Table of contents:
- 1 What is a broker and what does he do?
Many investors, traders, and speculators are nowadays used to trading securities, derivatives, or other financial products through a so-called broker. The times when, for example, shares or bonds could be traded exclusively through banks or direct banks are now more than ten years gone. Especially in the past five to ten years, more and more brokers have established themselves on the market to offer their customers trading in financial products. Nevertheless, many investors, savers, and speculators are not yet informed in detail about what a broker actually does, what types of brokers there are, how the provider makes his profits, and what to look for when comparing the numerous brokers. For this very reason, we would like to provide you with a lot of information in this regard, so that you will be well informed on the subject of brokers in the future.
What is a broker and what does he do?
First of all, it is important to understand what a broker is exactly and what business activity a broker actually carries out.
Most customers certainly know a broker in the form of an online or discount broker who offers trading in shares in particular. In addition, there are many other securities and other financial instruments that can be traded through the appropriate broker. In a somewhat generalised way, a broker is nothing more than a financial service provider who, like banks, provides access to trading in financial products. Any investor who trades in shares or other securities, for example, inevitably needs a broker. The reason for this is quite simply that private individuals are not allowed to trade on the stock exchange themselves, so that a provider with the appropriate access is needed. While for credit institutions, on the one hand, special and professional stock exchange traders take on this task, on the other hand, there are so-called retail brokers who also have access to the financial markets and make them available to private investors for a fee.
The essential characteristic of a broker, however, is not only that it gives customers access to as many financial products and stock exchanges as possible, but that it also offers a so-called trading platform. This is special software that the customer can use to place orders, call up his securities account balance or view charts in the course of an analysis. Such a platform is usually provided free of charge and consists of numerous components. The trading platform has various functions that are intended to make it as convenient as possible for the client to inform himself about trading in financial products and to place orders, e.g. some brokers offer MetaTrader as a comprehensive trading platform or use specially developed trading platforms. In our comparison, you will find a list of all MetaTrader brokers.
In summary, it can be stated that a broker is responsible for the following tasks and offers services:
- provides access to the financial markets
- provides trading platform
- offers additional services and benefits
- supports the customer with questions and problems
- offers information material, such as real-time quotes
What types of brokers exist on the financial market?
Now that you know what a broker is and what the tasks of the provider are, the second step is to differentiate between the numerous brokers who make their services available on the market. Brokers can be divided into various groups based on two different criteria in particular. Firstly, the types of brokers can be divided according to which financial products the customer can trade. On the other hand, there is a further distinction based on the way in which orders are executed and traded via the broker.
If one takes the first mentioned criterion as a benchmark, i.e. with which financial products the customer can trade via the respective broker, the providers can be divided according to the following types:
- Stock or securities brokers (online or discount brokers)
- Online Brokers
- Forex broker
- CFD Broker
- Binary Options Broker
- All-round broker
Broker which we reviewed on out website:
- Bitcoin Broker
- Binary Options Broker
- CFD Broker
- Cryptocurrency Broker
- Day Trading Broker
In practice, it is relatively easy to distinguish between the above-mentioned types of brokers because, in principle, each customer can determine which financial products can be traded via the respective provider. In the case of equity or securities brokers, for example, it is the case that they primarily offer to trade in bonds, shares, funds, and sometimes also derivatives. In addition, a distinction can be made as to whether trading via the broker is only possible on the stock exchange or also over the counter (OTC trading). Binary options brokers, on the other hand, provide almost exclusively for trading in binary options. Accordingly, a Forex broker offers to trade in currency pairs, while a CFD broker specializes in providing clients with the ability to trade CFD contracts.
Currently, the so-called all-round brokers are particularly popular. This is a somewhat colloquial term that refers to those brokers who, in principle, make trading in almost all financial instruments available. Such an all-round broker would therefore offer trading in securities as well as in foreign exchange, CFDs and binary options.
Differentiation according to the type of order execution
In addition to differentiating between the financial products offered for trading by brokers, it is also possible to differentiate between providers, particularly according to the type of order execution used. In this context, the providers represented on the market can be divided into the following five major groups:
- Dealing desk brokers
- Market maker
- ECN Broker
- STP Broker
The difference between these brokers lies in particular in the way the order is executed and in the spreads, which represent the serious cost factor for you as a trader.
Here we have illustrated the difference between market makers (dealing desk brokers) and no dealing desk brokers such as ECN or STP brokers:
Dealing Desk Broker
Characteristic of a so-called dealing desk broker is the fact that each order placed by you goes over the trading desk, which is located in the respective trading department of the provider. From there, the order is either forwarded to the stock exchange or an OTC transaction is executed. If it is an over-the-counter transaction, the dealing desk broker usually acts as market maker at the same time.
