What Is a Brokerage Firm? How It Makes Money, and Types (2024)

What Is a Brokerage Firm?

A brokerage firm or brokerage company is a middleman who connects buyers and sellers to complete a transaction for stock shares, bonds, options, and other financial instruments.

Brokers are compensated in commissions or fees that are charged once the transaction has been completed.

Most discount brokerages now offer their customers zero-commission stock trading. The companies make up for this loss of revenue from other sources, including payments from the exchanges for large quantities of orders and trading fees for other products like mutual funds and bonds.

Key Takeaways

  • A brokerage company primarily acts as a middleman, connecting buyers and sellers to facilitate a transaction.
  • Full-service brokerage companies are compensated via a flat annual fee or fees per transaction.
  • Online brokers offer a set amount of free stock trading but charge fees for other services.
  • The lines are blurring, with full-service brokers launching phone apps and online discount brokers adding fee-based services.

Brokers may work for brokerage companies or operate as independent agents.

Understanding Brokerage Firms

In a perfect market in which every party had all of the necessary information, there would be no need for brokerage firms. That is impossible in a market that has a huge number of participants making transactions at split-second intervals. The Nasdaq alone has in excess of 30 million trades per day.

Brokerage companies exist to help their clients match two sides for a trade, bringing together buyers and sellers at the best price possible for each and extracting a commission for their service. Full-service brokerages offer additional services, including advice and research on a wide range of financial products.

Types of Brokerages

The amount you pay a broker depends on the level of service you receive, how personalized the services are, and whether they involve direct contact with human beings rather than computer algorithms.

Full-Service Brokerage

Full-service brokerages, also known as traditional brokerages, offer a range of products and services including money management, estate planning, tax advice, and financial consultation.

These companies also offer stock quotes, research on economic conditions, and market analysis. Highly trained and credentialed professional brokers and financial advisers are available to advise their clients on money matters.

Traditional brokerages charge a fee, a commission, or both. For regular stock orders, full-servicebrokers may charge as much as $100 for broker-assisted trades. However, many are switching to a wrap-fee business model in which all services, including stock trades, are covered by an all-inclusive annual fee. The fee averages 1% to 3% of assets under management (AUM).

Many full-service brokers seek out affluent clients and establish minimum account balances that are required to obtain their services, often starting at six figures or more.

Some full-service brokerages offer a lower-cost discount brokerage option as well.

Merrill Lynch Wealth Management, Morgan Stanley, and Edward Jones are among the big names in full-service brokerages.

Discount Brokerage

A discount brokerage is an online brokerage. The online broker's automated network is the middleman, handling buy and sell orders that are input directly by the investor.

The introduction of the first discount brokerage is often attributed to Charles Schwab Corp., which launched its first website in 1995. Competitors soon appeared.

As they have evolved, the brokerages have added tiered services at premium prices. Fierce competition on the web and, later, on phone apps, have led most competitors to drop their fees to zero for basic stock trading services.

Charles Schwab remains one of the biggest names in online brokerages, along with others including Fidelity Investments and Interactive Brokers.

The same names pop up for mobile brokerage apps, along with newer competitors such as Robinhood and Acorns.


A robo-advisor is an online investment platform that uses algorithms to implement trading strategies on behalf of its clients in an automated process.

Most robo-advisors are programmed to follow long-term passive index strategies based on modern portfolio theory (MPT), although several robo-advisors allow clients to modify their investment strategy somewhat if they want more active management. Some even have human advisors waiting in the wings.

Robo-advisors have their appeal, not the least of which is very low entry fees and account balance requirements. Most charge no annual fee, zero commissions, and set their account requirements to a few dollars.

Access to an advisor comes with a fee, typically 0.25% to 0.50%of AUM per year. That's still far less than the cost of a traditional broker.

Independent vs. Captive Brokerage

If you're buying or selling certain financial products, including mutual funds and insurance, it's important to know whether your broker is affiliated with certain companies and sells only its products or can sell you the full range of choices.

You should also find out whether that broker holds to the fiduciary standard or the suitability standard. The suitability standard requires the broker to recommend actions that are suitable to your personal and financial circ*mstances. The higher fiduciary standard requires the broker to act in your best interests.

Independent Brokerage

Registered investment advisors (RIAs) are the most common type of independent broker found today.

Independent brokerages are not affiliated with a mutual fund company. They may be able to recommend and sell products that are better for the client.

They are required to hold to the fiduciary standard, meaning that they must recommend the investments most in the client's best interest.

Captive Brokerage

A captive brokerage is affiliated with or employed by a mutual fund company or insurance company and can sell only their products. These brokers are employed to recommend and sell the range of products that the mutual or insurance company owns.

The products they recommend may not be the best choice available to the client.

Is It Worth It to Use a Full-Service Broker?

People who use full-service brokers want the advice and attention of an expert to guide their financial affairs. These are usually complex, as these clients tend to be high-net-worth individuals with complex financial affairs. They are willing and able to pay an average of 1% to 3% of their assets per year for the service.

People who use an online discount broker may feel confident in their ability to handle their own finances and make their own decisions.

How Does a Brokerage Firm Work?

A broker is essentially a middleman. Brokers match buyers with sellers, complete the transaction between the two parties, and pocket a fee for their service.

If you use an online brokerage to buy stock, there's no human standing between you and the transaction. The brokerage software makes the match.

If you use a full-service brokerage, the process is much the same, except that someone else is pressing the keys on the keyboard. However, the full-service brokerage may have identified a good investment opportunity, discussed it with the client, and acted in the client's behalf in making the transaction.

