Module 1: Introduction to the Stock Market
Brokers & Brokerage Accounts
Lesson 3: By the end of this class, you will understand what brokers are, how they operate, and the types of accounts you can use to trade stocks safely.
Let's Learn
What Brokers Are
A broker is essentially your gateway to the stock market. You cannot buy or sell shares directly on the exchange without one. Brokers act as intermediaries, taking your buy or sell orders and sending them to the market.
In addition to routing orders, brokers provide the platforms and tools that make trading accessible, from charts and alerts to research reports and paper trading accounts.
Let's Learn A Little Bit Mour
Order Routing and Payment for Order Flow
When you place a trade, your broker decides how to route your order. Some brokers sell your order flow to market makers, which is completely legal and very common.
This means that instead of sending your order directly to the exchange, it goes to a firm that fills it for you. The trade still happens at a fair price, but sometimes there can be small differences in execution speed or the price you receive. It’s worth understanding how your broker handles this so you know what to expect.
Tell Me About The Different
Trading Account Types
Brokers generally offer two main types of accounts, as well as a simulated version so you can practice your trades without risking real money:
Cash
You can only trade with the money you deposit. There is no borrowing, so the risk is limited to the funds you put in.
Cash accounts are subject to more severe restrictions if you trade with unsettled funds because of the extra risk your broker takes since they have to cover the cost & risk of your trade while that cash settles.
Selling shares you've bought with unsettled cash may result in a Good-Faith Violation (GFV). There is no limit for how many daytrades you can execute on a cash account other than what you can afford with your settled cash.
Margin
This allows you to borrow money from your broker to increase the size of your trades, as well as to perform certain types of trade like shortsells. While this can amplify gains, it also increases risk and comes with interest costs. Using margin without understanding it can quickly lead to large losses and potential liability since you're borrowing money.
Margin accounts with less than $25,000 are subject to the Pattern Day Trader (PDT) Rule. This is an SEC/FINRA regulation which states that if you execute more than three (3) round-trip changes of ownership within a five (5) day rolling period, you will be flagged as a PDT and may face restrictions.
Paper
Paper trading accounts are simulated accounts which use virtual money. These are sandbox accounts which can be reset over and over again as you collect data about the market and your trading. Beware, however, this ability to reset without consequence can lead to bad habits which can then carry over into your real account if you're not careful!
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What About
Commissions, Fees, and Regulations
Many brokers today offer commission-free trading, but there can still be hidden costs such as:
- Margin interest
- Fees for certain order types or account services
- Payment for order flow considerations
All brokers in the United States are regulated to keep your investments safe. The two main regulators are:
- Financial Industry Regulatory Authority (FINRA)
- U.S. Securities and Exchange Commission (SEC)
Knowing which rules protect you and what fees to expect is important before you start trading.
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