Broker - Explained
What is a Broker?
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Table of ContentsWhat is a Broker?What Does a Broker Do?Types of BrokersReal estate broker Insurance Broker Stock Broker High-End Broker Online Broker How to Protect Yourself from BrokersAcademic Research on Brokers
What is a Broker?
A broker is an individual in charge of transacting business deals on behalf of clients. A broker gets a commission for every transaction he or she makes. A broker can also be a firm acting as customers agent and charges a commission for the services it renders to customers. Another way to define a broker would be a middleman who purchases and sells products or services for a third party.
What Does a Broker Do?
Brokers are people who have undergone training and have a license to offer brokerage services. Brokers usually specialize mostly in bonds, options, commodities, or stocks. Brokers are generally required to register with the exchange where trading of securities take place. Brokers are different from salesmen because the salesmen engage in selling simple products on behalf of the manufacturer. Also, they do not need any training or license to sell or buy the products. In general, brokers are professionals who operate in various fields. For this reason, a broker must be specialized and knowledgeable in the area he or she intends to work in. The training, therefore, comes in handy.It equips the broker with appropriate knowledge and skills to be able to execute his or her duties efficiently. Note that brokers exist not just in financial markets but also in real estate markets. When it comes to brokerage firms, they are required to operate under certain regulations. These regulations are usually based on the brokerage type as well as the jurisdiction in which the brokerage firm operates. Also, it is important to note that brokers do not get their license from the federal government. Instead, each state in the United States is in charge of giving their brokers license. Additionally, each state has its own laws which they use to define various correlations existing between investors and brokers. It includes the brokers duties to clients as well as members of the public.
Types of Brokers
In the world of business, there are different types of brokers. Some of them are as explained below:
Real estate broker
A real estate broker is an individual who facilitates the buying and selling of property. However, real estate brokers usually sought assistance from salespersons known by the name estate agents. These individuals usually assist real estate brokers in the selling process. When it comes to the estate industry, a brokers duties include the following:
- To determine properties market values set to be sold
- Taking potential buyers to view the property
- To list and advertise the properties set for sale
- Giving advice to clients on the available real estate offers as well as matters related to real estate
- Submitting to the sellers the available offers for consideration
- Researching and locating the properties in areas that clients desire so that they can make an offer to clients
- Doing property transaction on the buyers behalf
- Property management and repair negotiations
Different insurance companies also work with brokers. These brokers usually provide clients with the best insurance policies. Apart from providing structure policies, they also work on customer claims. Insurance brokers work on a commission basis. Note that there are several types of insurance deals. Some areas mentioned below:
Usually, an insurance broker would specialize in one kind of insurance deal. To be eligible to work as an insurance broker, you are required to go through training first. In addition, you will have to obtain a formal license from either of the following:
- Security and Exchange Commission
- Other government investment-related associations
A stockbroker works in the stock market. There are two types of stockbrokers. Full-service brokers and discount brokers. The difference between the two stockbrokers is that the discount brokers charge less commission for their services. The situation is contrary to full-service brokerage whose charges are considerably high because of the extra roles they are mandated to do. For instance, discount stockbrokers do not offer advisory services to the clients, but full-service stockbrokers do. Such extra roles are what makes their commission charges to be a bit higher.
High-End brokers are mandated to study and make plans on the economys condition. They usually engage a team of researchers who study the market status, give recommendations, and advice to clients. Some of the advice given to the clients is the best time for selling or buying a property.
Online brokers use various brokerage websites to make business transactions. Their main job is to avail investment-related database information to their clients. They do this through the internet. The database information is presented in the form of charts, graphs, and investment tips.
How to Protect Yourself from Brokers
Generally, there are risks involved when investors decide to involve middlemen in their businesses. It is, therefore, important for investors to do in-depth research about a broker before engaging him or her. This way, an investor can easily access a genuine licensed broker, who is also transparent in his or her dealings. In other words, to avoid broker-related investment risks, it is important to know the kind of person you are bringing on board as your broker. Know his background information and how he or she has handled his brokerage services in the past. Note that a broker may be an individual or a firm. In every state, there is a state securities regulator. From this place, you will be able to access genuine and detailed information about various brokers. It is, therefore, important for a broker to get information for them before making a decision. Also, there is the Securities Investor Protection Corporation (SIPC). It protects investors from brokerage firms, especially in the event that the firm becomes bankrupt. It also protects investors in case their securities are stolen. An investor should find out if the person or the firm he is about to engage as a broker covers such risks. However, SIPC is not in any way obligated to protect an investor in case of a decline in his or her investment holdings.
