A stock broker is a qualified and regulated professional who buys and sells shares and other securities through market
makers on behalf of investors.
Requirements
In order to become a stockbroker, a person must pass the General
Securities Representative Exam (also known as the "series 7 exam").
Services provided
A transaction on a stock exchange must be made between two members of the exchange — a
typical person may not walk into the New York Stock Exchange (for example), and
ask to trade stock. Such an exchange must be done through a broker.
There are three types of stockbroking service.
- Execution-only, which means that the broker will only carry out the client's instructions to buy or sell.
- Advisory dealing, where the broker advises the client on which shares to buy and sell, but leaves the final decision to the
investor.
- Discretionary dealing, where the stockbroker ascertains the client's investment objectives and then makes all dealing
decisions on the client's behalf.
In addition to actually trading stocks for their clients, stock brokers may also offer advice to their clients on which
stocks, mutual funds, etc. to buy.
History
Philadelphia was the center of American finance during the first forty
years of the new United States. In 1790, the country's first stock exchange was founded
there and Chestnut Street was home to the nation's most powerful financial institutions. However, in the 1820s a shift to
New York City began and for more than one hundred and fifty years Wall Street has been synonymous with the stock brokerage business. Historical top level brokers like Goldman
Sachs and a number of firms rose to prominence over that time with the top-ranked brokerages in the early 1950s being:[citation needed]
- Merrill Lynch & Co. Inc.
- E. F. Hutton & Co.
- Bache & Co.
- Paine Webber & Company
- Francis I. DuPont & Co.
- Dean Witter Co.
- Goldman Sachs
- Bear Stearns
Since the 1980s stockbroking firms have also been allowed to be market makers as long as
the appropriate Chinese walls are put in place.
With the advent of automated stockbroking systems on the Internet the client often has no
personal contact with his/her stockbroking firm. The stockbroker's system performs all the stockbroking functions: it obtains the
best price from the market and
executes and settles the trade.
Today, most of the once well-known corporate brand names including mid-sized firms such as
Smith Barney have been swallowed up by global financial conglomerates. Only a few firms
remain independent, such as Edward Jones Investments, Stifel Nicolaus, Oppenheimer & Co and Raymond James. Discount
brokers (such as E-Trade, Scottrade, TD Ameritrade, and Charles Schwab) have taken a large share of the
business by offering highly discounted commissions. Discount brokers may offer limited advisory services, but their primary focus
tends to servicing self directed retail accounts.
Similar roles
Roles similar to that of a stock broker include investment advisor, and
financial advisor. A stockbroker may or may not be also an investment advisor, and
vice versa.
The Certified Financial Planner designation initially offered by the
American College in Pennsylvania is considered by many to be the next educational step a stock broker can take in order to be
considered a legitimate and ethical financial consultant.
Acting as a principal
Stockbrokers also sometimes or exclusively trade on their own behalf, as a principal, speculating that a share or other financial instrument will increase or decline in price. In such cases the term broker makes
little sense and the individuals or firms trading in a principal capacity sometimes call themselves dealers, stock traders or simply traders.
Transactions by stock brokers in the US and UK
In the US: When acting as an agent, the stockbroker typically charges the client a flat fee and/or a percentage-based
commission for undertaking the trade, and the price quoted the client must be
the best price available in the market. When acting as a principal, the trade could be with another market participant or one of
the stockbroker's clients. When trading in a principal capacity with a client, the broker informs the client and charges the
client a markup or markdown from the prevailing market price.
In the UK: Stock brokers act the same in the UK as in the US, except that when trading in a principal capacity with a
client, the broker is obliged to inform the client and no commission is charged.
Other jurisdictions are thought to have similar rules.
Brokerage terms
Front office: This is a description of the part of a brokerage firm that is
"client facing". The sales staff, brokers and traders are part of the front office. Functions of the front office include
acquisition and entry of orders, fulfillment of the orders, and all the regulatory reporting for the orders.
Back office: The back office is where the clearance processing of the trades is
done. Transfer of securities and money and the tracking of "failure to deliver" is handled. Securities lending for a brokerage
firm, wherein shares of a security that is being sold short are located to ensure they can be delivered, is usually included in the back office as well.
Famous stock brokers
- Larry "Buster" Crabbe - Actor and former Olympic swimmer, Crabbe became a stockbroker and businessman after a career in film.
- Brian Dennehy - An actor, Dennehy worked as a broker for a time at the same firm as
Martha Stewart.
- Christopher Gardner - A man who averted homelessness and became a multi-millionaire,
his struggle to attain his first job as a stock broker is the subject of the 2006 Will Smith film, The Pursuit of Happyness.
- Paul Gauguin - French Impressionist Painter of
the late 19th Century initially worked as a young man as a broker in Paris.
- Edward Francis Hutton - Founder of the firm known for its slogan: "When E. F.
Hutton talks, people listen." In the late '20s and early '30s, Hutton was married to cereal heiress Marjorie Merriweather Post. Hutton's daughter with Post was actress Dina Merrill, the one-time wife of actor Cliff Robertson. Hutton's
namesake firm imploded into bankruptcy in the 1970s.
- Michael Milken - The financier came to fame at Drexel Burnham Lambert in the 1980s.
- George Murphy - Silent film and early
talkies star Murphy worked for a time as a Wall Street
runner.
- William A. Paine - co-founder of Paine
Webber.
- Hemish Shah - Late English poker player, who left
stocks for poker, going on to win a World Series of Poker bracelet.
- Martha Stewart - After she gave up modeling in the late 60s, Stewart worked as a
broker on Wall Street for 7-8 years before launching her lifestyle business.
- Nick Leeson - Rogue trader whose unchecked risk-taking caused the biggest financial
scandal of the century.
- Jerry Doyle - Known to many as "Michael Garibaldi" on Babylon5 was a stock broker for 10
years.
See also
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