"“Broker” is one of those words often used inappropriately and without knowing their true meaning.
Today we'll look at what you need to know to understand the differences between brokers and potentially choose the right one.
The term "broker" refers to an intermediary between buyers and sellers.
This is applicable to all kinds of fields and industries such as insurance, real estate, etc.
In this article we will focus on explaining what a financial broker is and what it is used for.
Then we will see what types of brokers exist and the main differences with other related terms such as trader or dealer, which sometimes cause some confusion.
Let's get to the point:
Here is the definition of Broker
A broker is an agent or company that deals with the purchase or sale of financial instruments requested by its clients.
Its main function is to act as an intermediary between its clients and the market, finding a seller when its client gives it a buy order or a buyer when its client gives it a sell order.
Each broker will offer its clients a range of financial instruments that they can trade, such as currencies, stocks, stock indices, commodities, precious metals, energies, etc.
To operate as a broker you need to be authorized by the relevant bodies in each country where you want to operate, you need to comply with the current regulations that govern the financial markets and also be supervised by the competent regulatory bodies.
Pay attention to this last point before choosing a trading platform, because the best italian brokers are authorized and have headquarters and offices in Italy. The official list of authorized brokers acting as withholding agents is published on the Consob website.
Until a few years ago, a private investor could access financial markets only through large banks or some financial institutions.
Today, with the advancement of new technologies and the Internet, online brokers have emerged and revolutionized the industry, popularizing and, above all, democratizing investing.
This democratization allows anyone to operate from anywhere with just a computer or smartphone and an Internet connection.
All this with commissions that are significantly lower than those of traditional banks.
Difference between Broker and Trader
A trader is someone who buys and sells financial instruments on his own account. trader It's the investor who needs a broker (the intermediary with the market) to execute the required buying and selling transactions. Therefore, all traders must open an account with one or more brokers, who are responsible for executing the transactions.
There are different types of traders depending on their trading strategies and the period they usually keep their trades open.
- scalpers (who trade in very short time frames of minutes or even seconds)
- day traders (who open and close their trades on the same day)
- swing traders (who keep their trades open for days or even weeks)
- traders who trade long term for months or even years
Difference between Broker and Dealer
As mentioned above, a broker acts as an intermediary and executes transactions on behalf of a third party.
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A dealer, on the other hand, buys and sells financial instruments on his own account for himself or in some cases for his clients.
Types of Brokers
There are 2 main types of brokers according to the way they execute their clients' orders:
1- Dealing Desk Brokers
These are brokers that have a “Dealing Desk”.
This means that their clients' transactions do not actually go to the market, but are executed on the broker's dealing desk.
This type of broker creates an internal market for its clients and looks for the counterparty for each trade within the trades of its other clients.
If they don't find it, they act as the counterparty to the trade themselves, ensuring liquidity and permanent availability, even if that trade means a profit or loss for them.
2- Non-Dealing Desk Brokers
NDD (Non-Dealing Desk) brokers do not have a “money desk” and are only responsible for sending transactions to the market.
They are connected to liquidity providers (usually large banks and financial institutions) that act as counterparties to each trade.
How to choose the right broker?
There are several factors to consider when choosing a broker: the broker's reliability, its regulation, the minimum deposit required to open an account, available leverage, the financial instruments it offers, and the commissions it charges.
HOW TO CHOOSE THE BEST BROKER IN ITALY?
There is also a very useful mechanism to learn how to invest and test the services of an online broker without having to risk your own money:
Demo Trading Accounts
These are accounts that are very similar to a real trading account, but come pre-loaded with a virtual balance.
The results of your trades will increase or decrease your virtual balance and even if you will not be able to profit beyond learning.
They allow you to learn to trading or test without having to deposit your funds before you start trading on a live account.
Here is the definition of broker and the tools to choose a good trading platform.
