Broker

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: Broker is the term for a licensed individual or firm that executes buy and sell orders for securities on behalf of clients. Brokerage firms also hold customer assets, provide account services, and may offer research and advice.

How a broker works

Individual investors cannot send orders directly to an exchange. Instead, they open an account with a brokerage firm, deposit cash, and enter an order. The broker routes the order to an exchange, market maker, or alternative trading venue for execution, then records the resulting position in the account.

In the US, broker-dealers must register with the Securities and Exchange Commission and are overseen by FINRA, the self-regulatory organization for the industry. Individual representatives also must pass licensing exams.

Types of brokers

  • Full-service brokers: provide personalized advice, financial planning, and research, usually for higher fees.
  • Discount and online brokers: offer self-directed trading, often with zero commissions on online US stock and ETF trades, plus research tools.
  • Robo-advisors: automated platforms that build and rebalance portfolios using algorithms.
  • Direct-access brokers: geared to active traders who want control over order routing and advanced platforms.

Many firms blend these models, offering self-directed accounts alongside optional advisory services, so the categories overlap in practice.

How brokers make money

Even with commission-free trading, brokers earn revenue in several ways: interest on uninvested customer cash, interest charged on margin loans, payment for order flow from market makers, fees on options and other products, advisory fees on managed accounts, and stock lending income. Understanding these sources helps investors compare costs that do not appear as a commission line item.

Brokers are also required to seek best execution for customer orders, which means taking reasonable steps to obtain the most favorable terms available.

Example: total cost of a trade

Suppose you buy 200 shares of a stock quoted at a $25.00 bid and $25.04 ask through a commission-free broker. Your market order fills at the ask, $25.04, costing $5,008. If you immediately sold at the bid of $25.00, you would receive $5,000.

The $8 difference is the cost of the bid-ask spread, which applies even when the commission is zero. Execution quality, meaning how often a broker gets you a price better than the quoted ask or bid, can matter more than headline fees for frequent traders, particularly in day trading.

Choosing a broker and account protection

Investors usually compare fees, available investments, platform tools, research, customer service, and account types such as IRAs. Most US brokerages are members of SIPC, which protects customer securities and cash up to set limits if a member firm fails. SIPC coverage does not protect against market losses, and it is separate from bank deposit insurance.

Frequently asked questions

What does a stock broker do?

A broker executes buy and sell orders for clients, holds their securities and cash in accounts, and may provide research, tools, or financial advice.

How do commission-free brokers make money?

They earn revenue from sources such as interest on customer cash, margin lending, payment for order flow, options fees, and securities lending.

Is my money safe with a broker?

Most US brokers are SIPC members, which protects customer assets up to set limits if the firm fails. It does not protect against losses from market declines.

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For information only, not investment advice. See the disclaimer.