Brokerage Company - Definition, What is Brokerage Company, Advantages of Brokerage Company, and Latest News - ClearTax (2024)

What is a brokerage company?

The vital role of a brokerage company is to act as an intermediary, connecting buyers and sellers to allow for a transaction. Brokerage firms can receive payment through a commission (either a flat fee or a percentage of the transaction amount) once the transaction is completed successfully.

For example, when a trading order is executed for a stock, a buyer charges a transaction fee for the efforts made by the brokerage firm to complete the sale. The real estate industry often works in the form of a brokerage firm, as it is common practice for real estate brokers to work with each company representing one party to the deal to make a sale.

Role of a brokerage company

In this case, the commission is shared by both brokerage companies. It may also be called a brokerage firm, or a brokerage. Brokers may work for brokerage firms or act as independent agents. In a perfect market, where everyone had full information and could act swiftly and appropriately on that information, brokerage firms would not be needed.

However, there is less than perfect knowledge of details, obscurity and asymmetric. Consequently, consumers don't always know who the sellers are and who offers the best deal. Sellers likewise are in the same position.

Brokerage companies exist to help their customers match the other side of a trade, bring buyers and sellers together at the best possible price for each one, and extract a commission for their services. When choosing a brokerage firm, investors have a range of options. The type of services a person requires depends on their level of market knowledge, sophistication, risk tolerance, and comfort in trusting others to manage their money.

Factors to consider before opening an investment account

Brokerage commissions erode returns over time so investors should choose a company that provides the most cost-effective service fees. A customer should compare prices, goods, rewards, customer service, credibility, and the quality of the services provided before opening an investment account.