What is a Trading Broker?

The broker does not only exist in the stock market. Insurance, real estate, Forex, this intermediary, also called broker in French, is indeed found in many fields of activity. Commonly used by cinema, literature or the media, this term is all too often overused, confused with the trader, thus creating some confusion about its exact role. However, if you are passionate about the world of finance and want to play on the stock market, understanding what a trading broker is is essential. Here are some clarifications.

Broker trading: what is it?

An indispensable market intermediary

On the financial markets, there are 4 main categories of players:

  • Issuers who issue shares or bonds in order to finance themselves (States, companies).
  • Investors who buy securities (investment funds, individuals).
  • Intermediaries which bring together market companies, ISPs (Investment Service Providers) and clearing houses.
  • The regulators who set the rules of the game.

The brokers and trading belong to ISPs, in the same way as banking establishments. They therefore play the role of essential intermediaries between investors and issuers of securities.

A strictly regulated profession

In France, the AMF (Financial Markets Authority) is responsible for regulating the activity of broker trading.

To be authorized to offer their services in France, trading brokers must be regulated by at least one of the European regulatory authorities. Admiral Markets investment companies are for example authorized and regulated by the Financial Conduct Authority (FCA) in the United Kingdom, the Cyprus Securities and Exchange Commission (CySec) in Cyprus or the Estonian Financial Supervision and Resolution Authority (EFSA) .

How does the trading broker intervene on the markets?

The trading broker’s main role is to receive and transmit orders from investors. In practice, a professional trader or an individual transmits to his broker a purchase or sale order which the latter executes.

Its objective is always to facilitate exchanges between the two parties by trying to obtain the best rates on a security, an action or even a currency. It therefore offers a gateway to the market and acts as an essential intermediary in the processing of transactions. It is indeed today almost impossible to buy or sell financial securities without its intervention.

It should be noted that the trading broker is also responsible for clearing orders, ie payments between the buyer’s account and the seller’s account as well as the delivery of financial products if necessary.

Good to know: do not confuse Trader and Broker

These are two completely different professions! While the trader makes investment decisions based on his fundamental and technical analysis, the trading broker only executes them.

How does a trading broker get paid?

Commission or brokerage fees

The trading broker may apply a percentage commission for each of the operations carried out by the investor. The amount will vary depending on the percentage of capital invested, the minimum threshold and the maximum ceiling of the commission

For example, the general conditions of the trading broker may provide for a commission of 0.10% levied on each transaction, with a minimum of 5 euros.

Generally, the commission only applies to share CFDs. Indices, currencies and commodities are in principle not affected.

The spread, or price difference

The trading broker can also be remunerated on the difference between the purchase price of a security and its selling price, also called the spread. This is calculated as a margin paid automatically by the investor when closing his position.

In practice, there are two types of spread. The fixed spread corresponds to an amount determined in advance and which will not depend on the margin made during the operation. This type of remuneration provides the investor with some security and avoids unpleasant surprises when closing the position. The variable spread varies according to the state of the market.

Three main variables determine the amount of broker trading commission:

  • The level of market liquidity: the higher the levels, the more the spread decreases.
  • Political, economic and geopolitical events: the higher the risks in a country concerned, the more brokers increase their commission on securities linked to this country in order to protect themselves against uncertainties.
  • The volatility of a security over time: the more a security tends to show strong variations, the higher the broker trading spread will be.

How to choose the right trading broker?

To choose the right trading broker, it is necessary to follow certain essential steps.

First of all, before embarking on the online trading activity, make sure that your broker is well regulated by an authority. For this, you can consult the Register of Financial Agents (REGAFI). In order to secure your funds, it is also better to contact online brokers present in countries where the regulations are rather favorable to investors.

Then consult the comparisons between brokers which give an interesting overview of reliability, but also of the responsiveness of customer service and the functionality of the site.

After selecting a few trading brokers, it’s time to test them. For this, it is important to open a demo account in order to get a clearer idea of ​​how it works. These specific accounts can be used, most of the time, in an unlimited way and allow you to take no risk to train. You will be able to discover the proposed trading platform, the possibilities in terms of leverage, the possible trading styles or the available markets.

Finally, before placing orders on an online trading platform, be sure to review the brokerage fees and spreads displayed on the assets that interest you the most.

You now understand a little better what the role of the trading broker is and why it is essential to choose it well. For your next market transactions, trust the trading broker Admiral Markets.

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