Understanding The Role Of A Stock Broker?

Understanding The Role Of A Stock Broker?

Financial markets have been in existence from 100s of years in some form or the other. For example, in the early 18th century, the rice traders from Japan used to gather at a particular place to trade their commodities with other potential buyers. This was the financial market 100s of years ago.

Today, we have much more complicated and sophisticated markets which are interconnected with other markets on a global scale. To trade in these markets, one needs to go to an exchange where that specific security is listed and available to trade. But the problem started to develop when the markets grew in size, and a greater number of traders started to participate. The exchanges were limited in number which couldn’t handle the crowd and therefore appointed some of the wealthy individuals and group of people to register a trade on behalf of others to weed out the crowd. Since then, the concept of stock broker has come into existence. These stock brokers eventually saw a business opportunity and started to charge a commission or brokerage from their respective clients to register/execute a trade on their behalf.

Some of the major stock brokers in Australia are Rakuten Securities, CMC Markets, IG, Saxo Bank etc.

Today, these stock brokers perform the same primary function of buying and selling of securities in a recognised stock exchange on behalf of their clients. Apart from this, they also perform other major roles which help to facilitate the smooth and efficient functioning of the financial markets. Some of the major roles performed by the stock brokers are:

  1. Trade execution

The most basic and primary function of a stock broker is to execute the orders (both buying and selling) on behalf of their clients after their due consent. No broker is authorised to execute any trade without the approval of the respective client, except in special cases as per the regulatory authority guidelines. For example, in the case of margin shortfall, the broker has full right to square off the position of the client after communicating the same with him.

  1. Risk management

The broker also helps in managing the overall risk management in the financial markets by collecting the full amount of margins as mandated by exchanges, informing clients about any major uncertain event occurring etc.

  1. Provides Liquidity

Many brokers also participate in market-making activities which provides liquidity in the markets for other participants to trade. A market maker is an individual or company who is willing to quote both the buy and sell prices in an attempt to make a profit off the bid-ask spread.

  1. Supervision of suspicious activity

One of the most critical roles for broker nowadays is to keep an eye on any suspicious activity by their clients. Suspicious activities include insider trading, buying penny stocks in massive quantity, in an attempt to artificially inflate the prices or any other activity that is not in accordance with the rules and regulations laid down by the regulators.

5. Disclosure

A broker is obliged to disclose all the necessary information related to an investment recommendation by him even at the time of opening the trading account with him. Brokers must be truthful in all communications with customers.

6. Stock Recommendations

Nowadays, almost every broker is also recommending the stocks to buy or sell based on the research done by him but can only be done after receiving the approvals from the regulatory authorities.


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