Types of Brokers. The trading activities done by the investors are executed by a security firm acting either a broker or a dealer. A firm acting in a brokerage capacity serves as an agent for investors by finding anther investor to take the other side of the transaction. For doing this job, the broker is compensated by a commission.
A broker in the securities markets is an intermediary representing buyers and sellers in securities transactions. Types of Brokers discussed in below.
Types of Brokers and Dealers
A dealer, on the other hand, may take positions in various securities. A dealer may buy or/and sell securities for its own account. If the dealer has a long position i. e., owns the stock and the stock declines in price, the dealer loses money. On the other hand, if the dealer has a short position in a stock, he has temporarily sold more stocks than it owns. Under this circumstance, if the stock increases in price, the dealer will lose money if it covers its short position through purchasing stock in the market prices higher than the dealer originally sold the stock for.
The difference between the bid price and ask price is the compensation (profit/loss) for the dealer. Bid price refers to the price that dealer wishes to pay to the seller of the securities and ask prices is the price at which he will sell a security. Dealers are called market makers as they will sell or buy the securities for their own account in order to balance customers’ orders. If a party of the transaction is not available, the dealer will become the second party to constitute the transaction. A vast majority of the securities firms act as both brokers and dealers.
Membership in the organized stock exchange are frequently referred to as seats, though tradings conducted without chairs. Being an investor an individual will fill out a form disclosing information about his personal income and finances. An investor will deal with a broker who will probably be his connection with the market for the same time. The broker will provide the investor with information about the company he is interested in, about general economic trends, and about other investments of interest. However, the brokers are categorized as under:
The vast majority of the seats of an organized stock exchange are owned by the commission brokers. They are he agents on the exchange floor who buy and sell securities for the clients of brokerage houses. They act like employees of a brokerage house. They communicate via telephone with brokerage, receive transactions from the brokerages that employ their services and they send back confirmation messages. They may also act dealers and seek profits by trading for their own account.
Floor broker execute orders for commission brokers having more orders than they can handle. From the brokerage house, orders of the clients will be phoned to floor of the exchange to a person called a floor broker. Floor brokers basically buy an sell securities on the floor of the exchange. They are free-lance members of the exchange and help prevent backlogs of orders, and allow many firms to operate with fewer exchange memberships than would be needed without their services.
Floor traders are sometimes called as registered traders. They differ from floor brokers as they trade primarily for their own accounts. They are speculators searching the exchange floor for profitable buying and selling opportunities. They trade free of commission as they deal for their own accounts. They can buy and sell the same security on the same day in order to profit from price movements.
The floor brokers purchase securities from a person called a specialist. Specialists are assigned to posts on the trading floor where they make a market in one or more stocks assigned to them by the exchange. These market makers act as both a dealer and a broker in the stocks assigned to them. As a broker, they execute orders for other brokers for commission and as a dealer, they buy and sell shares of their assigned stock for their own accounts. The specialists keep an investor in one or more stocks and buy and sell out of that inventory. They publicize prices at which they are willing to buy a stock and prices at which they are willing to sell. Specialists must accept the obligation to maintain a fair and orderly market for their assigned stocks.Types of Brokers.