Glossary
Broker
A firm or person that executes buy and sell orders for clients and holds their accounts, in exchange for fees or other revenue.
A broker is an intermediary that places trades on behalf of customers and, in most cases, holds their cash and securities in an account. Individual investors cannot send orders straight to an exchange; they go through a brokerage firm, which routes the order to an exchange, a market maker or another venue for execution. The word also describes an individual registered representative who works for such a firm.
How brokers work and earn money
When you click "buy" in a brokerage app, the firm checks your buying power, then routes the order under its duty of best execution, which requires reasonable efforts to get the most favorable terms available. Your shares are usually held in "street name," meaning the broker is the registered holder on your behalf.
Since late 2019, most large US online brokers have charged zero commission on online stock and ETF trades. Their revenue now comes from other sources:
- interest earned on customers' uninvested cash, often far above what customers are paid on it;
- margin loan interest;
- payment for order flow from market makers that execute customer orders;
- options contract fees, securities lending and advisory fees.
Checking a broker
In the US, a firm that handles customer securities trades must be registered as a broker-dealer with the SEC and be a member of FINRA, and most are SIPC members, which protects customer assets up to $500,000 (including $250,000 cash) if the firm fails and assets are missing. SIPC does not cover market losses. FINRA's free BrokerCheck tool shows a firm's or representative's registration and disciplinary history.