What is a broker, really?
Brokers are not banks. Here's the actual difference, and why it matters for your money.
CFA · 14 yrs on a commodities prop desk · ex-lecturer, NYU Stern
By the end of this lesson you'll be able to:
- Explain the difference between a broker and an exchange
- Identify the three regulatory tiers a retail broker can sit in
- Decide which broker tier matches a beginner trading account
What exactly is a broker?
When you want to buy or sell a financial instrument — whether that's a stock, a currency pair, or a futures contract — you can't just walk up to the market and hand over your money. You need an intermediary. That intermediary is your broker.
Think of a broker like a real estate agent. You could theoretically find a house to buy on your own, but the agent has access to listings, knows the process, and handles the paperwork. Similarly, your broker has access to market liquidity and handles the mechanics of trade execution.
Brokers vs. Banks
The key difference is in how they handle your money:
- Banks are deposit-taking institutions with strict capital requirements
- Brokers are execution intermediaries — they move money to facilitate trades
- Your funds at a broker may have different protections than at a bank
The three regulatory tiers
Not all brokers are created equal. Regulation varies dramatically depending on where the broker is licensed:
Quiz — Test your understanding
1. What is the primary function of a retail broker?
2. Which regulatory tier offers the strongest protection for retail traders?
3. Why should you check if your broker is regulated?
Understanding positions
- Define long and short positions in plain language
- Explain how P&L changes when price moves