You may know a bit about the market, and you?ve done your research on potential companies you?d like to invest in and the return you could get on your investment. The next step is to hire a broker or a brokerage firm to handle to your transactions. Let?s begin by defining what it means to be a stock broker.
Working with a stock broker is inevitable; you?ll need one to purchase stocks at one point or another if you?re thinking about investing in the stock market. Even if you are buying and selling online, a broker is behind each transaction you make. There are big online firms such as Fidelity or Scott Trade, and there are many small one and two man shops that offer to execute trades and help you manage your portfolio. Much like realtors who can operate their own businesses, each stock broker is a member of a larger stock brokerage house.
Even the most well-meaning of brokers has more on his plate than your best interests. Below are some of the darkest secrets your stock broker won?t tell you (to your face.)
1. I?m really just a salesman. Sure, you?ve hired him for his financial expertise, but at the end of the day your stock broker is a salesman. Yes, you have to take a series of licensing exams, but the skills and knowledge to become a stock broker doesn?t require any specialized training other than the ability to study and test well.
So what sets one stock broker apart from another? His financial savvy, but also his people skills. Brokers have to garner clients just like any other sales joe, and so when hiring managers scout for potential brokers for their firms, they pick the brightest, snappiest candidate who can sell themselves?and the financial products they?re pushing?the best.
A stock broker gets paid off of the commissions of the trades you make. They only make money if you buy. The fact that stock brokers are in it for the sale should also tell you to expect them to pitch certain funds for you that may or may not be the best fit. Just like in any other business, brokers have a ?preferred list? of funds, people they prefer to do business with, because they get an extra incentive. Beware of the extra incentives, as not all financial products pay out the highest commissions. This leads brokers to push the products that pay the most out to their clients, rather than ones that offer the best benefit or ?bang for the buck.?
A studied financial expert can help you manage your wealth and plan for retirement, but also temper your search for a broker with the knowledge that at the end of the day?they?re sales guys. All-the-more reason for you to do your homework and fully vet a broker before you hire.
2. I?ve been a very bad boy. As we?ve seen from decades of insider trading and news stories of schmarmy brokers and financial businesses taking money from innocent people?the financial industry is one of the most lenient when it comes to punishing its members for their crimes.
A broker can actually be caught doing something against FINRA regulations, be formally punished (sanctioned, as they call it) and then return to business as usual, normally after the punishment is over.
It works a bit differently for big banks or hedge funds that rely on investor relations to make their living, but a one-man broker outfit can quickly change companies or move out of town and set up shop. You can combat this by doing your complete due diligence and checking a broker?s disciplinary record on the FINRA website.
Truthfully, you pay for the right to speak to a real person rather than use an online brokerage in more ways than you realize. Not only do brokers make commissions off of your sales, but brokers can make money lending out your stock in a company to investors who want to buy it short. Brokers are also allowed to markup inventory, and there isn?t much you can do or say about. Just ensure the price you are paying for a stock is around the same market price for the day.
Sure, there are online brokerage firms. Most everything is done online nowadays anyway, but having that warm, reassuring voice who has met you personally handling your money sure feels a lot safer, doesn?t it? I mean, this is your life?s blood, sweat and tears! With an online house these practices still happen, but with more checks and balances and on a much smaller scale than in house.
3. I can?t actually pick stocks. Stock brokers are salesman (See #1), which means they?re basically selling confidence; selling their confidence in the markets to you, which you then buy for confidence and peace of mind in knowing that they are making safe and sound financial decisions for you.
The biggest secret in trading is that no one person or machine can accurately pick undervalued stocks. Even Wall Street wonder kids who have a hit every now and again make huge mistakes. It may seem counterintuitive to buy a stock when it is abysmally low, but this is how the larger financial institutions make money: by using Newton?s Law of Gravity.
What goes up must come down and vice versa, so bear this in mind when one of your favorite stocks has hit rock bottom. Banks swoop in when stocks are at their lowest and wait for companies to rebuild.
We don?t want to paint with a broad paintbrush and make it seem as if all stock brokers are two-bit swindlers out to make a buck. We write this to remind you to be a discerning individual and pick a broker that is right for you and your financial situation.