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An online brokerage is a service that lets investors buy and sell securities through a website or app. A brokerage may earn money from customer fees, lending to customers who use margin, or arrangements related to how orders are routed or filled. Which sources apply depends on the firm and the service; a zero-commission stock trade does not mean every part of an account is free.
What an online brokerage does
A brokerage connects customers with securities markets and handles transactions such as buying or selling stocks. “Online” describes how the service is delivered, not a separate type of investment. In securities transactions, a firm can act as a broker for a customer, as a dealer trading for its own account, or in both roles. The SEC’s broker-dealer overview explains those roles.
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Brokerages may provide different levels of service, from trade execution through an app to recommendations or other account services. In the US, Investor.gov says brokers making recommendations must act in the customer’s best interest and not put their own interests ahead of the customer’s. That statement concerns recommendations; it should not be mistaken for a description of every legal duty in every brokerage activity.
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Brokerages do not all use the same revenue model. A firm may earn through one or several of the following channels, and its fee schedule and disclosures determine what applies to a particular account or trade.
Commissions, markups, and account fees
A broker may charge a commission or markup for a transaction. Customers may also pay account-service or investment-related charges. The applicable costs can vary with the security, service, account, and firm, so a headline commission—especially a $0 stock-trade commission—does not establish the full cost of investing. See Investor.gov’s broker-dealer guidance and the brokerage’s own fee schedule.
Payment for order flow
Some market makers pay brokers to route customer orders to them. This is called payment for order flow (PFOF). It is a payment connected to routing, not the commission the customer pays for the trade. Investor.gov gives “perhaps a penny or more per share” as an illustration of a possible payment; it is not a typical or current rate that can be assumed for a particular broker or order. The SEC explains the arrangement and related execution considerations in its order types and trade executions guide.
Internalizing orders and earning a spread
A broker may fill a customer’s order from its own inventory rather than route it to an outside venue. In that case, the firm may earn the difference between what it paid to acquire the security and the price at which it sells it to the customer. This is one possible model, not a practice that should be attributed to every online brokerage.
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Interest on margin borrowing
In a margin account, a customer borrows cash from the brokerage against assets in the account and pays interest. Rates and terms are firm-specific. Borrowing can magnify losses as well as gains, and the firm may sell securities under the applicable margin agreement if account collateral falls or requirements are not met. Review the broker’s margin terms before borrowing; Investor.gov’s margin account guide describes the risks.
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Why routing revenue raises questions about execution
A routing payment can give a broker a financial incentive when deciding where to send an order, so it is reasonable to ask whether the arrangement affects execution. The existence of PFOF alone, however, does not establish that a particular customer received a better or worse fill. An order’s execution depends on its details and market conditions, among other factors.
Brokers have a duty to seek the best execution reasonably available for customers’ orders. Investor.gov explains that firms evaluate orders in aggregate and periodically assess competing exchanges, market makers, or electronic communications networks (ECNs). A broker may also seek price improvement, but it is a possibility, not a guarantee; delays can matter when prices move quickly. See the SEC’s execution guidance for the relationship between routing, execution, and price improvement.
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What to check before choosing a brokerage
Compare the costs and services relevant to how you expect to invest rather than judging a brokerage only by its advertised stock-trading commission. Use the firm’s current documents because rates, account terms, and routing arrangements can change.
Do these 3 things before closing this tab:
1Fix the driver behind crashes, sound loss and screen glitches2Clear out junk files and repair common Windows errors3Scan for outdated or missing drivers - takes under a minute- Fee schedule: Check commissions, markups, account charges, transfer fees, and service fees for the securities and services you plan to use.
- Uninvested cash: Find out how cash is handled and what rate or program terms apply to your account.
- Margin terms: If you might borrow, compare the interest rate and understand what happens if the value of your collateral falls.
- Routing disclosures: Ask whether the firm receives PFOF or has profit-sharing relationships, and review its available order-routing disclosures. SEC Rule 606 disclosures address routing and related payment or profit-sharing terms; the SEC’s Trading and Markets resources provide information on these disclosures.
- Execution information and service: Review any execution-quality information the firm publishes, as well as its investment range, research tools, and customer support.
Also read the brokerage’s relationship summary alongside its fee schedule and routing disclosures. These documents offer useful context about the firm’s services, conflicts, and costs, but a disclosure alone does not prove how an individual order was executed. To confirm that a firm or person is registered, use the SEC’s Check Out Your Investment Professional resources.
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