What is a broker? Definition and meaning
A broker is a person who buys and sells things on behalf of other people, or arranges transactions between a purchaser and vendor, and receives a commission when the deal is completed.
When brokers also act as purchasers or sellers, they become the principal party to the deal.
A broker may be a firm – it acts as an agent for a customer, who pays it commission for its services.
Mrs. Smith, who is recently widowed, needed to sell her late husband’s yacht. She got in touch with Linda Robinson, a yacht broker, who found a buyer and made sure the transaction went through smoothly. Ms. Robinson received a fee – a percentage of the final sale price – for her services.
Brokers commonly used in many industries
Brokers are common in many industries – they typically represent the seller of a property. For example, a licensed real estate broker may advertise the property for sale, show it to prospective purchasers, determine its market value, advise its clients regarding offers and other related matters.
In the vast majority of cases, the broker works on behalf of the seller. Some of them represent the buyer. They can never represent both the buyer and seller at the same time.
Brokers are common in the financial world, they work on behalf of clients selling – and sometimes buying – bonds, stocks and other financial services.
The Financial Times FT Lexicon says the following regarding the meaning of broker:
“Generally, an intermediary who helps to effect (who brokers) a transaction between two parties. They normally specialise in a particular business, such as insurance and real estate. In securities trade, the broker acts an agent for a buyer or seller, charging a commission (a brokerage fee) usually based on a percentage of the value of the transaction.”
Brokers no longer just for rich clients
In the past, brokers were only used by wealthy people when trying to access the stock market. The Internet has changed all that. Today there are thousands of online discount brokers – they allow investors to trade at considerably lower costs compared to their pre-Internet counterparts. Online brokers, unlike face-to-face ones or those who talk on the telephone with clients, do not provide personalized advice.
In some sectors, such as the stock market or real estate, to use the title ‘Broker’ you need to be fully-licensed after passing several exams. In others, there are no requirements.
Thanks to the Internet, virtually every citizen in the advanced economies can today afford to invest in the stock market.
Why use a broker?
The main advantage in using brokers is that they know their market well – they are experts – and have established relations with prospective accounts. They know who to talk to, what to do, and how to do it.
A broker also has the resources and tools to reach the widest possible base of buyers. They screen these potential purchasers for revenue that would support the potential acquisition.
Before deciding whether to hire a broker, you should check what the requirements are in your country or market for somebody to use the title. In real estate, for example, there are strict requirements in most regions of the world for using the term. In other industries, such as selling aircraft, the title is more loosely used.
What is a commercial finance broker?
According to the NACFB (National Association of Commercial Finance Brokers), a commercial finance broker is somebody who channels funds from lenders to commercial businesses – they find lenders for companies.
A well-trained commercial finance broker will know the details of several alternative lenders – not just the well-known ones. They also know the types of enterprises that each lender tends to focus on.
This type of broker works on behalf of companies that are looking to borrow money from specialized lenders. Through their knowledge and expertise, they will match a borrower’s requirements with the most suitable lender operating in the market.
On its website, the NACFB writes:
“Small and medium-sized businesses who struggle to find funding from high street banks can tap into the expertise of the Commercial Finance Broker.”
Examples of some types of brokers:
– Business brokers: also called intermediaries or business transfer brokers. They help buyers and sellers of privately held commercial enterprises in the buying and selling process.
– Cargo brokers: also known as shipping agents or port agents. These people are responsible for handling shipments and cargo on behalf of their clients at ports and harbors globally.
– Commodity brokers: they execute orders to buy-sell commodity contracts on behalf of clients.
– Information brokers: or data brokers. They gather information, often about individual people. The information is then sold to companies that use the data to target advertising and marketing towards specific groups.
– Insurance brokers: known also as insurance agents. They sell, solicit or negotiate insurance for compensation.
– Intellectual property brokers: mediate between buyers and sellers of intellectual property. They may also manage the many steps in the process of reaching a deal related to the purchase, license, sale, or marketing of intellectual property assets such as trademarks, patents or inventions.
– Investment brokers: bring together purchasers and sellers of investments. In most countries they need to be licensed to act on behalf of buyers-sellers of stock.
– Mortgage brokers: act as intermediaries. They broker mortgage loans on behalf of people or businesses.
– Pawnbrokers: offer secured loans to people with items of personal property that are used as collateral. They typically accept jewelry, computers, video game systems and other possessions as collateral.
– Ship brokers: are specialist intermediaries/negotiators between shipowners and charterers who use ships to transport cargo. They may also facilitate business between buyers and sellers of vessels.
– Stockbrokers: are regulated professionals, usually associated with a broker-dealer or brokerage firm that buys-sells stocks and other financial securities on behalf of both retail and institutional clients through a stock exchange or over the counter. In the USA, to become a licensed stockbroker you need to pass several demanding exams (Series 7 and either the Series 66 or Series 63 exams).
– Yacht brokers: represent sellers or buyers of yachts or boats.
Video – Day in the life of a broker
This ICAP Media Centre video looks at a day in the life of three brokers – one lives in New York, another in London, and the other in Australia.