What Is a Broker?

Every article about investing ends in the same place. Open a brokerage account, and start.

Then it stops. It doesn't say what a broker is, or what happens to your money between deposits. It doesn't say whose name your shares end up in. It certainly doesn't say how a firm that charges you nothing to trade pays for its staff.

So here's the sentence the rest of this article unpacks. A broker is a licensed middleman: it sends your order to the market, and then it holds the shares for you.

You can't just phone the exchange

Say you want a share of a company listed in New York. You know the price. You have the money. You still can't buy it.

An exchange isn't a shop. It's a members-only network, and it accepts orders from its members only — a few hundred firms that have posted capital, passed the checks and signed up to the rules. You aren't one of them, and you can't become one for the price of a single trade.

A broker is your membership. It's a firm licensed by your country's financial regulator and admitted to the exchanges, allowed to place orders there on behalf of people who aren't members. When you press buy, you're asking a member to act for you.

One thing to clear up while we're here: the company isn't involved either. Your money goes to whoever sold you the share, not to the business. Where a company's money actually came from is its own article — primary vs secondary market, linked at the end.

So what does a broker actually do?

A broker is a licensed middleman: it sends your order to the market, and then it holds the shares for you. That's the whole job, and it breaks into four things.

1. 1Opens the account. It checks who you are, where your money came from, and which country's rules apply to you. That's the paperwork at signup, and it's a legal requirement rather than a formality.
2. 2Holds your money. Cash you've deposited and haven't spent yet sits with the broker, kept separate from the firm's own money.
3. 3Routes your order. When you press buy, the broker decides where the order goes: an exchange, another firm, or its own book. Then it gets the order filled. Where it goes, and why, is the stock market article, linked at the end.
4. 4Keeps the shares. Once the trade settles, the broker holds the shares and keeps the record of which ones are yours. This is the job that lasts for thirty years.

Three of those take a second each. The fourth one runs for as long as you own anything.

The account is not the shares

A brokerage account is a wrapper. It holds two different things, and people forget they're different.

One is cash: money you've paid in, or money from something you sold, sitting there uninvested. The other is securities: the shares and funds you've bought. Buying moves value from the first to the second. Selling moves it back.

It is not a bank account. Your broker isn't a bank, your cash there isn't a bank deposit, and the scheme that protects it isn't the one that protects your current account. That distinction does nothing for you on an ordinary Tuesday and everything on the worst day, which is the section after next.

Accounts also come in types, and the type is usually a tax question rather than a broker question. Most countries have at least one sheltered wrapper for long-term saving and one ordinary taxable account. Which ones exist, what you're allowed to put in them and how they're taxed varies by country — check yours, or ask someone qualified where you live. The broker just supplies the wrapper.

Whose name is on your shares?

Almost certainly not yours.

When you buy, the broker doesn't go and write your name on the company's share register. It puts the shares into a pooled account held in a name that isn't yours, alongside every other customer who bought the same company. That pooled account is called a nominee account. The broker then keeps its own record of how many of those shares are yours.

You're the beneficial owner: the shares are yours, the economics are yours, and the name on the register is the nominee's. The firm doing the actual holding is the custodian, which is sometimes the broker itself and sometimes a separate specialist firm it hired.

This is why your dividends and your votes arrive through the broker. The company pays the nominee, the nominee's records say what share of that is yours, and the broker credits your account. If there's a shareholder vote, the broker asks whether you want to instruct it, and passes your instruction up the chain.

It reads like a weak link and it's the opposite. Those pooled shares are held apart from the broker's own assets. They aren't the broker's to spend, to pledge, or to lose. That's also why the broker's regulator matters at least as much as its fees, which is the next section.

It costs $0. So how do they make money?

Buying a stock at a big broker costs $0. Not cheap. Zero. Somebody still has to pay for the app, the licences, the compliance staff and the statements.

You do. Just not at the moment you trade, and not in a number that ever looks like a bill.

Take a $10,000 account belonging to somebody completely ordinary: a little cash drifting between deposits, one holding bought in another currency, a handful of trades in the year. Price that year, line by line.

There are five lines, and each one is a habit rather than a charge:

• Interest on cash you left sitting. The broker earns about 3.58% a year on customer cash and passes back around 0.19%. It keeps the gap.
• Converting your currency. Buy something priced in another currency and the conversion carries a fee — 0.25% at one large European broker, charged once on the way in.
• Interest on money you borrowed. Borrow to buy more and you pay 11.825% on a small balance, while that money costs the broker about 0.70% to fund.
• Lending your shares out. Someone who wants to sell a share short has to borrow it first. On a share short sellers actually want, the fee runs near 9% a year, and a broker that shares it hands back 50% to the customer whose shares were lent.
• Selling your order. Where it's legal, a trading firm pays your broker for the right to fill your order.

Rank those five and the answer is interest. Not the visible fees, not the trading — interest, earned on your cash and on money lent to other customers. At the brokers big enough to be listed and to publish the split, it's comfortably the biggest thing they earn.

For you it's narrower than that, and it stings more. You don't borrow, so the interest that applies to you is interest on the cash you left sitting. On that $10,000 account it's $27.12 of the $32.32 the broker earns in the year. The currency conversion is $5.00. All the trading put together is $0.20.

0.323% a year is a real fee. Put it next to a fund's expense ratio, where you'd never accept a number you couldn't see.

Now the honest half, because this isn't a conspiracy. Take the same $10,000 and invest every dollar of it. No cash sitting, nothing bought abroad, nothing borrowed, no trades at all. The broker earns $0.00 — 0.000%. A reader who does the boring thing properly costs their broker money, and somebody else's account pays for the servers.

