The Stock Broker’s Role in Investment

The broker’s primary role in investing is to serve as the vehicle through which you either buy or sell stock. Often, the word “brokers” refers to companies such as Charles Schwab, TD Ameritrade, E*TRADE, and many other organizations that can buy stock on your behalf. Brokers can also be individuals who work for such firms.

Although you can buy some stocks directly from the company that issues them, to purchase most stocks, you still need a broker.

The distinction between institutional stockbrokers and personal stockbrokers is important:

  • Institutional stockbrokers make money from institutions and companies through investment banking and securities placement fees (such as initial public offerings and secondary offerings), advisory services, and other broker services.

  • Personal stockbrokers generally offer the same services to individuals and small businesses.

Although the primary task of brokers is the buying and selling of securities (the word securities refers to the world of financial or paper investments, and stocks are only a small part of that world), they can perform other tasks for you, including the following:

  • Providing advisory services: Investors pay brokers a fee for investment advice. Customers also get access to the firm’s research.

  • Offering limited banking services: Brokers can offer features such as interest-bearing accounts, check-writing, electronic deposits and withdrawals, and credit/debit cards.

  • Brokering other securities: In addition to stocks, brokers can buy bonds, mutual funds, options, exchange-traded funds (ETFs), and other investments on your behalf.

Personal stockbrokers make their money from individual investors through various fees, including the following:

  • Brokerage commissions: This fee is for buying and/or selling stocks and other securities.

  • Margin interest charges: This interest is charged to investors for borrowing against their brokerage account for investment purposes.

  • Service charges: These charges are for performing administrative tasks and other functions. Brokers charge fees to investors for Individual Retirement Accounts (IRAs) and for mailing stocks in certificate form.

Any broker (some brokers are now called financial advisors) you deal with should be registered with the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).

In addition, to protect your money after you deposit it into a brokerage account, that broker should be a member of the Securities Investor Protection Corporation (SIPC). SIPC doesn’t protect you from market losses; it protects your money in case the brokerage firm goes out of business or if your losses are due to brokerage fraud.

To find out whether the broker is registered with these organizations, contact FINRA, SEC, or SIPC.

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