Finance

What Are Commission Brokers, and Is It Wise to Engage With Them?

What are commission brokers?

A commission broker gets paid for every trade executed. Earning money in this way is one of the reasons why some commission brokers forget about dignity. What do we mean? Sometimes, they tend to overtrade, which we can also call churning. Since brokers earn through commissions, they may resort to excessive trades even when not in the client’s best interest. Instead, they only think about the commission they will get for every trade without considering the client’s profitability.

Brokers and their payments

We already covered a bit of how brokers are paid. Since we are talking about commission brokers, let us name a few more modes of payment for brokers. There are significantly two ways to earn as a broker. One is by commissions, and the other is receiving a flat rate. Some brokers may charge flat fees before rendering services to the client, and it does not matter how many trades or how much he will do for the client. In a sense, payment is one way for a client to protect himself against churning. Hence, a broker who charges flat rates will not encourage a client to get specific security if it’s not promising. The broker will do no such thing because the number of sales is not too relevant for him. What matters is the incentive that he gets if he can talk the client into the best-performing investments. In this way, the broker will gain more trust from the client, and the client will become more loyal in return. This will give the broker a steady income if his clients remain trusting him.

Some commission brokers are risky.

Since commission brokers’ earnings depend on how much work and trades they perform, they do more unnecessary work. Some dishonest brokers try to churn or overtrade to squeeze more commissions from the client. Some tries bucketing. Bucketing brokers buy or sell a security at a price better than what the client expected. However, this broker does not disclose that better price to the client and keeps the profit for himself instead.

What services can brokers offer anyway?

Here are the services that brokers usually offer. First, they offer advice. They can tell which stocks are wise to buy or sell. They will most likely give trading ideas since they earn by getting commissions. They need that trading volume. Next, they can also provide you with research if you need one. These researches are propriety ones from the company, and they include suggestions and recommendations when clients trade. Finally, they can also manage your account. Busy people who want to trade can commission brokers to manage their accounts as they are full-service brokers. However, that broker should be someone trustworthy because some tend to overtrade for their benefit.

Our little words

Commission brokers need to split the money they earn from clients who ask them to trade securities. So, it may be tempting for them to execute more trades than they need to. In a sense, it is also a challenging job. The income is not always steady. There are times when there are fewer clients. So, investors need to be wary of their commission brokers. If in doubt, wrap accounts and flat rate brokers are also options. 

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