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A broker is a person or company authorized to buy and sell stocks or other investments. If you want to buy stocks, you will almost always need a broker — essentially, a middleman — to place those orders on your behalf.
These days, many people open a brokerage account with online brokers rather than working with a person. Often called discount brokers, online brokers are typically less expensive and allow you to buy or sell stocks and other investments directly through their websites or trading platforms. Many online brokers now charge no commission to buy or sell stocks and other investments.
What does a broker do and why do I need one?
To understand what brokers do, it helps to have some quick background about the stock market.
Stocks are traded through market exchanges, like the New York Stock Exchange or the Nasdaq. These exchanges are like a supermarket for stocks: Companies list their stock with an exchange, and the exchange connects buyers and sellers, imposes rules and regulations, and tracks the demand for each stock, which influences the stock’s price.
» Learn more: A beginner’s guide to the stock market
But the average investor can’t just walk into an exchange and pluck a stock off the shelf. Instead, you need a stockbroker, a company or person who is licensed to execute trades with the exchange. Brokers generally must be registered with the U.S. Securities and Exchange Commission.
In some cases, brokers also provide advice on which stocks you should buy and sell. However, brokers should not be confused with financial planners, who tend to offer more holistic guidance on your financial situation.
How does a broker make money?
Brokers are typically compensated through a commission on each trade. Investors have historically paid a broker a commission to buy or sell a stock.
That's still true of human stockbrokers at full-service brokerage firms, but investors who manage their own brokerage accounts and use an online broker to buy and sell investments can now do that commission-free if they choose the correct broker. (We have a list of brokers that offer free trading here.)
Brokers that do not charge commissions make money off investor assets in other ways — most often by earning interest on uninvested cash in investor accounts. Most investment accounts hold a small amount of cash, and a broker sweeps that cash into a deposit account that earns interest. A small portion of that interest is paid to the investor, and the brokerage firm pockets the rest.
Brokers also sell trades to market makers, which earns them a small fee per trade. Investors rarely notice this, but it can in some cases slow trade execution and increase the cost of the trade slightly. High-volume traders may wish to choose a broker that routes trade orders based on price, like Interactive Brokers.
How do you find a broker?
These days, it’s easy to find a broker. Most investors should opt for an online broker, due to the cost savings and ease of placing online orders.
To find the best online broker for you, look for discount brokers that require a low minimum investment and charge no ongoing account fees. If you’re new to investing, consider choosing an online broker that offers educational resources — many have libraries of how-to content on their websites to help you get started.
Once you choose a broker, you’ll open a brokerage account, which is an investment account. You need a brokerage account to buy or sell stocks and other investments, like mutual funds. The broker will walk you through the process of opening an account, which takes minutes and is typically completed online. (We also have a full guide to brokerage accounts and how to open one.)
For more options, you can see our picks for the best brokers here.