker will ensure that you trade with confidence.