What is a Broker? Meaning & Types of Brokers

A broker is an individual, firm, or a company that acts as an intermediary and conducts financial transactions on behalf of another party.

A broker usually charges a fee or commission for the services it offers you. In normal routine, you might have come across one or the other form of broker for sure. So, let’s gather more information on the numerous types of brokers, their functions and importance.

Brokers are an important element in the sale and purchase of financial instruments. They have the tools necessary to trade and are now a worldwide phenomenon. Such third-party interference is voluntarily hired by a buyer or seller to make convenient transactions. The combined AUM (Assets under Management) by some conglomerate brokers such as Vanguard, Charles Shwab, Fidelity, Ally invest, etc. was recorded to be approximately $18.4 Trillion as of the ending of 2019.

What is a Broker? Who is a Broker?

A broker is, typically, a middleman involved in a transaction between an individual and a product or service. They are certified to provide that particular product or service to a client to cater to their needs. They make sure the client gets the best value by guiding them in the whole process. In exchange for their services, a fee or commission is charged depending on the type of Broker they are.

You must have heard of brokers in the stock exchanges. However, the terminology isn’t limited to that. Brokers exist in the financial market, real estate, commodities, and even the art and antique markets. They cater to both individual and orgaisation-based clients and usually are part of brokerage firms. They, sometimes also exist independently with a license to exercise transactions in the market.

Did you know the concept of ‘Broker’ first initiated in the 2nd Century BC in the Roman empire, during the time of Julias Ceaser?

Anyways, the main duty of a broker is solely client-assistance. He helps you buy and sell securities ranging from Equity, Debt, to currency and even insurance policies, and, acts as your personal consultant during the whole process. The assistance doesn’t end here. A typical broker also takes care of the after-sale services and keeps in touch with you. They often offer advisory and research services to help you make more informed decisions for future transactions. If you feel your broker is just charging for the services and not providing you with insights, it might be time to switch!

To become a broker you have to have a blend of soft skills and hard skills. The latter is learnt through training, education and license certifications. Some of the examples are:

1. Using online platforms for sales and customer management.
2. How to draft documents, contracts, record transactions and deliver the same to the parties.

Soft skills on the other hand include:

1. Effective communication.
2. People skills.
3. Efficiency to search for new potential customers etc.

Read on to know the different types of brokers and the tasks they perform for you:

Different Types of Brokers:

Primarily, brokers can be categorized into four main categories:

1. Stock Broker:

Let’s start with the basics. StockBrokers are licensed intermediaries affiliated by particular stock exchanges in the world who perform trading on the behalf of the investors. If you invest in the capital market in any form, you must’ve used a stockbroking firm to undergo the transaction. Within Stock Brokers there are two types:

A) Full-service Brokers:

They serve an all-in-one deal when it comes to trading in the securities market. In addition to providing a platform to trade, they also act as a personal financial advisor and consultant. From buying and selling securities like Mutual Funds, IPOs, ETFs, Currencies, etc to portfolio management and tax-saving services, A full-time broker covers it all over you.

They are usually wealth management companies or banking bodies with a subsidiary branch of Broking services attached to them. 

For a detailed study, you may have a look at Types of Stock Brokers

B) Discount Brokers:

Discount brokers are a less comprehensive broking body, in comparison to full-service brokers. Their main focus is to provide a platform for you to trade securities in the stock exchange and charge a commission or brokerage for it. The advisory and consulting element is not included in a Discount broker’s services. However, they often provide free researched data and other educational material to their client.

Discount brokers are suitable for someone just starting out with Stock Market and don’t want to pay high commission to trade or prefers to do their own research regarding securities.

You may like to go through Best Discount Brokers in India

2. Forex Brokers

The word Forex is a portmanteau of Foreign and exchange that facilitates the exchange of foreign currency. Forex brokers provide you with a platform to buy and sell foreign currency in the capital markets. Transactions in a Forex market are done are in a duet manner ie a pair of two different currencies are either bought or sold at the same time.

Most Forex brokers cater to retail clients. However, when they are linked with a banking parent body, they also serve institutional clients. Common currencies traded with Forex Brokers range from USD/EUR to USD/JPY and every other in between.

3. Mortgage Brokers

A mortgage broker is a person who assists you when you’re trying to procure a home loan. He does the research on different interest rates offered by different banks in order to land you with the best deal. A mortgage broker, however, should not be confused with mortgage bankers who provides his own funds for your mortgage purposes.

He solely acts as an intermediary between a mortgage lender and borrower by helping them meet to gain mutual benefits. A mortgage broker’s aim to save your time and money during the process of obtaining a loan.

Also read Mortgage Brokers vs. Banks: Which one to choose?

4. Real Estate Brokers

The job of a real-estate broker begins after the mortgage broker’ ends(in some cases). After you have procured the loan and have access to funds for buying a property, Real estate brokers work towards finding the perfect one for you.  They will look for multiple houses, keeping in mind your requirements, preference, and budget.

apart from finding the property, they also assist in legal contracts, and transportation at times. There are three interlinked and often confused between terms related to Real estate brokers, I.e Real estate agents, and Realtors. Well, to explain it in a nutshell, real estate brokers hire real estate agents to assist clients in the property buying process and realtors are licensed members of the National Association of realtors who are a higher professional in the industry and has to function according to code of ethics.

5. Insurance Brokers

As the name suggests, An insurance broker is someone who assists you while choosing the best insurance policy. These are certified individuals with access to hundreds of policies and their extensive research. they advise you on the best value policy for your requirements.

An insurance broker can also prepare customized insurance and risk mitigation policies in accordance with your goals and risk appetite.

You may also like to review Foreign Stock Brokers in India

Types of Brokers: The Bottom Line

Different types of brokers exist as a third party to assist the client In various financial transactions and products. The broking world, however, is changing. In this digital era, start-ups are coming up to remove intermediary interference. today, you can directly buy a stock, trade currencies on online portals, and find applications that allow you to compare different insurance policies to choose the best one.

However, in such practices you are in-charge of the trade and also the only one accountable. It is still to determine if this change will completely wave off the traditional broker system or work hand in hand.

If you are a Canadian investor and wish to start stock trading, do explore the List of Best Online Stock Brokers in Canada.

What do you think? would you rather directly trade or involve a third party? Do let us know your views below.