Purpose of a Brokerage Firm

by Chris Hamilton ; Updated July 27, 2017
Brokerage firms help individuals invest and plan for retirement.

A broker acts as a middleman in a financial transaction, between a buyer and seller of securities, such as stocks and bonds. A brokerage firm consists of a number of brokers, working together in the same company to service a larger pool of financial clients. Most individuals use brokerage firms to manage their investments.

Connect Buyers and Sellers

Every financial instrument must have a buyer and a seller. Finding sellers on your own can be difficult, which is why brokerage houses exist. For a commission, the brokerage house will connect buyers and sellers, facilitating the transfer of securities. Brokerage firms also help manage 401(k) retirement plan investments. They manage government bonds, such as certified deposits and treasury inflation protected securities, which provide low rates of return on cash deposits.

Benefits

The ease of using an online brokerage firm eliminates much of the hassle of finding buyers and sellers of securities. Even better, many trades can be done for under $10, since the competition between brokerage houses is fierce. Brokerage firms help advise clients on how to manage their money, based upon their unique financial services. While brokers charge fees for managing a financial portfolio, navigating the maze of investments alone can be difficult for those not well versed in the markets, so the fees can be worth it.

Features

Most brokerage firms are big names, such as Fidelity or Merrill Lynch, that can help individuals and corporations invest in almost any type of financial instrument. A broker from the firm will have a consultation with you, where she examines your current financial situation, in addition to your plans for retirement. She will then recommend investments. For example, she may advise a young person to take riskier returns, while advising older clients to invest in low risk U.S. treasuries or CDs.

Online Brokerage Firms

People may now manage their own financial portfolios without an advisor, although they still use the services of a brokerage firm. One benefit is that they do not have a fee to maintain their advisor. Most online investment brokerages offer the ability to buy almost any type of security or investment with the click of the mouse. Accounts may be easily viewed 24/7, in order to manage your investment portfolio.

Warning

When dealing with so much money, the temptation for fraud on the part of an individual broker is high. Some brokers may recommend overly risky investments or too many trades, in order to increase their commissions. Other brokerage firms flaunt the regulations of the U.S. Securities and Exchange Commission, which regulates financial transactions in America. Always investigate the record of the brokerage firm that you are using.

About the Author

Chris Hamilton has been a writer since 2005, specializing in business and legal topics. He contributes to various websites and holds a Bachelor of Science in biology from Virginia Tech.

Photo Credits

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