Brokerage house – What is it, definition and concept | 2022

A brokerage house is an intermediary institution between buyers and sellers of equity and fixed income securities.

In this sense, brokerage firms earn money by charging fees and commissions resulting from such operations. They also offer a variety of financial services related to advice and research.

Characteristics of the brokerage house

These organizations are made up of brokers, duly authorized, who carry out the intermediation activity. These brokers specialize in different financial instruments to tell the most detailed and accurate information possible. Consequently, the strengths of the brokerage house depend on this specialization. For example, there may be brokerage firms specializing in stocks, bonds, mutual funds, or options.

They may also offer banking services such as issuing checks and cards. This, supported by the balance that customers maintain in their accounts. In addition, in some cases, they pay interest rates that can be higher than those offered by commercial banks.

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Among other financial services that they offer are market research and investment strategies. As specialists in the financial market, they provide advice to maximize their clients’ profits depending on risk aversion.

Finally, despite these services, they can become purely intermediary organizations that meet customer demands. For example, ordering you to buy a certain specific instrument, avoiding consulting for the formation of a portfolio.

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How do brokerage houses work?

Generally, the relationship between client and broker involves opening an account at the brokerage house. To do this, the client provides basic information about the person and their income. Furthermore, he deposits the amount of money that he wishes to invest.

Usually, depending on the operations carried out, the organization charges a commission. However, this is not the only way they have to generate income. As the business diversifies, other sources of income appear. For example, annual or account maintenance fees, advice, transfer of assets and money, inactivity fees, among others.

These rates, fixed or variable, depend on each brokerage house and the affiliation plans they offer. Therefore, they can be indicative of the quality of service. For example, customers who handle large volumes of money can enjoy lower percentage rates.

Also, they may depend on the speed at which the brokerage house can execute the operation. In this sense, they would be higher rates for more instantaneous operations.

Importance of brokerage firms

The main function of these organizations is to connect sellers and buyers to reach an agreement. The agreement is reached when both parties decide on a price and the operation is executed. Without the existence of these houses, the asymmetry of information can harm any of the parties in a significant way for their assets.

Therefore, these exist to guarantee a price according to the current market situation. This helps reduce the risk of market manipulation, although it may not completely eradicate it.

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