Most individuals place their orders to buy or sell stocks with a retail broker, such as Ameritrade (a “deep-discount broker”), Charles Schwab (a discount broker), or Merrill Lynch (a full service broker). Investors can place either market orders, which ask for execution at the current price, or limit orders, which ask for execution if the price is above or below a limit that the investor can specify. (There are also many other types of orders, e.g., stop-loss orders [which instruct a broker to sell a security if it has lost a certain amount of money], GTC [good-to-cancel orders], and ?ll-or-kill orders.) The ?rst function of retail brokers is to execute these trades. They usually do so by routing investors’ orders to a centralized trading location (e.g., a particular stock exchange), the choice of which is typically at the retail broker’s discretion, as is the particular agent (e.g., ?oor broker) engaged to execute the trade. The second function of retail brokers is to keep track of investors’ holdings, to facilitate purchasing on margin (whereby investors can borrow money to purchase stock, allowing them to purchase more securities than they could a?ord on a purely cash basis), and to facilitate selling securities “short,” which allows investors to speculate that a stock will go down.
Many larger investors break these two functions apart: the investor can employ its own traders, while the broker takes care only of the bookkeeping of the investor’s portfolio, margin provision and the shorting provisions. Such limited brokers are called prime brokers.