What is an online broker?

An online broker is a broker that interfaces with customers over the Internet instead of face-to-face. It is a brokerage firm that people visit online, rather than in a physical office. Because running costs are higher for bricks-and-mortar brokers, online brokers offer lower fees. They also offer resources so that the customer can engage in do-it-yourself investment trading.

The term ‘online brokerage firm’ means the same as ‘online broker.’ In the United States, many people refer to online brokers as discount brokers.

People involved in online trading use online brokers.

Broker is a go-between

Securities brokers or stockbrokers handle customers’ orders to purchase and sell securities. They act just like a grocer, i.e., as the middle-man between food producers and food consumers.

However, in the case of the brokers, they are the middle-men between tradable securities and investors who purchase and sell them.

Online brokers are middlemen too. However, they operate online. They do not see their customers face-to-face. Everything takes place on the Internet.

Brokers may specialize in securities, insurance, or real estate. In this article, the term ‘online broker’ refers to securities. Securities are financial instruments that people buy and sell, such as bonds or shares.

We can use the word ‘broker’ for a person or firm. However, in most cases, online brokers are firms.

According to IG Bank:

“An online broker is a trading provider that allows its clients to open and close positions using a digital platform.”

“Before the internet became ubiquitous, individual investors would either have to place orders over the phone or allow their broker to place trades on their behalf.”

Online broker - image explaining meaning
If you use an online broker, you are investing online without the face-to-face help of a trained stockbroker. In other words, you might not be fully aware of the potential risks of investing in a particular security.

Online broker gives greater control

With an online broker, customers have much greater control over trades. They can execute them much faster than they ever could over the telephone.

Thanks to the Internet, investors can manage multiple positions simultaneously. The online broker has opened the door to the world of investments to a wide range of people.

In other words, online brokers have opened up financial trading to more people than anybody had expected.

The online broker – brief history

Before the Internet existed, investors had to place their orders either through a stockbroker, in person, or via the telephone. The brokerage firm would then enter the order into their system. Their system was linked to the exchanges and trading floors.

In 1985, America Online and Compuserve hosted Trad-Plus, a retail trading platform. William Porter, one of Trade-Plus’ founders, created E-Trade Securities Inc. in 1991.

K. Aufhauser & Company, Inc. offered online trading via its WealthWeb. Since then, online trading has been expanding rapidly. (TD Ameritrade later acquired Aufhauser & Company, Inc.)

If you want to trade today, your online brokerage firm provides you with an online trading platform. The platform is a sort of hub.

The platform allows investors to trade various types of securities. For example, they can buy and sell mutual funds, options, equities/stocks, and bonds.

Video – What is an online broker?

This Clay Trader video explains how an online broker works.