When you start investing, you quickly come across an important term: broker. Through a broker, you gain access to the stock exchange where you can buy and sell investment products. But what exactly is a broker, and why do you need one? In this article, we explain everything about brokers and how to choose the right one.
Broker: a definition
An (online) broker is an intermediary or company that holds a license and executes orders for investors. The broker ensures that you gain access to the stock exchange where you can buy and sell financial instruments such as ETFs, stocks, and bonds. Well-known exchanges include the Amsterdam Exchange Index (AEX) or the New York Stock Exchange (NYSE).
Not a BUX investor yet? Create your account
What is the meaning of a broker?
The term ‘broker’ can be described as a ‘stock trader’ or ‘securities broker’. The term is also used as another name for an intermediary who arranges or negotiates an agreement.
What does a broker do?
Brokers play an important role in financial markets by facilitating trade between buyers and sellers of financial products. As a private investor, you do not have direct access to the stock exchange. This is because the exchange only works with professional parties that hold the correct license and must meet strict requirements. Therefore, you open an investment account with a broker, who is your official partner for placing orders on the market.
The main task of the broker is to execute your orders quickly and efficiently. Here is how it works:
- You submit an order via the broker’s app or website.
- The broker processes this order and sends it to the exchange.
- The transaction between you and the market is executed.
Brokers generally act as agents. They execute your orders on the exchange and are not the counterparty themselves. They simply bring buyers and sellers together.
However, some brokers (or their partners) can also act as a dealer or market maker. In that case, they fill your order from their own inventory or temporarily take the other side of the transaction. This happens depending on the product, the market, and the broker’s revenue model.
4 types of brokers
There are different types of brokers, each with their own characteristics. Below we discuss four of them:
- Stock broker: Stock brokers execute orders for buying and selling stocks. They offer you access to exchanges such as the Amsterdam Exchange Index (AEX), the London Stock Exchange (LSE), and even the New York Stock Exchange (NYSE).
- Forex broker: Forex brokers buy and sell on your behalf in different currencies. This is done via currency pairs, such as the euro and dollar, or euro and yen. Forex brokers often focus on active traders who want to profit quickly from price movements.
- Full-service broker: Full-service brokers offer other services alongside transaction services, such as advice, reports, and guidance. This type of broker is suitable for a type of investor who needs extra help making decisions. You often pay extra service fees for this.
- Discount broker: Discount brokers focus on lower costs. They offer lower transaction fees and do not provide advice. You must manage your portfolio yourself.
3 ways to bring buyers and sellers together
Brokers use different ways to bring buyers and sellers together. The three most common methods are the electronic exchange, voice brokerage, and dark pools.
1. Electronic exchange
The electronic exchange is the most common way brokers work. With electronic exchanges, trading is automated via digital platforms that ensure orders are executed quickly and efficiently.
2. Voice brokerage
With voice brokerage, the broker executes the transaction over the telephone. Voice brokers are usually used for larger, more complex transactions, especially by institutional investors. These are large organisations that invest money on behalf of third parties, such as pension funds, insurance companies, and mutual funds.
3. Dark pools
Dark pools are private exchanges where large orders are executed out of the public eye. Institutional investors often use dark pools to avoid influencing the price with large purchases or sales.
Broker fees: how does a broker make money?
Investing via a broker is not free; there are fees you must pay that impact your returns. These can be transaction fees, but also hidden costs that you might not see immediately. Transaction fees are the costs you pay per transaction. The fee can be a percentage of the transaction with a minimum fixed amount. Some brokers charge extra service fees, such as for data feeds, investment advice, or access to premium tools. It is therefore important to look carefully at the different fees that brokers charge before choosing a broker.
Do I need a broker to invest?
Yes, if you want to invest in investment products such as stocks, ETFs, or ETCs, you need a broker. Brokers make it possible for you as an investor to access the markets and help you execute your investment strategies.
How can I best compare brokers?
When choosing a broker, it is wise to take various factors into account. Consider at least the following:
- Investment strategy: Check which broker fits your investment strategy. With many investment platforms, for example, you can set up an investment plan for automatic periodic investing.
- Fees: Compare different brokers based on the fees they charge for transactions and extra services.
- Services: Find out if the broker offers tools and analyses that help you make informed decisions.
- Ease of use: Investigate how user-friendly the platform is. The platform should be easy to navigate, especially for beginning investors.
- Reviews: Read various reviews from previous users on independent review sites.
- Reliability: Ensure that the broker is reliable and complies with the rules of regulators such as the AFM.
BUX as a broker
If you are a beginning investor looking for a broker that is user-friendly, charges low fees, and focuses on long-term wealth, take a look at BUX. With us, you can invest in various stocks, ETFs, and ETCs. Easily set up your BUX Investment Plan via the BUX app and choose the amount you want to invest every month. This is possible starting from €10. Then select the investment products that suit you, and we will ensure your deposit is automatically invested. All you have to do is pick a day of the month and set your goal. This way, you can work on your returns.
Are you ready to learn more? Then go quickly to the next module.
Not a BUX investor yet?
Create your account in a few minutes and start building your wealth.
Investing involves risks. You can lose your investment.
All views, opinions, and analyses in this article should not be read as personal investment advice. Individual investors should make their own decisions or seek independent advice. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.