Academic Research on Brokers
- Electronic callmarkettrading, Economides, N., & Schwartz, R. A. (1995). Electronic call market trading.Journal of Portfolio Management,21(3). Despite its power as a transactions network, scant attention has been given to incorporating an electronic call into a major market center such as the NYSE or Nasdaq. An electronic call clears the markets for all assets at predetermined points in time. By bunching many transactions together, a call market increases liquidity, thereby decreasing transaction costs for public participants. After describing alternative call market structures and their attributes, we propose that an open book electronic call be held three times during the trading day: at the open, at 12:00 noon, and at the close. We discuss the impact of this innovation on an array of issues, including order flow and handling, information revelation, and market transparency. We also discuss the proposed changes from the perspectives of investors, listed companies, exchanges, brokers, and regulators.
- Marketmaking under the proposed Volcker rule, Duffie, D. (2012). Market making under the proposed Volcker rule.Rock Center for Corporate Governance at Stanford University Working Paper, (106). This submission discusses implications for the quality and safety of financial markets of proposed rules implementing the market-making provisions of section 13 of the Bank Holding Company Act, commonly known as the Volcker Rule. The proposed rules1 have been described by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Securities and Exchange Commission. The Agencies proposed implementation of the Volcker Rule would reduce the quality and capacity of market making services that banks provide to U.S. investors. Investors and issuers of securities would find it more costly to borrow, raise capital, invest, hedge risks, and obtain liquidity for their existing positions. Eventually, non-bank providers of market-making services would fill some or all of the lost market making capacity, but with an unpredictable and potentially adverse impact on the safety and soundness of the financial system. These near-term and longer-run impacts should be considered carefully in the Agencies cost-benefit analysis of their final proposed rule. Regulatory capital and liquidity requirements for market making are a more cost effective method of treating the associated systemic risks.
- Industry change through vertical disintegration: How and whymarketsemerged in mortgage banking, Jacobides, M. G. (2005). Industry change through vertical disintegration: How and why markets emerged in mortgage banking.Academy of Management Journal,48(3), 465-498. This paper provides an inductive theoretical framework that explains how and why vertical disintegration happens, showing that transaction costs are an incidental feature of industry evolution. I find that gains from intrafirm specialization set off a process of intraorganizational partitioning, which simplifies coordination along parts of the value chain. Likewise, latent gains from trade foster interfirm cospecialization, which leads to information standardization. Given standardized information and simplified coordination, new intermediate markets emerge, breaking up the value chain, allowing new types of vertically specialized firms to participate in an industry, and changing the industry's competitive landscape.
- The microstructure of the TIPSmarket, Fleming, M. J., & Krishnan, N. (2012). The microstructure of the TIPS market.Economic Policy Review. The potential advantages from the introduction of Treasury inflation-protected securities (TIPS) in 1997 have not been fully realized, mainly because TIPS are less liquid than nominal Treasury securities. The lack of liquidity is thought to adversely affect TIPS prices relative to prices of nominal securities, offsetting the benefits that come from TIPS having no inflation risk. Despite the importance of TIPS liquidity and the markets large size, there is virtually no quantitative evidence on the securities liquidity. This article sheds light on this phenomenon using novel tick data from the interdealer market. The authors identify several features of the TIPS market also present in the nominal securities market, but some unique features as well. As in the nominal market, there is a marked difference in trading activity between the most recently issued (on-the-run) and previously issued (off-the-run) securities, as trading drops sharply when securities go off the run. In contrast to the nominal market, there is little difference in bid-ask spreads or quoted depth between these securities, but there is a difference in the incidence of posted quotes. These results suggest that trading activity and quote incidence may be better cross-sectional measures of liquidity in the TIPS market than bid-ask spreads or quoted depth. Intraday patterns of trading activity are broadly similar in both markets, but TIPS activity peaks somewhat later, likely reflecting differences in the use and ownership of these securities. Announcement effects also differ between markets, with TIPS auction results and CPI releases eliciting particularly strong increases in trading activity, likely indicating these announcements special importance to TIPS valuation.
- The brokerage of asymmetric information, Apreda, R. (2001). The brokerage of asymmetric information. In this paper we oversee the logic of information sets, firstly handling information and markets in perfect environments and, secondly, dealing with information and markets in imperfect environments, in the context of bounded rationality. Further on, asymmetric information is addressed together with the role of opportunistic behaviour through hidden action, hidden information, the free-rider problem and signaling, expanding on financial accounting and asymmetric information. At last, asymmetric markets are expanded on, reviewing the buyers and sellers markets so as to handle the performance of intermediaries who stand ready to provide with immediacy and liquidity to buyers and sellers of financial assets. There are two contributions that this paper brings forward: firstly, an intuitive treatment of information sets in the context of mathematical Set Theory so as to make tractable some issues still neglected. Secondly, we claim and develop that a careful assessment of information sets makes headway towards an approach that regards market makers and other intermediaries as brokers of asymmetric information.