What Is a Broker?
Ordinary people can't walk into an exchange and buy stocks. A broker is the middleman that opens your account, sends your orders and holds your shares.
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Text version · Stock Basics, lesson 2: “What Is a Broker?”
Ordinary people can't walk into an exchange and buy stocks. A broker is the middleman that opens your account, sends your orders and holds your shares.
Broker = your channel to the market
Individuals can't go straight to the exchange. A broker opens your account, sends your orders in and brings back the results.
The broker holds your assets and charges commission
The shares you buy are held in custody by the broker, in your name. The broker charges a small commission on every trade.
After the fill comes settlement
A fill only means both sides have agreed. The actual exchange of money and shares is called settlement, and it takes different amounts of time in different markets (US stocks settle T+1, for example). Legitimate brokers keep client assets separate from their own.
Key takeaways
- An exchange is the marketplace where buyers and sellers meet. Individuals get in through a licensed broker.
- Once your account is open, the broker routes your orders, handles settlement and holds your cash and shares in custody.
- Regulated brokers must keep client assets separate from their own, and your shares are recorded in your name.
- Buyers and sellers set the trade price. The broker is just the channel and earns money from commissions and other fees.
Try it yourself
You can do these exercises in this lesson's interactive simulation:
- Stay on step 0 and look at the lock on the exchange: why can't you go straight in?
- Press ▶ and play to step 2: who receives your order first?
- On step 4, notice: who decided the fill price? Did the broker take part in setting it?
- Scrub to steps 5 and 6, compare "Your cash" with "Your shares", and find where the commission is taken out.
Quiz and explanations
- 1. You tap "Buy" in a trading app. Who receives your order first?
- Answer: The broker.The app belongs to the broker, which then routes the order to the exchange.
- 2. Which of these is NOT a broker's job?
- Answer: Setting the stock price.Prices are set by buyers and sellers in the market. The broker is just the channel.
- 3. Through your broker you buy 10 shares at $150 each, with a $1 commission. How much leaves your account in total?
- Answer: $1,501.10 × $150 = $1,500 goes to the seller, plus a $1 commission to the broker: $1,501 in total.
Terms in this lesson
- brokerage account (Brokerage Account): The account you open with a broker to hold your trading cash and the shares you buy.
- broker (Broker): A licensed middleman that opens your account, sends your orders to the exchange and holds your cash and shares.
- commission (Commission): The fee you pay your broker each time you buy or sell, which comes straight out of your profit.
- custody (Custody): Your shares are held for you by the broker and the clearing and settlement system, recorded in your name.
- exchange (Exchange): A central marketplace that matches buy and sell orders, such as the NYSE or NASDAQ.
- fill (Fill): A buy order and a sell order matching at the same price, so the trade actually happens.
- settlement (Settlement): The step after a trade where cash and shares formally change hands; different markets take different numbers of trading days (US stocks T+1, Hong Kong T+2).