What is an online broker, and do you need one to invest?
An online broker is the platform you use to buy and sell investments like stocks. This guide covers what a broker actually does, why you cannot trade on an exchange without one, how "free" brokers make money, and how to choose one. No experience required.
01 The basics
What is an online broker?
An online broker is a licensed company that lets you buy and sell investments through an app or website. When you tap "buy" on a stock, the broker takes your order and gets it filled on your behalf. You are the investor, the broker is the middleman that connects you to the market.
If you have used an investing app, you have used a broker. The app is not a separate portal to some other company, the app is the broker. That trips up a lot of new investors, so it is worth saying plainly: the platform you sign up with is the broker itself.
Brokers exist because you cannot walk onto a stock exchange and trade directly. Exchanges only deal with licensed members. The broker is your licensed access point, holding your account and routing your orders to where they get filled.
Here is what happens when you place a buy order through a broker.
Fund the account
You add money to your brokerage account.
Place an order
You choose a stock and enter how much you want to buy.
Route the order
The broker sends it to an exchange or market maker to be filled.
Settle
Ownership of the shares transfers to you and they appear in your account.
Brokerage account
The account you open with a broker to hold your money and your investments.
Order routing
The process a broker uses to send your buy or sell order to an exchange or market maker.
Settlement
The final step where ownership of the investment officially transfers to you.
02 How it works
Broker vs exchange
This is the difference that confuses almost everyone at the start, so here it is clearly.
An exchange is the marketplace. The New York Stock Exchange and Nasdaq are exchanges. They are where buyers and sellers actually meet and where prices are set. You, as an individual, cannot open an account directly with an exchange.
A broker is your way in. You open an account with the broker, add money, and place orders. The broker is a licensed member of the exchange, so it can send your order to the marketplace and bring back the result. Think of the exchange as the wholesale market and the broker as the shop that lets you actually buy.
This is also why "broker" and "exchange" get used loosely in crypto. Some crypto platforms are true exchanges with an order book, some are brokers that sell to you directly at a quoted price, and many apps blend both. The label matters less than understanding who you are trading with and what you pay.
03 What to know
How brokers make money and stay safe
Most brokers now advertise commission-free trading on stocks. That raises a fair question: if trades are free, how does the broker make money?
There are a few common answers. In the US, some brokers earn from payment for order flow, where they route your order to a firm that pays them a small fee for it. That practice is banned or restricted in places like the UK, the EU, and Canada, so brokers there lean more on the other methods. Those include earning interest on the cash sitting in your account, charging interest on money you borrow to trade, and selling premium subscription tiers with extra features.
None of that is hidden or sinister, but it does mean "free" is rarely completely free. It pays to know where the costs actually sit.
Safety is the other thing to understand. In many countries, brokerage accounts carry investor protection that covers your assets up to a limit if the broker fails. This is not the same as insurance against losing money on your investments, it protects you if the company itself collapses, not if your stock goes down. Rules differ by country, so check what protection applies where you live.
04 Get started
How to choose an online broker
Once you understand what a broker is, choosing one is straightforward. Run through these checks.
First, regulation. Confirm the broker is licensed to operate in your country and that your account carries local investor protection.
Second, available markets. Check that it offers what you want to trade, whether that is US stocks, local stocks, crypto, or several asset classes in one place.
Third, fees. Look past "commission-free" to the currency conversion, withdrawal, and inactivity fees that add up over time.
Fourth, minimums. Some brokers require a minimum deposit, others let you start with a few dollars through fractional shares.
Fifth, country support. Availability varies a lot by region, so make sure the broker actually serves your country before you get attached to it.
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FAQ
Do I need a broker to buy stocks?
Yes. Everyday investors cannot trade directly on a stock exchange. A licensed broker always handles the trade, even when an app makes the process feel direct and instant.
What is the difference between a broker and an exchange?
An exchange is the marketplace where buyers and sellers meet and prices are set, like the New York Stock Exchange. A broker is the licensed company that gives you access to that marketplace. You open an account with a broker, not with an exchange.
How do commission-free brokers make money?
They earn in several ways: interest on your uninvested cash, interest on money you borrow to trade, and premium subscription features. In the US, many also use payment for order flow, though that practice is banned or restricted in the UK, EU, and Canada. Commission-free usually applies to stock trades, so other fees may still exist.
Is my money safe with an online broker?
Many countries offer investor protection that covers your assets up to a limit if the broker fails. This does not protect you from investment losses, only from the broker collapsing. Check the specific protection that applies in your country.
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