What are Stock Brokers, and What Do They Do?

What are Stock Brokers, and What Do They Do?

broker and client shaking hands over a deal

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Brokers seem to have it all when it comes to the big screen. They live fast and make moves, and they are constantly working with their clients to make more money.

In fact, recent reports show that brokers are now texting and using social media more than ever to reach their clients when they need to. Brokers also get to play the stock market almost as insiders due to their specialized knowledge, and it’s incredibly lucrative for clients when their advice pay off.

What does it take to become a stockbroker? It’s actually a straightforward career with a lot of potential if you love to play the market and know how to manage risk.

Ultimately, brokers are rated for their trade execution quality, research tools, ease-of-use and mobile apps, and their fee structure. However, to truly be at the top of your game, you need a brokerage firm that has real-time data, robust charting, and analysis tools. As Nicolas Darvas put it, “I believe in analysis and not forecasting.”


What is a Broker?

As a liaison between buyers and sellers, investment brokers, also known as stockbrokers, manage client accounts and portfolios. They also provide keen investment advice. They receive commissions for each transaction, and they often get signing bonuses for each account.

The day-to-day of a broker is placing buy and sell orders for their investors. While brokers are less traditional these days due to new technology and the digital age boom, brokers still work with clients to provide sage advice to improve client portfolios, provide expert investment plans, and inform clients on the latest market intelligence.

The difference with new technology is that “online brokers” now include robo-advisors and algorithms that do not rely on a human broker to execute orders. If you have signed up for an online broker or an app, you may use tools informed by AI rather than a human broker.

To become a broker, you have to be licensed, and many brokers also get advanced degrees in business, finance, economics or accounting. Certifications also help brokers work in specialized fields or go after high-level positions.

How Brokers and Brokerage Firms Operate

  •  Brokers can be a single individual or a firm that charges a commission or trade fee for placing buy and sell orders that you submit as an investor.
  •  The term “broker” can also be used interchangeably for a digital broker or online broker that charges a commission to place buy and sell orders.
  •  There are also discount brokers that place trading orders for clients, but they do not provide any investment tips, market intelligence, or 1-on-1 advice.
  •  A “full-service broker” typically includes your own advisor who provides investment tips and solutions for your portfolio, while also executing buy and sell orders for you.
  •  To be a legitimate broker, you must register with FINRA, but if you are an investment advisor, then you register as an RIA through the SEC.

Discount vs. Full-Service Brokers: Weighing Your Options

Discount brokers can execute a variety of orders for their clients, and they typically do not charge as much in commission as a full-service broker. Trades typically cost as little as $5, but you will never spend over $15 on commission fees with discount brokers. The goal for these brokers is to appeal to the masses and structure their rates based on volume.

While they don’t offer investment advice, new online brokers often have “robo-advisors” or online tools to provide market intelligence instead. Discount brokers typically work off salary rather than commissions or fees like a full-service broker. Online trading platforms are typically known for being discount brokers because of their low fees and zero commission rates.

Full-service brokers offer more services like market intelligence and research, retirement planning, investment advice, and access to all investment types. Investors use this type of service when they want someone else to help with their buy and sell decisions, and they trade at higher costs and risks.

Brokers earn more compensation if they trade at higher volumes and selling more investment products to their clients. For example, they may earn more compensation through a managed investment account.

Stock Brokers vs. Real Estate Brokers

Brokerage takes on a different meaning in the real estate world. These brokers work with clients who want to sell and buy real estate properties. They also must have a license to practice.

Real estate brokers typically have duties like:

  •  Researching the market values of real estate properties in both commercial and residential markets
  •  Listing and marketing properties for sale on behalf of their clients
  •  Showing properties to potential buyers
  •  Providing advice to clients on provisions, offers, and other real estate fees
  •  Prepares and submits offers to clients for consideration

Real estate brokers may also work for buyers. In this case, they help buyers find the best properties using their market knowledge and insights.

  •  Find all properties within a buyer’s preferred home shopping area and sort by price range and buyer’s income limits
  •  If a buyer wants to make an initial offer or decides on a purchase, the broker drafts up the offer and purchase agreements
  •  Brokers also negotiate with sellers to get a better price and reduced closing costs for their buyers
  •  Manage inspections and negotiating cost based on repairs needed before a purchase is final
  •  Work with buyers and sellers through closing and taking possession of a property

Broker Laws and Financial Regulation

To become a broker, you must first register at FINRA or the Financial Industry Regulatory Authority. This is the self-regulating body for broker-dealers. FINRA maintains that brokers adhere to a standard of conduct known as the “suitability rule.” This rule requires that the broker must have sufficient reasons for suggesting a client invest in a particular stock or product.

