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In: Finance

how do brokerage firms make money through Trading profits on stocks and Trading profits on bonds

how do brokerage firms make money through Trading profits on stocks and Trading profits on bonds

Solutions

Expert Solution

To buy and sell stocks, bonds and mutual funds, you need a broker. A broker can either be an individual licensed agent or a brokerage. The most basic function of a broker is to execute trades for the investor, but many brokers offer additional services like investment advice and portfolio management. Brokers make money by charging commissions on each trade and collecting fees from investors.

  • Commission and fees - Charging investors a fee to buy/sell securities. Securities are the financial instruments that has monetary value and can be traded.Securities are generally classified as either equity securities such as stock and debt securities such as bonds and debentures.
  • Interest on idle cash - Accruing interest from investor's money.Accruing interest is the interest on bond that has accumulated since the principal investment.
  • Interest on cash lent in margin account - Charging interest on the borrowed money in a margin account.
  • Fees charged for short selling - Charging the investor for the securities that have been lent.
  • Payment for order flow - Market makers pay the brokerage firm for the right to transact with the firm's clients. Assuming the firm itself is not a market maker.
  • Exchanges pay firm for liquidity - Exchanges where the buying/selling of securities are taking place, pay the firm for providing traffic so to speak.

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