A brokerage firm’s main purpose is to act as a middle man between a buyer and a seller to facilitate a transaction. Charles Schwab and Fidelity Investments are examples of large and well-known brokerage firms, however, there are many different specialisations of brokers, and the way in which they function can differ. The roles of a brokerage firm are commonly mistaken with those of a market maker and, while they both contribute to the normal and efficient functioning of financial markets, their purposes are separate. This blog will break down these differences as well as explain the process by which both brokerage firms and market makers earn money.
What do they do?
As mentioned above, the main function of a Brokerage Firm is to act as a middle man between buyer and seller to facilitate a transaction. This is fulfilled by the brokerage firm facilitating transactions of stocks, options, bonds, and other financial products to their clients to enable the construction of a portfolio. Additionally, brokerage firms may also provide financial advice to their clients such as what assets to purchases, given the client’s investment preferences.
How Do They Make Money?
The way in which these brokerage firms make money is by charging a small brokerage fee for each trade made on behalf of the client. Other brokers may also make money by marking up the price of the assets that they allow you to trade. Overall, the function of a brokerage firm is of high importance as they enable individual investors to make trades and contributes to an optimal flow of money between corporations, stakeholders, and investors.
What do they do?
While the main goal of a broker is to bring investors together, the function of a market maker is quite different. The roles of these positions are often confused or assumed to be the same but that is not the case. The main role of a market maker is to create a market where financial assets can be bought and sold by investors. Market Makers are usually large financial institutions or banks. The goal is to ensure that there is sufficient liquidity in the markets so that assets can be bought and sold easily. Market makers also need to quote buy and sell prices for these securities and this is done on the basis of supply and demand.
How Do They Make Money?
The way in which market makers make money is through the spread on a buy and sell price where the bid price will be lower than the actual price and an ask price will be slightly higher than the market price. Similar to brokers, market makers also make money through a commission by providing liquidity and ensuring the fluent functioning of the financial markets. It is then in the market makers’ best interest to minimise their exposure to risk on their side of the trade by unwinding their position in the financial asset. Examples of some of the largest market makers include Morgan Stanley and Deutsche Bank.
Robinhood, the famous low-cost online broker in the USA offers commission-free trades of stocks, ETFs, and cryptocurrency. Since Robinhood doesn’t charge its users commission for trades, how do they make money?
Robinhood makes money primarily through fees paid by market makers and high-frequency trading firms who pay for order flow. Payment for order flow accounts for the majority of their revenue. Robinhood also provides credit or margin on which they receive interest from their users.
Different Types of Brokerage Firms
There are many different types of Brokerage Firms such as a stockbroker, a credit brokerage, a forex broker, and also a real estate broker. The different functions of these broker specialisations are outlined below.
A stockbroker is the most common type of broker specialisation and focuses on providing stocks and commodities to buyers and sellers. Like most broker specialisations, the way in which a stockbroker makes money is through commission in the form of a brokerage fee.
This broker specialisation focuses on the foreign exchange market. These brokers make money through bid-ask spreads on different currencies as well as transaction fees.
The role of a Credit Brokerage is to connect a client who is looking for consumer credit with a company or institution that is willing to provide it. Credit brokers also assist in financial advice and in repayments etc.
Real Estate Brokerage
The task of a real estate brokerage is to connect their clients to buyers and sellers of real estate. This can range from residential properties to offices and these brokers play an important role in the functioning of the property market.
While they both make money in similar ways through commission and brokerage fees, the two roles offer different services which, in their own way, contribute to the running of an efficient financial market. Different specialisations of brokerage firms are also listed and explained such as stock, forex, credit, and real estate brokers. If you are seeking ease of access to the stock market but are unsure of how to get started the Aikido Finance website will help you. Aikido offers the tools to create an investment portfolio in less than 10 minutes with live trading available through broker integration, making it one of the best places to begin your investing journey.