Brokers are mixes of different broker types
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We talked about the advantages of handling your money on your own and looked into the differences between investing and trading. This information is crucial to find your broker because it helps to discover yourself. The other side of the coin are the brokers. Let’s investigate them in detail.
There are five types of broker businesses you should understand
Brokerage Types Explained
Online Stock brokers
Understanding online stock brokers
Online stock brokers operate as platforms where you can purchase and sell stocks. If you are looking to begin investing or trading, this is a logical starting point. As you gain more experience, you may wish to explore options beyond stocks. Some brokers will be equipped to support those needs, while others may not.
When you buy a stock through an online broker, the stock is held in your name. While this may seem obvious, it highlights a key distinction compared to betting-focused platforms.
Why does this matter?
Owning a company’s stock grants you certain rights as a shareholder. One of the most significant is the ability to receive cash dividends, which can boost your overall investment returns. This is not something you would get with spread betting.
The term “online stock broker” can be somewhat misleading, as it categorizes a broker based on a specific product type—namely stocks. Does that mean these brokers only handle stock trades? Not necessarily. In many cases, they also offer other products such as ETFs, bonds, and mutual funds. However, brokers that provide access to more complex investment products almost always support stock trading as well. For the sake of simplicity, we will continue using this term.
Take a look at the top-rated brokers reviewed by our team.
BEST ONLINE BROKERS
Brokerage Types Explained
Live brokers
Live brokers are guys sitting at the other end of the phone waiting for your orders. Or calling you. They can help you a ton, but it is very hard to find a good one. What’s more, they usually cost more than what they worth.
The advantages of live brokers are that they can
- make a trade on exotic products
- execute complicated deals
- help you to evaluate a trade idea
- call you if they have a trade idea, or there is something going wrong with your portfolio.
This is valuable information, but as you might expect, it comes at a cost. There is also a common criticism that since brokers earn commissions from trades, they may prioritize generating as many transactions as possible rather than acting in the best interest of their clients. Of course, this largely depends on the quality of the broker and the firm behind it. Unfortunately, we are not aware of any reliable independent sites that offer live ratings for brokers, which is a missed opportunity. Perhaps this is something to consider as a future project.
Brokerage Types Explained
Betting Brokers
Betting brokers are also online broker platforms. You can bet on whether asset prices will go up or down without buying the stock. It is just a bet. Betting brokers are like knives. Could be useful, but if no idea how to use, you can cut yourself.
Imagine them as bookies with whom you can bet on price movements without owning the security. Let’s say you want to profit from Microsoft stock price is going up. At an online stock broker, you buy Microsoft stock. At a betting broker, you bet with your broker whether Microsoft stock will go up or down.
Why on earth is this good for you? There are two advantages. Firstly, you can make bets on all kind of products. E.g. if you want to trade with let’s say Turkish stocks, you will be able to. This might not be possible with an online stock broker. The other advantage is leverage. You can make a larger bet with the same amount of money. This sounds complex, but don’t worry, we will get back to leverage later.
The two most common types of betting brokers are spread betting, contract for differences (CFDs) and certificates. If you see these expressions, that is a betting broker service. We will go into the differences later, but don’t worry about it for now. An important point to remember is if a broker offers you that you can reach a particular market check if it is ‘real’ market access or just the possibility to make a bet.
Brokerage Types Explained
FX brokers
What are FX brokers?
As you may have already guessed, FX brokers allow you to trade currencies. The most straightforward way to trade currencies is to exchange one currency for another. However, most FX brokers operate similarly to betting platforms. Rather than actually converting your money, you are essentially placing a bet—for instance, predicting whether the EUR/USD exchange rate will rise or fall. When a broker advertises FX trading, this is typically what they mean.
You might be wondering why FX brokers are considered a separate category. Aren’t they simply betting brokers that specialize in currency trading? Practically speaking, yes. Their advantages are the same: they offer access to a broad range of currencies and allow you to trade using leverage. That is a fair observation.
So why do we separate them? FX brokers tend to market themselves very aggressively. You have likely encountered an FX broker advertisement before—perhaps one promising lavish wealth in an impossibly short time, with a flashy reference to trading the euro. This approach works because many people have opinions about currencies like the euro or the dollar. Since they feel they understand these markets, it becomes easier to convince them to start trading currencies. However, it is important to recognize that the currency markets are filled with highly skilled traders, and achieving consistent long-term profitability in FX is extremely difficult.
Much like betting brokers, FX brokers come in many forms. Some operate responsibly, while others offer leverage as high as 400 times your invested amount—an arrangement best avoided. Some brokers hold your positions internally, while others match you with another trader on the other side of the bet. We will explore FX brokers in more detail later. For now, just keep in mind that if you decide to pursue currency trading, you will need to use an FX broker.
Take a look at the top-rated forex brokers reviewed by our team.
BEST FOREX BROKERS
Brokerage Types Explained
Binary option brokers
It is not an overstatement that you should stay away from binary option brokers. Binary options are derivatives easy to explain but hard to trade. Here it is how it goes. Let’s say you buy a binary option. You pay me 50 USD. If the S&P100 goes above 2000 points until the end of the month of the month, I give you 100 USD. If it stays below 2000, you get nothing. Simple, right? The catch is you might have an opinion on whether 50 USD is a lot or not, but there is a formula to count it based on probabilities. Most people have misleading feelings and will pay too much for the option. For now, we recommend you leave out binary option trading type. There are so million more ways to make money.
Brokerage Types Explained
Brokers are mixes of different broker types
Now you understand the five types of brokers. The next step is to realise that broker types are like business lines in brokerage companies. Imagine a broker is running a live broker business line and online stock broker business line. Ok, that was easy. Luckily it goes very similarly with the other types as well. E. g. a broker can be busy in FX trading and provide CFDs as a betting broker. Let’s see a few real life examples.
- Saxo Bank is one of the best-known brands on the market. It is primarily a betting broker doing CFD trades. Additionally, it is also an FX broker, providing FX trades very similar to specialized FX brokers. None the less, you can also buy major market stocks at Saxo, so it is also an online stock broker. But not for every market. Let’s say you want to go crazy and trade Hungarian stocks. At Saxo, it is not possible to buy Hungarian stock, but you can make a bet through CFD (e.g. a betting broker service). Clear? Lastly to make it more complicated Saxo can also provide live broker service if you are a platinum member.
- IG Broker provided CFD, FX, and Binary options but did not offer online stock broker services for a long time. As TD broadened its services from online stockbroking to FX and betting broker, IG went the other way around. It entered the online stock broker market next to providing CFD, FX, and binary.
VISIT IG BROKER
Brokerage Types Explained
Sum up questions
- What are the advantages of having a live broker?
- What is the difference between an online stock broker and a betting broker?
- What are the benefits of a betting broker?
- What are the benefits of owning stocks?
- Which are the two ways to trade currencies? In which type do FX brokers provide service?
- Explain a broker which you know and tell which kind of broker types it covers.
- Which broker type is the best fit for you?
As you can see, this is a big mess, and it is a challenge to distinguish the broker types. However, the five broker types framework helps you navigate in the brokerage world. We review the best brokers and rate their performance compared to each other. Probably, at this point, you started to think about whether you can open a foreign broker account. The short answer is yes, but unfortunately, that story is equally complicated. Let’s clear that out as well and check whether you can open a foreign account.