What a broker is and what it does
If you want a toy from a shop that only sells to grown-ups, you ask a grown-up to buy it for you. A broker is that helper for the market: you tell the broker what you want, and the broker goes to the market for you. Because you trust the helper with your money, the helper needs a licence.
- The legal meaning (United States). The US Securities Exchange Act defines a broker as "any person engaged in the business of effecting transactions in securities for the account of others", and a dealer as a person "engaged in the business of buying and selling securities for his own account". So a broker acts for you; a dealer trades for itself.
- The Philippines uses the same idea. The Securities Regulation Code (RA 8799) defines a broker as a person "engaged in the business of buying and selling securities for the account of others" (Section 3.3) and a dealer as someone who buys and sells for his or her own account in the ordinary course of business (Section 3.4).
- Many firms do both. That is why the US calls them broker-dealers. Most brokers and dealers must register with the SEC and join a self-regulatory organisation such as FINRA, and every registered broker-dealer must be a member of SIPC (with a few exceptions, for example firms whose main business is outside the US).
- What a broker does for you, step by step: opens and keeps your account; checks who you are; holds or arranges custody of your cash and investments; takes your orders and sends them to a market (or fills them itself); sends you a trade confirmation after each trade and regular account statements; and reports your account activity for tax purposes where the law requires it.
- Trade confirmations matter. Canada's Ontario Securities Commission (GetSmarterAboutMoney) says a confirmation slip lists the price, the commission you paid, the amount of each transaction charge, the date, the security and the quantity, and that brokers must send it, typically within a few days of the trade.
- A broker is not the same as an adviser. Some brokers only take your orders (in Canada, "order-execution-only" or online discount brokers). Others also give recommendations. The rules, fees and duties differ, so always ask what service you are getting.
| Word | Plain meaning |
|---|---|
| Broker (agent) | Trades for your account and is usually paid a commission or fee |
| Dealer (principal) | Buys and sells for its own account, and can be on the other side of your trade |
| Broker-dealer | A firm registered to do both |
| Custody | Who actually holds your cash and investments |
| Trade confirmation | The record of one trade: price, quantity, commission and fees |
- Take a sheet of paper and draw three boxes: "You", "Broker", "Market".
- Draw an arrow from You to Broker labelled "order + money".
- Draw an arrow from Broker to Market labelled "sends the order (agent)", and a second dotted arrow labelled "or fills it itself (dealer)".
- Under the Broker box, list its jobs from the Key facts: account, ID checks, custody, orders, confirmations, statements.
- Next to each job, write one thing that could go wrong if the firm were not honest (for example, "custody: my money is not really there").
- Check: you can explain the difference between "for your account" and "for its own account" in one sentence each.
Videos by other creators on YouTube, for reference. They are not made by or affiliated with The Future Market.
Read the video script
[Host] "You never buy a share or a currency directly from the market. Someone stands in the middle. That someone is a broker."
[Text on screen: Broker = trades for YOUR account] "In US law, a broker effects trades for the account of others. That means for you."
[Text on screen: Dealer = trades for ITS OWN account] "A dealer trades for its own account. Many firms do both, so they are called broker-dealers."
[Screen: a simple diagram, You to Broker to Market] "The broker opens your account, checks your ID, holds or arranges custody of your money, sends your orders and sends you a confirmation after each trade."
[Host] "You are trusting this firm with your money. That is why the first question is never 'how cheap?' It is 'who are you, and who licenses you?'"
Find one real trade confirmation or account statement (yours or a family member's, with permission, or a sample from a regulator's website). Circle the price, the quantity, the commission and every other fee. If you have none, write the five items a confirmation should show from memory and check them against the Key facts.
ClaudeStuck? Copy a ready-made prompt for Claude
Copy this, open Claude, paste it, and Claude will walk you through the lesson step by step.
For a grown-up: Claude is for adults (18+). Copy this, paste it into Claude, and use the answer to explain the lesson to your child.
