What is a Securities Broker?
Trading securities is a popular investment discipline. But what role does a securities broker play in this? And what else do you need to know about them? Keep reading to find out more!
What Are Securities?
First things first – what are securities? To put it as simply as possible, securities are financial contracts that grant the owner a stake in an asset. They have two main features: giving certain rights to the owner; and being tradable in the financial markets. There are various types of securities. For instance, bonds, stocks and options.
When looking for a more precise definition, we should talk about the Securities and Exchange Act of 1934. It states: “The term ‘security’ means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement”. The original definition goes on for eight more lines. But the key takeaway from this definition is that securities are complex to define.
If you are looking for a more detailed overview, check out our blog post on what are securities.
Securities Broker in Traditional Finance
A securities broker is a party that trades stocks and bonds on behalf of its clients. In traditional finance, they place buy and sell orders, and later report to their customers on the outcome of trades. Brokers charge a commission in exchange for such services.
The most common types of securities are stocks and bonds. When we look at institutional investing, private businesses offer the public part ownership of the business by issuing stocks. Depending on the transaction, stock buyers are sometimes promised dividends in return for their money. The value of the purchased stock changes along with the value of the company. This can mean increases as well as decreases.
Bonds represent loans made to companies and government agencies. Buyers receive a prescribed rate of interest in return for buying bonds. In addition, they sometimes receive a yearly or monthly cash payment. Bonds may be sold in much the same way that stocks are sold.
Types of Securities Brokers
The extent of support that brokers offer varies. There are brokerages doing market research and providing advice to clients. They are known as full-service firms and they charge a higher fee for their expertise. For people who need less support and know more about the securities market, there are discount brokers. They just execute orders without any investment advice. Consequently, they charge lower fees and allow almost anyone to trade stocks and securities.
Most brokers specialize in one type of security. It can be mutual funds, government bonds or commodities. The latter are a type of security that represents future ownership of certain goods.
Some brokers further specialize in the type of account that they serve. For instance, some brokers only work with individuals and some only with corporations. However, this type of specialization is quite rare and most brokers work with both individuals and corporations.
Now that you know what a securities broker is, why not continue learning? Head over to our security token platform and start exploring!