Brokers are professional intermediaries who facilitate transactions between buyers and sellers. When these brokers act as agents for only one party, either the buyer or the seller, they become representatives and principal participants in any transaction. It is important to distinguish brokers from agents, as agents work solely for one principal. In financial sector, there are various types of brokers, including stock brokers, commodity brokers, and option brokers.
Stock brokers are highly regulated professionals who facilitate the buying and selling of stocks and related securities. They operate on behalf of investors who wish to buy or sell these securities. Stock brokers conduct transactions through either Agency Only Firms or market makers in a specific security. Typically, these brokers are employed by brokerage firms, such as Morgan Stanley, Prudential, or UBS. Stock brokers play a crucial role in stock transactions, as these exchanges can only occur between two members of the exchange. An ordinary investor cannot simply enter a stock exchange like the NASDAQ and request to buy or sell a stock, which is where brokers come in.
Within the domain of stock brokers, there are three main types of broker services. One is advisory dealing, where the broker provides recommendations to the client about which shares to buy or sell, but the investor makes the final decision. Another type is the execution-only broker, who simply carries out the client’s specific buying and selling instructions. Lastly, discretionary dealing involves brokers who learn about the client’s investment goals and then execute trades based on those interests.
These same functions are performed by other financial market brokers as well. Commodities brokers handle commodities contracts for clients, dealing in commodities like gold, silver, wheat, and oil. These contracts include options, futures, and financial derivatives. Commodities brokers act as intermediaries for investors to execute buy and sell orders on commodities exchanges such as the New York Mercantile Exchange, Commodities Mercantile Exchange, and New York Board of Trade.
Options brokers specialize in options on stocks, commodities, or currencies, depending on their area of expertise. They provide research, trading, and education on options to individual investor clients. In addition to handling main options like straddles, option spreads, and covered calls, many options brokers also facilitate trades in related areas such as ETFs, stocks, bonds, and mutual funds
Brokers in the financial world are typically regulated by various oversight bodies. For instance, stock brokers are licensed and overseen by the Securities Exchange Commission and must pass an exam called the Series 7 to practice. Commodities brokers must obtain a Series 3 license from the Financial Industry Regulatory Authority and are closely monitored by the Commodities Futures Trading Commission. Options brokers are regulated by the agency associated with the area of options they trade.
