Commission Broker

Commission Broker Floor Broker Stock Broker Bonds Trading Commodities Trading Financial Markets Brokerage Commission-Based Trading
A commission broker is a type of broker, usually a floor broker, who executes trades of stocks, bonds, or commodities for a commission.
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Commission Broker

Definition

A commission broker is a financial intermediary who executes trades of stocks, bonds, or commodities on behalf of clients. Operating primarily on the trading floor of a stock exchange, these brokers carry out buying and selling orders as directed by their clients. In return for their services, commission brokers earn a fee, commonly referred to as a commission. Their primary role is to facilitate efficient market transactions, ensuring the best possible prices for their clients within specified parameters.

Examples

  1. Stock Trading: A commission broker on the New York Stock Exchange (NYSE) might execute a large buy order for a client looking to invest in blue-chip stocks. The broker would ensure the buy order is filled at the most favorable price, given the current market conditions.
  2. Bond Trading: A client wanting to purchase government bonds would hire a commission broker to execute the transaction. The broker navigates the bond market to acquire the securities at a competitive rate.
  3. Commodity Futures: A commodities trader uses a commission broker to handle the purchase of futures contracts on agricultural products like wheat or corn. The broker executes the trade on commodity exchanges such as the Chicago Mercantile Exchange (CME).

Frequently Asked Questions (FAQs)

  1. What is the primary role of a commission broker?

    • The primary role of a commission broker is to execute trades for clients on a commission basis, ensuring favorable market conditions and best execution practices.

  2. How does a commission broker differ from a full-service broker?

    • A commission broker focuses mainly on executing trades, while a full-service broker provides a wide range of services, including investment advice, financial planning, and portfolio management.

  3. Are commission brokers only found on trading floors?

    • While traditionally associated with trading floors, commission brokers can also operate electronically through various trading platforms.

  4. How are commission rates determined?

    • Commission rates can vary and are generally based on the value and volume of the trades, as well as the broker’s fee structure.

  5. Is a commission broker the same as a discount broker?

    • No, commission brokers charge fees per trade, whereas discount brokers usually charge lower fees and may offer fewer services.
  • Floor Broker: A broker who executes orders on the exchange floor on behalf of clients.
  • Full-Service Broker: A broker offering a comprehensive range of services including investment advice and management, not just trade execution.
  • Discount Broker: A broker offering low fees for trade execution but limited in additional services like advisory.
  • Stock Exchange: A marketplace where stock brokers and traders can buy and sell securities.
  • Futures Contract: An agreement to buy or sell an asset at a future date at an agreed-upon price.

Online References

Suggested Books for Further Studies

  • “Options, Futures, and Other Derivatives” by John C. Hull
  • “Market Wizards: Interviews with Top Traders” by Jack D. Schwager
  • “The Intelligent Investor” by Benjamin Graham

Fundamentals of Commission Broker: Finance Basics Quiz

### What is the primary role of a commission broker? - [x] To execute trades for clients for a commission. - [ ] To provide investment advice and financial planning. - [ ] To manage a client’s entire investment portfolio. - [ ] To act as a custodian of funds and securities. > **Explanation:** The primary role of a commission broker is to execute trades of stocks, bonds, or commodities on behalf of clients for a commission. ### Where do commission brokers traditionally operate? - [x] On the trading floor of an exchange. - [ ] In a corporate office. - [ ] In a bank branch. - [ ] At a private equity firm. > **Explanation:** Commission brokers traditionally operate on the trading floor of a stock or commodities exchange, executing orders on behalf of their clients. ### What type of fee does a commission broker earn? - [x] A commission. - [ ] A fixed salary. - [ ] A percentage of profits. - [ ] A retainer fee. > **Explanation:** Commission brokers earn a fee called a commission for executing trades on behalf of their clients. ### How does a commission broker differ from a full-service broker? - [ ] A commission broker provides broader financial services. - [x] A commission broker mainly focuses on trade execution. - [ ] A commission broker offers only investment advice. - [ ] A commission broker provides free trading services. > **Explanation:** A commission broker mainly focuses on trade execution, while a full-service broker offers a wider range of services including investment advice and portfolio management. ### Can commission brokers also operate electronically? - [x] Yes. - [ ] No. - [ ] Only if they are also licensed as investment advisors. - [ ] Only for small trades. > **Explanation:** Commission brokers can also operate electronically via various trading platforms, not just on physical trading floors. ### What is a common client of a commission broker looking to invest in? - [x] Stocks, bonds, or commodities. - [ ] Commercial real estate. - [ ] Art or antiques. - [ ] Collectible cars. > **Explanation:** Clients of commission brokers typically look to invest in financial instruments like stocks, bonds, or commodities. ### What might affect the commission rate charged by a broker? - [x] The value and volume of trades. - [ ] The broker's personal investment. - [ ] The client's credit score. - [ ] The local real estate market. > **Explanation:** The commission rate charged by a broker is generally based on factors like the value and volume of the trades and the broker’s fee structure. ### Who typically uses the services of a commission broker? - [x] Investors looking to buy or sell stocks, bonds, or commodities. - [ ] Retail customers seeking shopping advice. - [ ] Tourists needing travel arrangements. - [ ] Homeowners wanting to refinance mortgages. > **Explanation:** Investors looking to buy or sell financial instruments such as stocks, bonds, or commodities typically use the services of commission brokers. ### In what scenario would a commission broker execute a trade? - [x] When directed by a client’s order. - [ ] When they believe market conditions are favorable. - [ ] To balance their own portfolio. - [ ] After consulting with a financial advisor. > **Explanation:** A commission broker executes trades when directed by a client’s order, ensuring transactions occur as per client instructions. ### Which of the following is NOT typically a service of a commission broker? - [ ] Executing stock trades. - [ ] Buying commodity futures. - [ ] Trading bonds. - [x] Offering comprehensive financial planning. > **Explanation:** Comprehensive financial planning is typically not a service provided by commission brokers; this is usually offered by full-service brokers.

Thank you for exploring the concept of Commission Brokers with us and testing your understanding through our quiz. Keep advancing your financial proficiency!

Wednesday, August 7, 2024
Commissions Paid Account
Commission
Electronic Communication Network (ECN) January 1, 1
Going Short January 1, 1
Good-Till-Canceled Order (GTC) January 1, 1
Margin Call January 1, 1
Regular-Way Delivery (and Settlement) January 1, 1
Share Broker January 1, 1

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