Broker Dealer Definition Types How To Become Broker Dealer

Broker-Dealer Definition

Explanation

A layman’s language broker-dealer is simply a person or a business firm who helps investors buy and sell securities, offer them intelligent information regarding trade, and help them book profits while charging a certain amount of fees like commission which are their main source of revenue generation. With the advent of technology, broker-dealers have also gone online, where an investor can buy, sell securities, and book profits without even speaking to them. In the same way as offline brokers here, the marginal commission is deducted from the investor’s profit. There is a thin line of difference between broker and dealer, though; a broker supports security trade on behalf of the investor. On the other hand, a dealer engages in trading activities on behalf of it.

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Types of Broker-Dealers

Wirehouse: This type of broker-dealer generally operates on a big scale and has a large and expanded service. They typically have their own set of products that they further sell to their customers and make money.Independent: They perform more of an agency or an agent’s relationship. They are independent contractors to the customers and generally sell products not owned by them but are procured from outside. They help the customer connect to such outside products, buy and sell them and book the profits. In return, they charge the customer with a certain margin or commission based on the overall trade.

Functions

A broker initiates the trade on behalf of its customers and is involved in the trade cycle.On the other hand, a dealer is representative of the brokerage firm and will initiate the trade on behalf of the account that the firm owns.The broker has to ensure there is enough liquidityLiquidityLiquidity is the ease of converting assets or securities into cash.read more in the market in the market and cater to the requirement of what its client desires.The broker has to make sure it provides effective advice about the client’s portfolio diversification and suggests different avenues to park their money.The broker-dealer has to maintain the confidentiality of every client and ensure that no bank details or any personal information are being misused.Broker-dealers also help publish investment research materialsInvestment Research MaterialsInvestment research entails analyzing the performance of various financial instruments such as stocks, mutual funds, bonds, debentures, and so on in order to present an investor with a view of how the firm is performing. It also aids in predicting their future performance for price movements.read more specific to shares or trading related, which help their customer get a brief idea about their portfolio.Brokers also play a key role in raising capital for companies by going into the free market and seeking investors to invest in a particular company.A broker functions as an agent to its customer, and dealers act as the principal to its account.

Roles of a Broker Dealer

They act as the intermediary between investors and the company where one wants to invest.They also play a key role in helping a company raise its finance in capital requirements.Dealers are the ones who act on the stance of the brokerage firm itself and initiate the transaction for the account of the firm.They play a key role in providing liquidity to securities by supporting the trade of securities in a free market and, at times, making transactions, i.e., Buying or selling securities from their accounts, to ensure the marketability of the security.They also get themselves involved in the underwriting processUnderwriting ProcessThe underwriters take the financial risk of their client in return of a financial fee. Market Makers like financial institution and large banks ensure that there is enough amount of liquidity in the market by ensuring that enough trading volume is there.read more of the securities concerned.

How to Become a Broker-Dealer?

Salary

As of 2019 data, the average salary of an independent broker-dealer working for a firm can be around $90,000 per year. It can also go as high as $180,000 based on the experience and expertise one possesses. The primary way they make money is via the brokerage feesBrokerage FeesA brokerage fee refers to the remuneration or commission a broker obtains for providing services and executing transactions based on client requirements. It is usually charged as a percentage of the transaction amount.read more too. It is the fee charged for executing a trade. A full-time serviceable broker can charge anything close to 2% of the total transaction money. On the other hand, the online broker charges comparatively less, which may be like $5 – $20 on a trade to trade basis.

Obtain necessary certificates and licenses from the federal and state The first and foremost step here is to obtain the necessary certificates and licenses from the federal and state, which will permit the person or business to deal with investment products. These generally vary by the type of product involved. Along with this, the broker-dealer has to pass a certain level of examination, which is compulsory for selling any security directly to the client or customer. Become a registered member of FINRA The next step requires you to become a registered member of FINRA, i.e., the Financial Industry Regulatory Authority, which acts as a regulator or any other self-regulatory organization. Become a member of the SIPC The third process is that you have to become a member of the SIPC or Securities Investor Protection Corporation. SIPC helps investors to be compensated in case of the investment company goes bankrupt or becomes solvent. Provide an application form, also called the BD form. The fourth step is to provide an application form, also called the BD form, for every state where the broker has decided to sell its products. This form is provided to the SEC, which helps identify the broker’s personal information like contact and any conflict of interest. Adhere to any pending formalities of any state where the broker plans to sell its product. The final step is to adhere to any pending formalities of any state where the broker plans to sell its product and thus duly complete the certifications if required. SEC has a complete set of guidelines about all the formalities, which may vary from state to state, and the broker-dealer has to follow that duly.

The first and foremost step here is to obtain the necessary certificates and licenses from the federal and state, which will permit the person or business to deal with investment products. These generally vary by the type of product involved. Along with this, the broker-dealer has to pass a certain level of examination, which is compulsory for selling any security directly to the client or customer.

The next step requires you to become a registered member of FINRA, i.e., the Financial Industry Regulatory Authority, which acts as a regulator or any other self-regulatory organization.

The third process is that you have to become a member of the SIPC or Securities Investor Protection Corporation. SIPC helps investors to be compensated in case of the investment company goes bankrupt or becomes solvent.

The fourth step is to provide an application form, also called the BD form, for every state where the broker has decided to sell its products. This form is provided to the SEC, which helps identify the broker’s personal information like contact and any conflict of interest.

The final step is to adhere to any pending formalities of any state where the broker plans to sell its product and thus duly complete the certifications if required. SEC has a complete set of guidelines about all the formalities, which may vary from state to state, and the broker-dealer has to follow that duly.

Conclusion

Broker-dealer are the key people one will interact with when it comes to our investing needs. They are on a paid basis but duly help the customers to execute the trade and also make money. They also offer intelligent advice based on their experience so that the customers don’t end up losing money. They make sure that the portfolio of the customer is built in the most efficient manner where there is ample scope of diversification too.