And the sharp end. Park most of that same balance in cash because you haven't decided what to buy yet, and the broker earns $203.44 a year off you. That's 2.034%, or 6 times the typical account, while the app still says $0 and you feel like you're being careful.

Borrowing pushes it further again. Trade often, convert currency, borrow to buy more and lend your shares out, and the same balance pays $590.50 a year, or 5.905% — $333.75 of it on borrowed money alone.

That's the trick, and it isn't a scandal. The cost moved off the receipt and into your habits, and the most expensive habit on the list is leaving money uninvested.

One of those five lines depends entirely on where you live. Whether anyone is allowed to pay your broker for your order is a national question, and the three big answers are different:

• United States. Legal, disclosed quarterly under SEC Rule 606, and the reason a US app can charge you nothing.
• United Kingdom. No single rule bans it. The FCA polices being paid for your order under its conflicts, inducement and best-execution duties, which a broker can't square with taking the money — so a UK broker charges you a commission instead.
• European Union. Banned outright by MiFIR Article 39a. The last national exemption expired on 30 June 2026.

The order is the same order and the shares are the same shares. The hands it passes through, and who pays whom, are not. Which order type you send is a separate decision with its own article: market vs limit orders.

What happens if your broker goes under

Brokers do fail. Rarely, but they do.

Start with the part that isn't a compensation scheme, because it does most of the work. Your shares are held apart from the broker's own money and its own assets. They were never the broker's to lose. When a firm fails, an administrator identifies the client assets and they go back to the clients or move to another broker. That's segregation, and it's a rule rather than a courtesy.

It's slow, it's frightening, and you can't trade while it happens. The shares are still yours.

Compensation schemes cover what segregation doesn't: a shortfall in what should have been there, cash caught in the middle, money that went missing.

In the United States, SIPC covers up to $500,000 per customer, and $250,000 of that is the most it will replace in cash. The cash figure sits inside the total, not on top of it.

In the United Kingdom, the FSCS pays up to £85,000 per person per firm, as one limit covering the whole claim. Across the European Union the Investor Compensation Schemes Directive (97/9/EC) sets a floor of €20,000. It's a minimum every member state has to meet, not the figure your own country stops at — check yours, because several pay more.

Australia has no equivalent scheme, and it's worth saying so plainly. No fund gives your assets back if the broker fails. The last-resort scheme pays up to A$150,000, and only on a complaint ruling the firm never paid. What protects an Australian investor is the client-money rules and holding shares registered in their own name, not a compensation fund.

Now the limit that matters more than any of the caps. SIPC does not protect against the decline in value of your securities. It pays out when the firm fails, not when the investment falls — FSCS won't compensate you for poor performance.

They cover the firm failing. They don't cover you being wrong. Nobody anywhere insures a share price, and a scheme that did would be an insurance policy on your own judgement.

The kinds of broker — and the one that isn't one

Brokers differ mostly on one axis: how much of the job they do for you, and how much they hand you the controls.

• Full-service. An adviser picks, you pay a percentage of everything.
• Robo-adviser. Software picks a fund mix and rebalances it.
• Discount broker. You pick, it executes and holds. Most people's answer.
• App broker. The same job on a phone, with fewer account types.

All four of those buy you the actual asset and hold it. They differ on price, on how much choosing they do, and on how much hand-holding comes with it. Which one to actually open is a different question with a different article: the four-way comparison of the big US brokers, linked at the end.

Then there's the fifth, and it's on that chart below the line for a reason. CFD shop: Never buys you the share. You hold a bet against the house.

You never own the share. You hold a contract with the firm, settled in cash, and the firm is usually on the other side of your position — so it does better when you do worse. It's a different product under different rules, it's banned for retail customers in some countries and restricted in others, and it has its own article: what is a CFD.

How to tell a real broker from a lookalike

This is the most useful two minutes in the article. Every legitimate broker appears on a public register kept by a regulator, and anybody can search it.

1. 1Find your own regulator and go to its site by typing the address yourself. Not a link in an email, not a link in the app, not the first search result. Fake firms buy ads.
2. 2Search the register for the firm's name and match the details: legal name, firm reference number, address. If the app's name isn't the registered name, find out why before you deposit anything.
3. 3Check what the firm is actually permitted to do. Plenty of registered firms may advise you but may not hold your money, and a licence for one is not a licence for the other.
4. 4Walk away from guaranteed returns, from a personal account manager who telephones you, and from any pressure to deposit before a deadline. Real brokers are boring and in no hurry.
5. 5Walk away faster from a withdrawal that requires a payment first. No legitimate broker charges you a fee to release your own money.

That last one is the mechanism behind most investment fraud. The balance on screen is a number in somebody's database, the money left long ago, and the withdrawal fee is the last payment they'll ever get from you. How that structure works, and how it always ends, is the article on Ponzi schemes.

You're allowed to leave

The broker you open first is not the broker you're stuck with.

You can move an account to another firm without selling anything. It's called an in-kind transfer: the holdings themselves move across, position by position, and you're never out of the market while it happens. You fill in a form at the new broker and it chases the old one.

It's slow, days and sometimes weeks, and the broker you're leaving may charge an exit fee. The alternative is selling everything and buying it back, which in a taxable account can trigger a bill you didn't need to trigger. So transfer rather than sell where you can, and look up the exit fee before you open the account rather than after.

Knowing that changes what the first decision feels like. Pick a regulated broker in your own country that does what you need this year. If it stops fitting, you move.

The one sentence worth keeping

A broker is a licensed middleman. It sends your order to the market, and then it holds the shares for you.

Everything else follows from that. It's regulated because it's holding your assets. The shares sit in a pooled name because that's how holding at scale works. It costs $0 to trade because the money is made elsewhere. And the single biggest thing you can do about any of it is not to leave money sitting in cash while you decide.