Brokerage
Definition
A brokerage is a financial institution that facilitates the buying and selling of financial assets like stocks, bonds, ETFs, and cryptocurrencies on behalf of clients.
Explanation
Brokerages act as intermediaries between buyers and sellers in financial markets. They provide platforms, tools, and research to help investors make informed decisions. Brokerages earn revenue through commissions, fees, or earning interest on client cash balances.
There are two main types: full-service brokerages (offering personalized advice and portfolio management at a higher cost) and discount brokerages (providing self-directed trading platforms with lower fees). Modern brokerages, particularly those popular with retail investors, often offer commission-free trading and mobile apps.
In the US, brokerages must be registered with the SEC and are members of FINRA. Client accounts are typically protected by SIPC insurance up to $500,000.
Example
An investor opens a brokerage account with a discount brokerage, deposits $1,000, and uses the platform to buy shares of an S&P 500 ETF without paying any trading commission.