How Does a Brokerage Firm Make Money?

Generally, brokerages make money by charging various fees and commissions on transactions they facilitate and services they provide. The online broker who offers free stock trades receives fees for other services, plus fees from the exchanges.

Full-service brokerages increasingly charge a so-called wrap fee, an all-in-one charge for all or most services, This is usually 1% to 3% of the amount in the client's account per year and covers advisory services and investment research as well as trading fees.

What Is a Brokerage Firm? How It Makes Money, and Types (2024)


What Is a Brokerage Firm? How It Makes Money, and Types? ›

A brokerage firm or brokerage company is a middleman who connects buyers and sellers to complete a transaction for stock shares, bonds, options, and other financial instruments. Brokers are compensated in commissions or fees that are charged once the transaction has been completed.

How does a brokerage firm make money? ›

How does a broker make money? Brokers are typically compensated through a commission on each trade. Investors have historically paid a broker a commission to buy or sell a stock.

What is brokerage and its types? ›

The main function of a broker is to solve a client's problem for a fee. The secondary functions include lending to clients for margin transactions, provide information support about the situation on trading platforms, etc. The three types of brokerage are online, discount, and full-service brokerages.

What's a brokerage firm? ›

A brokerage firm acts as an intermediary who makes matches between buyers and sellers of stocks, bonds, and other financial assets.

What a brokerage account is and what it allows you to do? ›

A brokerage account is an investment account that allows you to buy and sell a variety of investments, such as stocks, bonds, mutual funds, and ETFs. Whether you're setting aside money for the future or saving up for a big purchase, you can use your funds whenever and however you want.

How does a brokerage firm work? ›

A brokerage company is an institution that provides financial services like trade facilitation and financial planning. Brokerage firms allow customers to buy and sell securities, which regular banks do not. There are three main types of brokerage firms: full-service firms, discount firms, and online firms.

Do brokerage firms create money? ›

Brokerage firms generate profits from their clients through various means, including commissions on trades, spreads in forex trading, management fees for investment services, interest on uninvested cash, margin interest, account maintenance fees, data and research service charges, payment for order flow, IPO ...

What type of broker makes the most money? ›

High Paying Brokerage Professional Jobs
  • Broker. Salary range: $45,000-$131,500 per year. ...
  • Commodity Broker. Salary range: $97,500-$112,500 per year. ...
  • Energy Broker. Salary range: $60,500-$78,000 per year. ...
  • Associate Broker. Salary range: $44,000-$73,500 per year. ...
  • Stock Broker. ...
  • Broker Assistant. ...
  • Brokerage Clerk.

What are the three types of brokerage firms? ›

There are three types of brokerage houses that will transact the purchase and sale of securities for you: full-service, discount and deep- discount brokers.

What are the two most common types of brokers? ›

Brokers come in two general types: full service and discount.

Why do I need a brokerage firm? ›

A broker maintains your brokerage account and acts as the custodian for the securities you own in your account. It acts as an the intermediary between you and the stock market, buying and selling assets on your instructions.

Do you need a brokerage firm? ›

The Bottom Line. A brokerage account is one way to access the stock market. You can invest in individual stocks, ETFs, mutual funds, IRAs and more—and stockbrokers are known for providing personalized investment advice and portfolio management services. But it's also possible to buy stocks without a brokerage account.

Is brokerage cash your money? ›

Brokerage cash is a top-line cash total in your investing account. It's the cash amount before stripping out items like unsettled trades and collateral. Buying power is the bottom-line amount of cash available to you immediately. It might be called "cash available for withdrawal" or some variant on that.

How much money do you need to open a brokerage account? ›

Here are additional considerations for account holders to consider. Brokerage account minimums: Many brokers allow you to open an account with $1,000 or less.

Are brokerage accounts good or bad? ›

Opening a brokerage account can be an easy way to invest in stocks, bonds and other securities, either on your own or with guidance from the brokerage. Brokerage accounts are more accessible investment accounts than other options, such as retirement funds, but they also have their downsides, including fees and taxes.

How do you get money out of a brokerage account? ›

Withdrawing money when you need to sell stocks to come up with the cash
  1. Choose the stocks you want to sell and enter the appropriate trades with your broker.
  2. Wait until the trades settle, which typically takes two business days.
  3. Request the cash withdrawal once the proceeds of the sale hit your account.
Dec 18, 2018

How do brokerages make money with no fees? ›

Commission-free brokers typically receive payment (in the form of rebates) from market makers, who pay for the privilege of buying what you sell and selling what you buy. Market makers profit from the bid-ask spread (when you buy from a market maker, it's at the “ask” price, and when you sell, it's at the “bid” price).

How do Charles Schwab brokers make money? ›

Schwab makes money both directly and indirectly. An example of how Schwab makes money directly is from direct commissions or transactions fees that you pay us for brokerage services. These are described in schwab.com/pricing-guide.

Why do brokers make so much money? ›

Their earnings primarily stem from commissions and broker fees, both reflecting their pivotal role. Another significant avenue that may contribute to a broker's earnings is volume and profit-sharing bonuses. Transparency is needed to ensure clients are informed and can make decisions with all the necessary information.

Do billionaires use brokerage firms? ›

A billionaire may use some or all of these services, but for buying stocks, they may use a prime brokerage specifically to borrow securities for short selling (making money from stocks when they go down) or borrowing large amounts of money to buy stocks on margin.

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