Defining The Broker’s Role

When you’re ready to dive in and start investing in stocks, you first have to choose a broker. It’s kind of like buying a car. You can do all the research in the world and know exactly what kind of car you want to buy, still, you need a venue to do the actual transaction. Similarly, when you want to buy stock, your task is to do all the research you can to select the company you want to invest in. Still, you need a broker to actually buy the stock, whether you buy over the phone or online.

The broker’s primary role is to serve as the vehicle through which you either buy or sell stock. When I talk about brokers, I’m referring to organizations such as Charles Schwab, Merrill Lynch, E TRADE, and many other organizations that can buy stock on your behalf. Brokers can also be individuals who work for such firms. Although you can buy some stocks directly from the company that issues them, to purchase most stocks, you still need a broker.

Although the primary task of brokers is the buying and selling of securities (keep in mind that the word securities refers to the world of financial or paper investments, and that stocks are only a small part of that world), such as stocks, they can perform other tasks for you, including the following:

  • Providing advisory services - Investors pay brokers a fee for investment advice. Customers also get access to the firm’s research.
  • Offering limited banking services - Brokers can offer features such as interest-bearing accounts, check writing, direct deposit, and credit cards.
  • Brokering other securities - Brokers can also buy bonds, mutual funds, options, Exchange Traded Funds (ETFs), and other investments on your behalf.

Personal stockbrokers make their money from individual investors like you and me through various fees, including the following:

  • Brokerage commissions - This fee is for buying and/or selling stocks and other securities.
  • Margin interest charges - This interest is charged to investors for borrowing against their brokerage account for investment purposes.
  • Service charges - These charges are for performing administrative tasks and other functions. Brokers charge fees to investors for Individual Retirement Accounts (IRAs) and for mailing stocks in certificate form.

Any broker you deal with should be registered with the National Association of Securities Dealers (NASD) and the Securities and Exchange Commission (SEC). In addition, to protect your money after you’ve deposited it into a brokerage account, that broker should be a member of the Securities Investor Protection Corporation (SIPC). SIPC doesn’t protect you from market losses; it protects your money in case the brokerage firm goes out of business. To find out whether the broker is registered with these organizations, contact the NASD, SEC, and SIPC.

The distinction between personal stockbrokers and institutional stockbrokers is important. Institutional brokers make money from institutions and companies through investment banking and securities placement fees (such as initial public offerings and secondary offerings), advisory services, and other broker services. Personal stockbrokers generally offer the same services to individuals and small businesses.

About the Author

By: Anthony Green

Get the best stock market trading and turn $1000 InTo $1,00,000 with latest investing tips. For more stock trading related articles and information visit http://www.2stocktrading.com.