What is a Stock Brokerage? – Accounting Superpowers

What is a Stock Brokerage?

Illustration of a man pointing towards a Brokerage

If you want to buy or sell a Stock, you cannot place an order with a Stock Exchange directly. Instead, you place your stock trade through a Stock Brokerage, who then deals with the exchange on your behalf.  

Investing Speak!

Brokerages HIRE brokers.
Though, in financial slang, people often use the two terms interchangeably.

Decades ago, access to brokerages was limited to the wealthy and investors would pay hundreds of dollars to brokers for executing a trade, but with time and the significant leaps made in modern technology, brokerages are now available to everyone and are far less expensive than ever before with automated access to exchanges.

While human brokers still handle many trades, especially those for large institutional investors, online brokers allow investors with relatively small-sized accounts to also take part in the trading of stocks with a small transaction fee. 

Popular Brokerage Firms in the U.S.

While there are several Brokerages in the United States, the most popular ones include names such as

  • Fidelity Investments
  • TD Ameritrade
  • Charles Schwab

Not just anyone can become a brokerage on the Stock Exchange. 

Becoming a brokerage is quite competitive and requires a Brokerage firm to first become a member of the Stock Exchange and these memberships cost a ton of money and have very strict regulatory requirements. 

How are Brokerages regulated? 

In the United States, Brokerages are regulated by a private not-for-profit organization called Financial Industry Regulatory Authority, Inc. or FINRA. 

FINRA works under the supervision of the SEC and is authorized by Congress to ensure that the broker-dealer industry operates fairly and honestly. 

FINRA oversees about 4,250 brokerage firms, and more than 634,000 brokers across the country—and analyzes billions of daily market events.

Different Types of Brokerages

Every Investor is different.  

Some are new in their investing journey learning the ropes while some are advanced and have well-defined trading strategies. Some investors may be investing with what little they have saved while others are Institutional investors who are managing millions of dollars in funds.  

As such, the Brokerage Industry has developed to meet the needs of each type of Investor. Investors today have a range of options when choosing a brokerage company and choice of a brokerage should align with the type of Investor they are. 

Common categories/Types of Brokerages you find in the market are: 

Full-Service Brokers

As the name suggests, full-service brokerages offer large and varied amounts of products and services. 

Apart from executing buy and sell orders, full-service brokerages also have their own advisors to provide suggestions and investment advice for client portfolios, research teams, retirement planning experts, tax advisors, and much more.  

Obviously, the scope of services being offered by full-service brokerages makes them the most expensive brokerage option and thus the typical fees for such brokerages range between 1-3% of an Investors portfolio. 

Discount Brokers

While Investing in the Stock Market used to predominantly be done by high net worth individuals, the advent of the internet allowed a number of new Investors with a smaller capital base to take part in the market. 

Sensing an opportunity with so many more investors entering the market, a number of brokerages with limited services moved into Financial Markets called Discount Brokerages   

The primary objective of a discount brokerage is to execute buy and sell orders at a low cost. As such, over time, discount Brokerages developed primarily as online platforms with no additional services such as personalized advice and research teams offered by their full-service counterparts. 

Discount brokerages today and are aimed at self-directed traders and investors. As such, communication with such Brokerages remains minimal and their utilization is best for those who want their trades executed at a low cost. 

Robo Advisors

For investors that need help with their investments and yet want to keep their costs low, the Financial Industry is slowly moving to what are called Robo Advisors.  

Robo Advisors use AI to build an optimal portfolio based on an Investors capital, preference, and risk tolerance.  

How do Robo Advisors work?

Investors supply basic information about their investment goals through an online questionnaire and once the Robo advisor crunches the data, they provide an asset allocation mix suited to the client's preferences.  

Once a clients funds are invested, Robo Advisors also automatically re balance a client's portfolio—that is, make changes to the clients based on the client's target allocation. 

When considering different brokers, it is wise to do your due diligence and pick a broker after assessing a variety of factors such as fee structure, user-friendly interface, research tools, and access to a mobile app.  


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