What is a 'Brokerage Company'
A brokerage company’s main duty is to be a middleman that connects buyers and sellers to facilitate a transaction. Brokerage companies receive compensation by means of commission once the transaction has successfully completed. For example, when a trade order for a stock is executed, an investor pays a transaction fee for the brokerage company's efforts to complete the trade.
BREAKING DOWN 'Brokerage Company'The real estate industry also functions using a brokerage company format as it is customary for real estate brokers to collaborate, each company representing one party of the transaction to make a sale. In this case, both brokerage companies divide the commission.
Choosing a Company
A brokerage company is also called a brokerage. Investors have a range of options when choosing a company to work with. An investment brokerage is authorized to trade securities for buyers and sellers.
Brokerage commissions erode returns, so investors should select a company that provides economical fees. Before opening an investment account, do research and compare fees, products, benefits, customer service, reputation and the quality of services provided.
Full-service brokerages are also known as traditional brokerages. These companies offer estate planning services, tax advice and consultations. These companies also offer up-to-date stock prices, quotes, and research on economic conditions and market analysis.
Traditional brokerages charge a fee, commission or both. For example, a brokerage may charge a load fee up to 5.75% for mutual funds. Broker commissions average about 2%. In addition, brokers sell their clients’ additional products to earn supplementary fees.
A discount brokerage typically charges less than a traditional brokerage. Several companies also offer advice at a lower cost. However, the depth of the advice depends on the size of an investor’s account. These types of companies charge a lower commission by having their clients conduct trades via computerized trading systems.
These companies may do business over the phone or on the Internet. These companies charge a minimum commission of $5 up to a higher rate of $45 for a broker assisted trade. Clients can wire money to their account and access tax documents.
Online brokerages only offer a website for investors to conduct transactions on their own. Clients can communicate by email or phone to conduct trades or ask questions. These companies offer their services at a discounted rate because they don't offer investment advice.
Captive brokerages are affiliated with a specific mutual fund company. Captive brokers are biased and are persuaded to recommend and sell mutual funds that the mutual company owns. As a result, brokers may sell client’s products that are not in their best interest.
Independent brokerages are not affiliated with any mutual fund company. They function similarly to a full-service brokerage. Typically, these brokers are not biased and can recommend and sell client’s products that are in their best interest.