How a brokerage account works
Who actually holds your shares, and what happens if the broker goes bust.
What a broker actually does
You cannot phone the stock exchange yourself. Exchanges only accept orders from their own members, and the broker is that member. When you press 'buy', the broker routes your order to a market and brings you back the result.
In exchange it takes either a fixed commission, a slice of the spread, or both. 'Commission-free' brokers do not work for free — they get paid elsewhere, usually by the firms that execute your orders.
That is not necessarily bad, but it is worth knowing: if you cannot see the fee, it is not missing — it has just changed shape.
The order types you will meet
A market order says 'buy it now, at whatever price is available'. It almost always executes, but in a thin market the price can turn out worse than the one you saw.
A limit order says 'buy it only if the price is below this number'. It protects you from a bad fill, but it may never execute at all.
For small, regular purchases of large stocks, the difference rarely matters. For anything illiquid or volatile, the limit order is usually the smarter choice.
Key terms in this lesson
- Broker
- The firm through which your orders reach the exchange.
- Custodian
- The institution that physically or legally holds the securities in your name.
- Limit order
- An order that only executes at the price you set, or better.
- Market order
- An order that executes immediately at the best available price.
Quick check
Why is a 'commission-free' broker not really free?
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