How many types of brokers are there?

A broker is a person who facilitates either buying or selling of an asset. The asset can be either tangible objects which have innate value like land, cars, houses, and many other objects that have innate value. The object can also be certificates of contract that do not have innate value but have value because of the economic transactions they represent. Such an object of the trade includes options that are valuable only because they hedge the investor against losses, but the paper, which represents the value, does not have innate value. Other items of trade are those that are intangible such as stocks, but are traded virtually through the stock exchange market. Brokers are important in the capital market because they connect buyers and sellers of physical assets while they are important in the securities markets because they connect buyers and sellers of financial instruments of securities. Financial instruments of securities are financial tools that transfer financial resources from lenders or savers to borrowers or investors and also transfer risk from those that are unable to bear it to those that are well equipped to bear it. Financial instruments that transfer value include bank loans, bonds, home mortgages, stocks, and assets backed securities. Financial instruments that transfer risk from those unable to bear it to those who are able to bear it include insurance contracts, futures contracts, and options. The brokers facilitate the transfer of physical assets and financial instruments of securities between buyers and sellers in the capital market and the financial market at a commission or at an advisory fee. The difference between advisory fees is that the commission is usually charged after each and every transaction, be it buying or selling, while an advisory fee is normally charged as a tax on the account balances annually. The broker and the investor usually agree on which one to charge based on their terms of trade. Most people use the terms dealer, broker, and a broker-dealer interchangeably. However, these terms do not represent the same individuals because they perform different functions in the financial market and capital markets. A broker finds a buyer or seller a counterparty to exchange with while a dealer acts as a counterparty to link the buyer and the seller. A broker-dealer, on the other hand, can find a buyer or seller a counterparty and can also act as the counterparty to link the two. Even though the buyers or sellers perform the function of buying and selling, they operate differently since they deal with different types of physical capital and financial instruments of securities. Therefore, there are different types of brokers. There are four main types of brokers: stockbroker, full-service broker, forex broker, and discount broker. I will give an outline of their differentiation below.