Another part of these standards states is known as the “know your customer” or KYC rule. This means that the broker must take steps to identify what their clients want to do with their investment portfolios.

In doing so, the broker can show reasonable grounds for their suggestions of an investment product. In addition, the broker must look into a client’s financial documents, such as their tax status, income, investment objectives, and other research to inform their recommendations.

These standards are separate from those required by the SEC or Securities and Exchange Commission for RIAs, AKA Registered Investment Advisers. These standards must be strictly adhered to under the Investment Advisers Act of 1940. RIAs must always abide by these rules and act in the best interests of their customers while also being completely transparent about their fees.

Real estate brokers must also abide by certain standards and rules. However, these are largely governed at a state-level. All real estate brokers must operate under a license as issued by their respective states. There are certain laws regarding rules of conduct between clients and brokers as well. For instance, brokers have strict limitations on how they advertise incentives to prospective clients.

5 Examples of Real Brokers and How They Operate

There are different types of brokers, but they mainly fall into these categories or a combination of them: Depending on what type of investor you are or what type of broker you want to be, they are several ways to invest.

  •  Full-service broker
  •  Discount broker
  •  Online broker
  •  Robo-advisor

1. TD Ameritrade

TD Ameritrade Trading Page

Also known as TD Ameritrade Holding Corporation (AMTD), this broker provides a full-service option and discount brokerage options with the ability to trade stocks, exchange-traded funds (ETFs), mutual funds, options, futures contracts, retirement investments, and income investments.

Based in Omaha, Nebraska, AMTD has 11 million accounts and manages more than $1 trillion for its clients. They also charge a simple trading fee of $6.95 per trade.

2. Charles Schwab

Charles Schwab Brokerage Page

Charles Schwab is a full-service brokerage firm that offers all kinds of technology and services to every kind of trader. If you are an active trader or need a full-service broker for trading advice, there are multiple levels of account management and investing.

They offer a number of online tools to help their clients make trades on their own, and they provide a guaranteed refund for clients unhappy with their fee-based services. However, Charles Schwab also pushes investors to use their financial advisors instead of making trades on their own, which can cause investors to lose confidence or change their portfolio too drastically.

3. Acorns

Acorns Broker Page

Acorns is a hands-off investor’s dream. As a brokerage account and savings tool, Acorns takes leftover change and small investments to build a nest egg. It basically uses robo-advisors to help beginner and passive investors make money through their savings.

They charge a $5 fee to start investing and a $1 to $3 monthly fee for account management. Their ETF expense ratios average at 0.10 percent. For an automated investing solution, this could help college students and beginner investors save some money.

4. E*Trade

Etrade Online Brokerage

E*Trade was probably the first discount online broker. Many people have seen E*Trade through their outlandish commercials, such as a baby broker advising on investments. E*Trade does contend that trading is that easy through their platinum, and they have a lot of tools and options to help their investors make it simple.

One of the benefits to E*Trade as a brokerage is that they offer robust trading, research, and analysis software. This broker also does not charge a commission for stock and ETF trades. Options are rated at $0.50 to $0.65 per contract, but it depends on trading volume.

5. Interactive Brokers

InteractiveBrokers Homepage

This is another online broker. Interactive Brokers Group, Inc or IBKR holds over $150 billion in equity from their clients. They also have low commissions going down to $0.005 per share with a minimum of $1 trades.

With their electronic exchange, you can access options, futures, and equities. There are also several mobile tools available through this broker, but you do not have access to your own investment advisor.

How To Become a Stock Broker

  1. Education. Brokers must have a high school diploma and a bachelor’s degree. Earning a degree in business, accounting, marketing, economics, or finance puts you ahead for the top positions at brokerage firms.
  2. Pass the licensing exam. This includes completing the General Securities Registered Representative Exam (Series 7). Some states also have their own Uniform Securities Agents State Law Exam (Series 63).
  3. Increase employment opportunities by getting a certification as a Certified Financial Planner (CFP) or a Chartered Financial Analyst (CFA).
  4. Pick the right firm. Some companies pay for their employees’ MBA degrees while others expect you to work 60 hours for an extremely small salary and no commission. If you want to earn higher salaries, you may want to intern first and understand what type of brokerage is best for you.

Should you go for an MBA? Most brokers who want to advance do end up in a Master of Business Administration program, and they combine it with a CFA program.

About Author

Tim Fries Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim is also the co-founder of Protective Technologies Capital (protechcap.com).


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