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What Is a Stock Broker?

What Is a Stock Broker?

Are you a beginner starting to dip your feet into the stock market or eager to break free from the title of first-time trader?

Many financial institutions, business administration firms, and investor clients work with stockbrokers when buying and selling stock. They are the experts on the financial market and its regulations and give trustworthy investment advice.

Understanding the Stock Market

Before rushing into what a stockbroker is, it’s a good idea to understand the stock market first.

The stock market and similar in-person and online trading platforms are like giant grocery store chains. It’s filled with different types of stock shares and financial securities from publicly held companies, ready to be bought or sold.

Unlike a grocery store, you can not grab a shopping cart, pluck items off the shelf, and bring them home. Instead, investors must have a stockbroker to act as the intermediary and assist in the transaction.

There are many different stock market exchanges across the globe. Most are familiar with the big named ones such as NASDAQ and the New York Stock Exchange (NYSE) on Wall Street. There are others, too, including the London Stock Exchange (LSE) and Tokyo Stock Exchange (JPX).

Defining a Stock Broker

A stockbroker is a registered professional who offers brokerage services to institutional and retail investors. They have many nicknames, including share broker, registered representative, trading representative, investment advisor, and investment broker. This title isn’t exactly the same as a financial advisor or financial planner — your stockbroker primarily handles stock trading, not every other type of investment.

A stockbroker is able to provide financial services as an individual or be hired within an investment firm. Examples of firms include Charles Schwab and Fidelity.

Being a stockbroker requires time and patience.

Who Are Stock Brokers Registered With?

Primarily, it is with FINRA (Financial Industry Regulatory Authority); however, there are three additional licensing requirements a stockbroker needs through NASAA (North American Securities Administrators Association).

Are Licenses Required?

Stockbrokers must pass the Series 7 exam, also known as FINRA’s General Securities Representative Exam, to sell stocks, bonds, options, and other securities.

A stockbroker can obtain additional licenses depending on what services they want to provide to clients.

Here are just a few examples:

  • Series 3 License - National Commodities Futures Exam, for commodity futures contracts
  • Series 6 License - Investment Company and Variable Contracts Products Representative Exam, for mutual funds and unit investment trusts
  • Series 63 License - Uniform Securities Agent State Law Exam, for broker-dealer representatives
  • Series 65 License - Uniform Investment Adviser Law Exam, to be able to offer financial advice or work with money-managed accounts
  • Series 66 License - Uniform Combined State Law Exam, which combines Series 63 and 65

Responsibilities of a Stock Broker

Primarily, a stockbroker is responsible for obtaining buy and sell orders and putting them into action. It sounds simple, but there is much more involved than that.

If you ever were to review a job description for a stockbroker, you’ll find responsibilities such as:

  • Providing accurate advice on investment accounts and investment management
  • Analyzing and interpreting financial reports
  • Staying up-to-date with the latest trends and news in finance. This includes following the market for average stock prices and making changes to an investment strategy
  • Stellar customer service, keeping old and new clients informed in a timely manner on the status of their investments

Finding a Stock Broker

Stockbrokers either work in a team environment in a brokerage firm or are independent. For example, you as the investor can be your own stockbroker if you feel confident enough while trading.

Are There Different Types of Stock Brokers?

Yes, there are. The three most common types include:

  1. Full-Service Broker
  2. Discount Broker
  3. Robo-Adviser

There is also a fourth one, known as a forex broker.

#1 | Full-Service Broker

Do you remember full-service gas stations? Where you would pull your car up to the pump, and an attendant would first tend to the type of gas you wanted and how much, but would later wash the windows and more?

Full-service brokers are similar, except they aren’t servicing your vehicle; they are responsible for your finances. They are the traditional brokers, the originals, before discount brokers and other types of brokers debuted.