  • Stock Broker: A stockbroker is also known as an investment broker. As the name suggests, the stockbroker is one who is involved in buying and selling of shares or stocks on behalf of the buyers or sellers. They act as the intermediary between the buyer and sellers of the stocks. The financial markets are where the buying and selling of stocks take place. Access to financial markets was hard previously before the advancement of technology, and therefore the brokers had a significant role in helping the investors to access financial markets at a fee, of course. Today, the financial markets are easily accessible since they can be accessed from anywhere on the globe through any device that has an internet connection. Therefore, the significance of the work of brokers in the stock markets has significantly reduced. However, they are still important because they are specialized in trading of shares and can offer great financial advice to investors about the current market situation and what shares are expected to either rise or fall in value based on the risks associated with them. Another point to note is that globalization and technology have made access to the shares of the financial markets off different markets easily. Therefore, the investors who want to go international heavily need brokers from the different financial markets they want to invest in because these brokers have specialized in studying those shares and they have information may not be apparent but is inherent and unique to the financial market in question
  • Forex brokers: A forex broker is also known as a retail forex broker. Forex simply means foreign exchange. Foreign exchange is the process of exchanging one currency for another. A trader of forex usually trades a pair of currencies in that they buy one currency while selling another one at the same time. The traders usually use speculative trading in that they buy a currency that they speculate will increase in value and sell the ones that they speculate will reduce in value or be constant in value. Unlike the stock exchange market, the foreign exchange market does not have a central controlling body. There are thus no centralized exchanges like the stock market, but the exchanges are decentralized and involve two parties in an over-the-counter market [OTC]. The institutional foreign market is run by a global network of banks and other organizations. A foreign exchange broker buys and sells currencies on behalf of an investor. Therefore, the foreign exchange broker works as an intermediary between the investor and the network of banks that run the institutional foreign market. The foreign exchange broker offers the investor a price from the banks of which they have a connection to since they have lines of credit and access to foreign exchange liquidity or forex liquidity. Forex liquidity is the ability of a pair of currencies to be bought and sold without creating a major impact on their exchange rates. In order for a currency pair to be regarded as having a high level of liquidity, it has to have the ability to be easily bought or sold, and there must be a high level of trading activity for that pair. A line of credit is a credit facility that is offered by financial institutions, especially banks that enables the holder to borrow money easily without the long process involved in credit approval as long as the holder keeps the line open. The forex broker thus evaluates the prices offered by the multiple banks which they have connections to and offers the investor the best price that is available. The advantage of having a stockbroker is that the investor will have a 24-7 access to the market since the forex brokers have connections, and also the investor will be able to speculate on the currency pairs all around the world due to the broker’s knowledge about the loops of the interbank system. Another benefit is that the investor will have a general lower investment cost since the foreign exchange broker minimizes costs in order for them to remain competitive in the market. However, this does not mean that there is no cost at all involved. The foreign exchange broker, like other brokers, charges a commission for their services. However, compared to the benefit of getting a lot of information on the forex prices of the different banks in the banking system, I do not see the service commission as a cost.
  • Full-service broker: The full-service brokers are also called advisory brokers. A full-service broker is also called a financial advisor. As the name suggests, the work of a full-service broker is to advise on finance. They do research on the situation of the market and offer investment advice. The full-service broker also analyses the financial situation of the potential investor by analyzing his or her present assets and liabilities and also their future income and expenses. Their future income sources include wages and salaries, inheritance, employee achievement awards, child support, health savings account, sick pay benefits, and deferred payments. The client’s future expenses include mortgage payments, credit card debt, parental care, and college tuition. After analyzing the above things, the full-service broker then analyses the investment objectives or goals of the investor and bits of advice whether or not the investment objectives are achievable based on the client’s present and estimated future financial situations. After doing this, the client and the full-service broker then sit down and design the investment plan based on the current situation of the investor and the investment destination that the client wants to reach. Before the signing of the contract, the client and the full-service broker agree on the terms of management of the present and future portfolio mix. They agree whether the full-service broker will manage the account on a discretionary basis or a non-discretionary basis. A discretionary basis means that the full-service broker performs the buying and selling transactions in the account of the investor without initial informing of the investor. The work of the full-service broker here is simply to give the investor a summary of all the transactions made on the account. Non-discretionary basis means that the full-service broker informs the investor on all transactions, and the investor has to either agree or disagree on the transaction that the full-service broker has advised. The full-service broker also offers services such as hedging advice that will help the investor avoid risk or insure against risk, tax preparation which hep the investor evade tax legally, and retirement planning that will help the investors secure the future when they are old. The difference between full-service brokers and other normal brokers is that the full-service brokers offer a wide range of services as compared to other brokers. However, nothing comes for free. Since the full-service brokers offer many services, the cost of their service is normally higher than that of other normal brokers. The full-service brokers either charge investors a commission or an advisory fee. I can refer to a commission as a transaction tax. This is because the commission is charged every time a transaction takes place on the brokerage account of the investor, be it buying or selling of securities in the account. The commission fee is charged regardless of whether input by a financial advisor is there or not. An advisory fee, on the other hand, is charged on the balances of the account, usually annually. The advisory fee usually a percentage ranging from 0.5% to 1.5%, which I can say is a good charge. The issue of the fee is a crucial one; therefore, I would advise the investor and the full-service to agree on the terms of fee payment before signing of the contract. Also, they should make the brokerage contract flexible enough to enable the investor to switch between advisory fee and commission depending on the preference during the period of the contract.
  • Discount Broker: Discount brokers are also called Execution-only brokers. The discount broker is one who does not offer advisory services about investment planning, tax planning, or retirement planning. Their work is confined to only purchasing and selling of financial instruments of securities. As the name suggests, they offer services at a discount in the fee they charge for a service is lower as compared to that charged by the full-service broker. They charge a lower commission fee because they do not offer a wide variety of services like the full-service broker. Since the discount broker does not offer any advisory services, the management of the portfolio and investment decisions are left entirely in the hands of the investor. Also, the discount broker offers services at a quantity discount. In that the more buying or selling they do for an investor, the lower the per-unit cost of the transaction. The more you have to trade, the less they will have to charge you. The low commission fee and the quantity discount gives the discount broker a competitive advantage as compared to the full-service broker. However, these advantages come at a cost. The portfolio of the investor is at risk of suffering a loss if the investor does not have knowledge on how to attain a portfolio mix that will yield maximum returns, how to hedge the portfolio against market fluctuations, how to predict future cash flows and how to appraise a project to determine whether it is viable for investment or not. I would advise an investor who does not have financial education background not to seek the discount brokers if they are seeking short term trading. I would advise the investors who are seeking long term trading to seek the discount brokers because it is only by managing their portfolio on their own will they learn the tricks of the game. It is only by doing their independent market analysis that they will have skills needed for long term trading.

