Stockbroking – What Is It?

By Derek On September 6, 2011 Under Uncategorized

“A stock broker is one who invests other people’s money until it’s all gone.” Woody Allen

A stockbroker (or “stock broker”) is a registered financial professional who acts as a middle man for an investor buying and selling stocks. Stocks are known as “equities” in “the business.” Equities are different from bonds, another area of finance which is known as “fixed income.”

The Three Types

There are three types of stockbroker – execution only, advisory and discretionary. Most “brokers” fall into the advisory area. Execution only brokers receive orders from clients and “execute” them in the market. There is no advisory involved. An advisory broker will “advise” clients on which stocks to buy or sell and when – but the final decision is 100% up to the client.

The discretionary broker, on the other hand, actually controls the client’s money (usually retail) and makes the decisions on when and what to buy and sell. These guys, naturally, earn the highest fees per transaction.

They All Live and Die By…

However, this does not always mean the discretionary guys are the best paid. This is because as middle men, brokers earn a commission on each transaction and volumes are what count. All brokers live and die by market volumes.

As you can see, all brokers are middlemen (or women) who stand between the investor and the stockmarket. They exist due to regulations that have created this “expert role.” An investor, whether retail (you) or institutional (a pension fund, for example), cannot call the stock exchange and buy or sell stocks directly. They must go through a licensed broker.

Licensed brokers work for brokerage firms – which are basically companies that have a brokerage license allowing them to execute trades on the exchange. “Stockbrokerages” can be small independent outfits or be part of large investment banks, like Goldman Sachs.

What We Say

In the industry itself, stockbrokers are referred to as “equity sales.” We say, “I’m in equity sales,” or, “She’s in sales. She works on the sales desk covering hedge funds.”

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