I'm learning "Brokers Explained: what they do, how they are regulated and how to check one (education only)" on The Future Market. Lesson 1: "What a broker is and what it does". What the lesson teaches: - The legal meaning (United States). The US Securities Exchange Act defines a broker as "any person engaged in the business of effecting transactions in securities for the account of others", and a dealer as a person "engaged in the business of buying and selling securities for his own account". So a broker acts for you; a dealer trades for itself. - The Philippines uses the same idea. The Securities Regulation Code (RA 8799) defines a broker as a person "engaged in the business of buying and selling securities for the account of others" (Section 3.3) and a dealer as someone who buys and sells for his or her own account in the ordinary course of business (Section 3.4). - Many firms do both. That is why the US calls them broker-dealers. Most brokers and dealers must register with the SEC and join a self-regulatory organisation such as FINRA, and every registered broker-dealer must be a member of SIPC (with a few exceptions, for example firms whose main business is outside the US). - What a broker does for you, step by step: opens and keeps your account; checks who you are; holds or arranges custody of your cash and investments; takes your orders and sends them to a market (or fills them itself); sends you a trade confirmation after each trade and regular account statements; and reports your account activity for tax purposes where the law requires it. - Trade confirmations matter. Canada's Ontario Securities Commission (GetSmarterAboutMoney) says a confirmation slip lists the price, the commission you paid, the amount of each transaction charge, the date, the security and the quantity, and that brokers must send it, typically within a few days of the trade. - A broker is not the same as an adviser. Some brokers only take your orders (in Canada, "order-execution-only" or online discount brokers). Others also give recommendations. The rules, fees and duties differ, so always ask what service you are getting. - Word - Plain meaning The exercise I'm working on: Find one real trade confirmation or account statement (yours or a family member's, with permission, or a sample from a regulator's website). Circle the price, the quantity, the commission and every other fee. If you have none, write the five items a confirmation should show from memory and check them against the Key facts. I'm stuck. Please: 1. Explain the main idea in plain, simple words with one everyday example. 2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step. 3. Don't just give me the final answer. Help me do it myself, and check my work when I share it. 4. This is for learning only. Remind me to check with a licensed professional before I make a real decision about my own money, health or legal situation.
I'm a parent helping my child (about 8 years old) with a lesson called "What a broker is and what it does" from the course "Brokers Explained: what they do, how they are regulated and how to check one (education only)". Here's what the lesson says: If you want a toy from a shop that only sells to grown-ups, you ask a grown-up to buy it for you. A broker is that helper for the market: you tell the broker what you want, and the broker goes to the market for you. Because you trust the helper with your money, the helper needs a licence. The activity: Find one real trade confirmation or account statement (yours or a family member's, with permission, or a sample from a regulator's website). Circle the price, the quantity, the commission and every other fee. If you have none, write the five items a confirmation should show from memory and check them against the Key facts. Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words. Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time. Keep it general and educational. This is not advice for a real situation.
Sources
- SEC, Guide to Broker-Dealer Registration: www.sec.gov/about/reports-publications/divisionsmarketregbdguidehtm
- Securities Regulation Code (RA 8799), text on Lawphil: lawphil.net/statutes/repacts/ra2000/ra_8799_2000.html
- Ontario Securities Commission (GetSmarterAboutMoney), What is a trade confirmation slip?: www.getsmarteraboutmoney.ca/learning-path/diy-investing/what-is-a-trad
- Ontario Securities Commission (GetSmarterAboutMoney), Commission-free trading: www.getsmarteraboutmoney.ca/learning-path/diy-investing/commission-fre
How brokers make money: agents, dealers, market makers and "ECN/STP" labels
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Account types: cash, margin, CFD and forex, and demo
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Regulation and investor protection: who licenses brokers, and what protection covers
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How to check a broker, step by step
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Offshore and unregistered brokers, clone firms and withdrawal problems
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Opening an account safely: KYC, 2-step login and never giving remote access
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Final project
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Quiz
What is the difference between a broker and a dealer?
A broker trades for your account; a dealer buys and sells for its own account.
Why is a firm that both brokers and deals called a broker-dealer?
Because it is registered to do both, acting as agent on some trades and principal on others.
In off-exchange forex, who is on the other side of your trade?
The dealer: when you buy, the dealer sells, and when you sell, the dealer buys.
Are "ECN" and "STP" licence types?
No. They are marketing labels; your protection comes from the firm's licence, agreement and disclosures.
Can you owe more than you deposit in a margin account?
Yes. You borrow money and pay interest, and losses can exceed your initial investment.
What share of retail CFD accounts typically lose money, according to ESMA's 2018 findings?
74 to 89 percent.
What is SIPC's protection limit, and does it cover market losses?
USD 500,000 including USD 250,000 cash; it does not cover market losses.
When does CIPF coverage apply?
Only when a member firm becomes insolvent and fails to return eligible property, generally up to CAD 1 million per account category.
What should you search on a register?
The firm's exact legal name, then compare address, licence number, website and phone with what you were given.
Does "not on a warning list" mean a firm is safe?
No. A firm can operate without registration and still not be on a list.
A platform asks for a "tax" before you can withdraw. What should you do?
Stop paying, save evidence, call your bank and report it; you should never pay to get your own money back.
Name two ways to protect a new trading account.
Turn on multi-factor authentication and never give anyone remote access to your device (also: unique password, check statements).
Final exam
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Certificate
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