Brokers

Brokers: How do they make
money and which kind should
you choose?
Chapter 4
Brokerage Houses
Investment firms that are
members of a stock exchange.
Brokers
 Handle
buy and sell orders
placed by individual or
institutional clients for a
commission.
 Must pass a test on securities
law.
Dealers

Buy and sell securities for their own
accounts or the firm’s accounts rather
than for a client.
Traders

Buy and sell stocks for their own
portfolios
How A Broker Makes Money
Two Types of Fee Structures:
 The broker gets paid when you make
transactions - commissions
OR
 Compensation based on the amount of
assets under their management
Advantages and disadvantages?
What kind of Broker is the best
for you?
 Full-Service
Broker
 Discount Broker
 Deep-Discount Broker
Full-Service Brokers
A full-service broker provides:
 day by day dedication to your portfolio
 recommendations on what stock to buy
or sell
 research and investigation of new
opportunities
 attention to balancing your portfolio to
match your needs
The Three Divisions of FullService Firms
Retail division
 Your broker works in this division
 exists to sell stocks to investors
Research Division
 made up of analysts who study stocks
Investment Banking Division
 helps companies go public
Discount Brokers



These services came about in 1975
when the SEC changed the rules of the
rate structure charged by brokers
under the new rules brokers could
charge whatever they considered
appropriate for each transaction
Because of increasing technology these
brokers are able to charge less
What does a Discount Broker
Do?




They are retail-oriented
they don’t have investment banking
divisions or research divisions
offers little or no investment guidance
some provide news and research
services
Deep-Discount Brokers


Offer the lowest possible prices (up to
90% discount on full-service rates)
Offers NO investment advice OR
research tools
What Kind of Service is the
Best?
When you’re choosing a broker you’ve got
to determine what kind of service is
important to you and how much you’re
willing to pay for it!
Some Questions to Ask a
Potential Broker




Get references about the company and the
individual broker
Ask questions about the broker’s investment
style
See the broker face to face to discuss your
investment goals
Ask if the broker is willing to discuss your
investments with other professionals who
help manage your money
More Questions for your Broker



Evaluate how quickly your broker
responds to your phone calls
Get specific numbers when you ask to
see the company’s commission
schedule
Ask about the interest rate the firm
charges for margin accounts