Full-service brokers do more than just buy and sell on the stock market. They also provide services such as:

  • Financial planning
  • Retirement planning
  • Banking services
  • Loans
  • Asset management
  • Tax advice

Because of the number of services they provide, full-service brokers can come with a hefty cost. Nevertheless, the cost may be worth it if:

  • You are new to investing, or if the thought of investing scares you
  • You look forward to having interactions with a professional advisor, informing of your steps and options available to take
  • You need assistance to meet or exceed your investment goals
  • You prefer to have a professional making investment decisions on your behalf
  • You desire a personalized experience

#2 | Discount Broker

If you are not interested in all of the bells and whistles a full-service stockbroker offers, you have options.

A discount broker is a self-service model. A professional is on standby to assist with the trading, but all of the heavy lifting is pushed to the investor’s shoulders. That means you are doing all the necessary research and managing your investment portfolio.

Let’s look at the benefits when using a discount broker:

  • Reduces costs. There are no overhead costs (i.e., administrative fees or management fees) associated with a discount broker since they aren’t performing the planning or giving investors direct advice.
  • Lowers commissions and minimum deposits.

Though the lower cost of a discount broker may seem more appealing than that of a full-service broker, the choice remains with the investor as to which to utilize.

Reflect on your investment goals, your current financial situation, and your industry knowledge before making a decision. If you consider yourself a swing trader or a day trader, this could be an outlet for you.

#3 | Robo-Advisor

Robo as in robot? That’s right. With technology today, humans can be removed from the equation, replacing them with a digital platform known as a robo-advisor.

The first robo-advisor was introduced back in 2008 by Jon Stein at Betterment. The intent was to assist in re-balancing investment portfolios, and it was a hit! Who knew that an algorithm-driven platform could change the face of investing?

Robo-advisors are held to the same standards as human stockbrokers. They must be registered with the Securities Exchange Commission (SEC) and follow the same laws and regulations.

How Does a Robo-Advisor Work?

Before getting started with a robo-advisor, a series of questions are asked. The purpose of the questions is to get to know you. Some of the many possible example questions include: What are your preferences? What is your financial situation today and your future objectives?

Once the survey is complete, the robo-advisor can begin offering services and plans to you that match your responses. If given permission, it even invests for you automatically.

What Are the Benefits of Using a Robo-Advisor?

Robo-advisors come at a lower cost than full-service stockbrokers and discount stock brokers. Since there is little human interaction, they operate at a fraction of the cost, especially when compared to commission-based accounts.

Robo-advisors are available 24/7 (they never sleep). As long as you have an internet connection, they are ready to take your request. You don’t have to set up a meeting to discuss options or wait for a return phone call to invest. Just fire up the PC, tablet, or phone, and you are on your way.

Robo-advisors do not require minimum balances to start trading, whereas other brokers may ask for a significant amount upfront before accepting the client.

#4 | Forex Broker

A forex broker is a fancy title for someone who handles the trade of foreign currencies. Forex is short for foreign exchange.

There are two types of forex brokers:

  1. Dealing desk - this type is common with institutional investors, allowing them to create their own market to trade in.
  2. No dealing desk - this type is most common with individual investors. Prices across financial institutions are analyzed, with the best ones offered to traders.

Forex brokers are similar to stockbrokers, but their services differ. They may specialize in currency or offer a range of securities, including bonds or shares.

When trading currency, it is sold in pairs. There are three main types:

  1. Major currency pairs - most common
  2. Minor currency pairs - excludes the U.S. dollar
  3. Exotic currency pairs - includes currency from developing economies

The Bottom Line

There is a lot of time vested into being a stockbroker. Following the economy, stock markets, and more can be exhausting, but it is an advantage for growth in investment portfolios. It’s a constant rebalancing act, ensuring assets are diversified.

Deciding on a stockbroker is your choice. Choose a stockbroker based on your state of affairs, not anyone else's. And remember, the stockbroker may turn out to be yourself.

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Sources:

Stockbroker - Overview, Responsibilities, Types, Qualifications | Corporate Finance Institute

What to Expect When You Open a Brokerage Account | FINRA.org

Qualification Exams | FINRA.org

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