In the world of finance and investment, there are several terms that can be difficult for the inexperienced to understand. One such term is broker, which has become increasingly common due to the rise of online investment platforms. In this article, we will take the mystery out of what a broker is and what its function is. In addition, we will look at the differences between broker, trader and dealer and explore the different types of brokers to understand how to choose the right one.
A broker is a person or company that acts as an intermediary between a buyer and a seller in a financial transaction in exchange for a commission. In other words, a broker is the agent who connects those who wish to buy and sell financial assets, such as stocks, bonds, currencies, among others.
Brokers facilitate the investment process by providing their clients with access to various financial instruments and markets. In addition, some online investment platforms offer additional services, such as market analysis, advice and portfolio management.
Until a few years ago, a private investor could only access the financial markets through large banks or certain financial institutions, but with the advance of new technologies and the Internet, online brokers have emerged and revolutionised the sector, popularising and democratising investment by allowing anyone to trade from anywhere simply with a computer, tablet or smartphone and an Internet connection. All of this with fees that are considerably lower than those charged by traditional banks.
Difference between Broker and Trader
People often confuse brokers with traders, but these two figures have different roles and responsibilities in the financial world.
A trader is a person or entity that buys and sells financial assets for its own account or on behalf of others. While a broker acts as an intermediary, a trader is the one who carries out the buying and selling operations with the aim of making a profit.
In other words, the broker is a trader’s point of contact with the financial markets, providing him with the platform and tools necessary to carry out his trades.
There are different types of traders depending on their trading strategies and the period in which they usually keep their trades open, from scalpers (who trade in very short time frames of minutes or even seconds), daytraders (who open and close their trades within the same day), swingtraders (who keep their trades open for days or even weeks) to traders who trade long term for months or even years.
Difference between Broker and Dealer
Another figure similar to the broker is the dealer or market maker, who is also in charge of bringing buyers and sellers together in certain financial markets. The main difference between a broker and a dealer is that the latter not only acts as an intermediary, but can also buy and sell for his own account.
In general, dealers maintain an inventory of financial assets and offer these assets for purchase or sale to clients, making a profit from the difference between the purchase price and the sale price, also called spread.
Types of Broker
There are different types of brokers that can be classified according to their characteristics and services. Some examples are:
1. Stock brokers: Specialised in buying and selling shares in listed companies.
2. Forex Brokers: Focused on the foreign exchange market, allowing their clients to buy and sell currencies.
3. CFD brokers: They offer the possibility of investing in contracts for difference, which allow speculation on the change in the value of an underlying asset.
4. Binary options brokers: They allow trading in binary options, a type of high-risk financial derivative.
In addition, brokers can also be classified as full-service brokers, which offer a wide range of additional services, such as advice, market analysis and portfolio management; and discount brokers, which offer basic investment services in exchange for lower commissions.
If we look at the way orders are executed, we can say that there are 2 main types of brokers:
1- Dealing Desk brokers
These are brokers that have a so-called “money desk”. This means that their clients’ trades do not actually go out to the market but are executed on the broker’s own dealing desk. This type of broker creates an internal market for its clients and looks for the counterparty of each trade within the trades of its other clients and if they do not find it, they themselves act as the counterparty of the trade, ensuring liquidity and permanent availability, even if that trade means a profit or a loss for them.
2- Non-Dealing Desk Brokers
NDD (Non Dealing Desk) brokers do not have a “money desk” and are only responsible for sending trades to the market. They are connected to liquidity providers (usually large banks and financial institutions such as Deutsche Bank, Bank of America, Barclays, Goldman Sachs, JP Morgan, CitiBank, HSBC, etc.) who act as counterparties to each trade.
How to choose the right broker?
Choosing the right broker is crucial for a successful investment experience. Therefore, it is important to take into account aspects such as:
1. Regulation and security: Make sure that the broker is regulated by competent bodies, such as the ASIC in Australia, the FCA in the UK or the SEC in the US.
2. Commissions and costs: Compare the commissions and fees of different brokers to find the one that best suits your budget and investment style.
3. Variety of instruments and markets: Choose a broker that allows you to access a wide range of financial assets and international markets.
4. Investment platform: Opt for a broker that has an easy-to-use online investment platform, with tools and resources that facilitate the investment process.
5. Customer service: Check that the broker has good customer service, both in your language and at the times that suit you best.
There is also a very useful mechanism to learn how to invest and test the services of an online broker without having to put your money at risk:
– Demo accounts: These are accounts that are very similar to a real trading account but come pre-loaded with a certain virtual balance. The result of your trades will increase or decrease your virtual balance and although you will not be able to profit beyond learning, they allow you to learn how to trade or test without having to deposit your own funds before you start trading on a live account. Take a look at this table:
In short, a broker is an essential figure for all those who wish to invest in the financial market. Understanding their role and making the right choice is a fundamental step before starting on the road to investment success.
I hope this information has been useful for you to know what is a broker, what is its function, what is the difference between broker and trader or broker vs dealer,… You can send your doubts from the comments section below and also share the article freely on social networks. Thank you very much.