The brokers can also be grouped by the way they execute orders. Using this framework, they can be grouped into dealing desk brokers [DD] and no-dealing desk brokers [NDD].

  • Dealing Desk Brokers: Dealing Desk trade brokers are also called market makers. They make the market for the investor. During transactions, they take the side opposite to that of the nature of the transaction. If the investor is buying, they sell to the investor, and if the investor is selling, they buy from the investor. When an investor wants to sell a security, the broker will first search for matching orders from the list of buyers he or she has. If the broker finds a matching buyer, good. If they do not, they pass the trade to their liquidity provider. A liquidity provider is a large financial institution or any other organization that readily buys or sells a financial asset. By doing this, the Dealing Desk Broker minimizes risk. In this case, the dealing desk broker will sell-buy the security from the investor and sell it to the person who wants to buy it at a higher price. In the case where the investor wants to buy a financial instrument or security, the deal desk broker will buy the security at a lower price and then sell to the investor at a higher price. Thus, the dealing desk broker always profits from the transaction by earning a spread from the difference between the asking price and the selling price. Most of the people see this as a conflict of the investor’s interest. However, I do not see that way. What is the harm if the dealing desk broker gets little change from the transaction? Also, I consider the possibility of spread as a motivating factor that will motivate the dealing desk broker to find a counterparty for the buyer or the seller.
  • No Dealing Desk Brokers: As the name suggests, they are the direct opposite of dealing desk brokers. They do not provide a market to the securities of their clients. They do not take the opposite side of the transaction during trading. Their mode of operation is simply finding a counter-party for their buyers or sellers. They link the buyers and sellers of securities and only charge a service commission. No dealing desk brokers can be classified into two: Electronic Communications Network brokers [ECN] and Straight Through Processing brokers [STP].

ü Electronic Communications Network broker: These are brokers link the orders of the opposite counter-parties by seeing the list of security orders they have and match them with their suitable counterparty. The broker charges a small commission fee for their services,

ü Straight Through Processing broker: These brokers usually connect their client orders to their liquidity providers. They usually have many liquidity providers and pick the one who is offering the juiciest deal. This broker usually profits from a margin only that their spread is usually way lower as compared to that of the Dealing Desk Broker.

Other types of brokers include:

  • Business brokers: They are also called business transfer agents or intermediaries. They assist the buyers and sellers of privately held businesses in buying or selling. They are involved in the evaluation of the business worth, markets it and sells it.
  • Shipping Agency: These can also be classified as brokers since they are involved in the handling of shipping cargo on behalf of individuals. They are also referred to as port agents, liner agents, or own agencies.
  • Auto Transport Broker: This is a type of cargo broker that specializes in the shipping and transporting of brokers on behalf of the buyer

Commodity Broker: A commodity broker is a type of 

  • a company or an individual who is involved in the buying and selling of commodity contracts such as futures, options, swaps and other financial derivatives on behalf of their clients for a small commission
  • Customs Broker: As the name suggests, these are individuals or companies that take care of issues to deal with customs on behalf of people for a small commission.
  • Information broker: An information Broker is also called a data broker. Their work involves collecting information about individuals or organizations from the public, and private sources profile them and sell the profile. The information broker charges a commission in instances where the information needed is about a specific individual or organization and thus needs customization.
  • Insurance broker: An insurance broker is one who sells or negotiates insurance contracts for compensation
  • Intellectual property broker. Intellectual properties include things such as patents, trademarks, or inventions. The intellectual property broker, therefore, is a broker who mediates between buying and selling of these intellectual properties.
  • Joint Venture Brokers: These are people who connect businessmen who are seeking to venture into an investment project for the purpose of making a profit.
  • Pawnbroker: A pawnbroker is a person who offers loans to people who use their personal property as collateral. They usually offer low-value loans; therefore, the items used as collateral are usually of a lower value as compared to those used for collateral in bank loans.
  • List broker: A list broker is involved in marketing. People who want to do direct marketing through avenues such as direct mail, email, or telemarketing.
  • Sponsorship Broker: A sponsorship broker is one who acquires sponsorship funds for properties on behalf of those seeking to fund the property or properties.