Stockbroking definition

What is stockbroking?

Stockbroking is a service which gives retail and institutional investors the opportunity to buy and sell equities.

Stockbroking has evolved over the past few decades – from physical paper documentation and over-the-phone deals to online transactions. But the process for buying and selling shares is broadly the same: it requires access to a stock exchange’s books.

To trade on an exchange, you have to be a member of the exchange or work for a member firm. Stock exchanges place strict regulations on who can trade shares directly on their books, which is why most individual investors hoping to deal shares will do so via a stockbroker.

There are a few companies that will choose to offer their stock over-the-counter (OTC) but these would still be traded with a broker.

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What is a stockbroker?

A stockbroker is an individual or a firm that offers a stockbroking service – operating on behalf of retail and institutional clients. They act as an intermediary between an individual investor and the stock exchange.

Individual stockbrokers need specific qualifications in order to give clients advice, as they require a deep understanding of financial regulations, accounting, economics and financial planning.

What does a stockbroker do?

Stockbrokers buy and sell shares on behalf of their clients. There are several different levels of service a stockbroker can provide though, with the choice of provider dependant on how much control the client wants over which shares they trade:

  • Execution-only stockbrokers will complete orders on their client's behalf, but do not offer any advice
  • Advisory stockbrokers will offer advice on which shares to buy and sell, but only act on orders submitted by clients
  • Discretionary stockbrokers will trade on behalf of their clients, executing trades without their input

Most stockbrokers will trade shares both on exchange and over-the-counter, dependant on where they can find the best price and liquidity. They'll charge a commission for executing trades, or a fee for retaining their services — or sometimes both. This is often a percentage of the customer’s purchase, although some brokers will ask for a flat rate.

There are other types of brokers, such as commodities brokers and forex brokers.

How does stockbroking work?

Stockbroking works by bringing buyers and sellers together to create efficiency in the market. While it usually remains up to the individual what positions they open, it is up to the broker to execute the trade and find the best price for the exchange.

They do this by using a market maker, whose job it is to buy and sell a stock, in order to facilitate market liquidity. When you enter an order with a broker, they will assess the quotes of a range of market makers and pick the best price to pass on to you – this process takes a matter of seconds. Without market makers, there would be the risk that no one would take the other side of your trade.

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