The essential characteristic of a broker as a market maker is that the order you place is not immediately forwarded to a financial market. Instead, the Broker sets its own prices and endeavours to execute the corresponding trade orders within its own system. Conversely, this means that the market maker usually has two of his own clients trade against each other. So, if customer A wants to sell, the broker looks for another customer B who wants to buy the same value under similar specifications regarding price and quantity.
The so-called ECN brokers are becoming more and more common, especially in the area of trading with foreign exchange and CFDs. In this context, ECN stands for “Electronic Communication Network”. The main characteristic of such an ECN broker is that the order is directly forwarded to the so-called interbank market. The price structure of the broker is made up of flexible spreads, whereby sometimes a commission is also charged. Another characteristic of the ECN broker is that, in contrast to the dealing desk broker, there is no intermediate trading table. A list of all brokers who execute their orders according to the ECN model can be found in our ECN Broker Comparison.
The so-called STP broker works in a very similar way to the ECN broker. The abbreviation STP stands for “Straight Through Processing”. With the STP broker it is also the case that the order is forwarded directly, namely to the exchange trader. This is also referred to as a liquidity provider in the technical language. In most cases, this is a credit institution that has direct access to the markets.
A fifth group of brokers are the so-called Introducing Brokers, also known as IBs for short. These are basically STP brokers with one limitation. This is that the Introducing Broker only has one exchange trader and does not work with several liquidity providers. He then receives a commission for his business activities from this particular provider.
How do brokers make profits?
An exciting question for many traders, speculators, and investors is certainly how brokers actually make profits. Of course, these providers are not charitable institutions, but commercial enterprises that want to make a profit with their business activities. In practice, there are three types of income in particular that can ultimately result in a profit for the broker. Income for the broker, of course, inevitably means costs for the client. In practice, the following three types of income can be distinguished in particular:
- Financing costs
The type of income the broker earns depends in particular on the type of business activity. In the case of stock or securities brokers, for example, the fees to be paid by the customer are the most important. These are usually calculated in the form of an annual custody account fee and, above all, in the form of order fees. So if you place an order via a securities broker, you have to pay order costs on the basis of various fee models.
While the fees are the main focus for stockbrokers, forex, CFD and binary options brokers, in particular, tend to make their profit on the basis of the spread. The spread is the difference resulting from two different prices, namely the buy and sells price of an underlying asset. The customer can therefore never sell a financial product through the broker at the price at which he previously bought it. Due to the high turnover volumes, brokers sometimes make good profits from this small difference.
Apart from fees and spreads, there is another way in which brokers can make profits. These are the so-called financing costs, which are especially due when the trader holds a long position overnight. In this case, a certain interest rate is charged for the fact that the broker has lent capital to the client on the basis of the so-called leverage.
Compare brokers: What to look for?
Now that we know what brokers are, what their business is, how they make profits, and what types of brokers there are, there is another aspect that is particularly important for you. It is not only about finding the right brokers, but also about finding the most suitable provider in the category that best suits you. Choosing a broker is by no means easy, which is mainly due to the fact that there is a large number of providers on the market. In the stock, CFD, forex and binary options broker categories alone, you now have a choice of over 100 providers in the market. Therefore, it is important that you know at least some of the characteristics that will help you compare the providers and find the best broker possible.
In the overview, it is the following factors that should play a role in comparing the brokers:
- Type and speed of order execution
- Fees or other costs
- Trading platform
- Customer Service
- further services
As you can already see, the list is comparatively long, which you can use to find the right broker. It is certainly very important that you choose a broker who guarantees transparent and above all fast execution of your orders. Particularly in tight markets and if you want to make a profit with high volumes even with the smallest price differences, it is very important that the order is executed within a few seconds if possible. You can compare the individual brokers in our Forex CFD Broker Comparison.
A further aspect, which is of course extremely important in the Forex Broker Comparison, is the costs you incur. Mostly this aspect is decisive, however, especially with stock and securities brokers, because when trading currency pairs and CFDs, the costs incurred are usually negligible due to the high-profit potential. However, this does not apply to another point of comparison, namely the trading platform offered. You should get along well with the trading platform. Furthermore, the trading platform should be user-friendly, have numerous functions, and simply suit you well. Stability and security are of course also criteria that can speak for or against a trading platform.
Especially for beginners, the quality and accessibility of customer service is definitely also a decision criterion that is of greater importance. Pay attention here, for example, to the ways in which the employees can be reached and whether the customer support is available in your own language. In this context, it sometimes makes sense to contact an employee before opening a securities account in order to test the service. Alternatively, it is also a good idea to obtain detailed information about one or another provider through so-called broker reviews (experience reports).