house for a period of time, again, usually a couple of years. Most of the people who go
through this are also attracted by the availability of high income. As brokers work on
commission, their pay is directly tied to how motivated they are to sell stock. An aggressive
broker can make hundreds of thousands, or even millions of dollars per year.
In addition to having the qualifications including licensing and knowledge of stocks and the
markets, brokers are the only ones legally permitted to buy and sell stock, so they've got a
lock on the market. Like it or not, you've got to use a broker or brokerage firm to buy stocks.
Luckily, since the abolishment of standardized broker fees in 1975, many different types and
price structures for stockbrokers now exist. Everyone has access to any number of
competing firms, so you can pick the type of broker or brokerage that is most applicable to
your needs.
I l@ve RuBoard
I l@ve RuBoard
Securities and Exchange Commission
The Securities and Exchange Commission (SEC) is the U.S. Government commission
charged with the responsibility of ensuring compliance with its securities act. Through the use
of its own financial professionals, which includes qualified stockbrokers, the SEC monitors
trading and the markets through the computerized networks for strange and/or unusual
trading activity, for example. These professionals would then further investigate to uncover
illegal activity such as insider trading (trading with prior or nonpublic information). To
eliminate conflict of interests, SEC financial professionals do not engage in professional
trading activity themselves, but work for and are compensated exclusively by the U.S.
Government.
Plain English
The Securities and Exchange Commission (SEC) acts as the stock market
police. The SEC makes sure everyone is following the stock laws, or securities acts,
passed by the U.S. Government.
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I l@ve RuBoard
Full Service Stockbrokers
You can find full service stockbrokers at the most well-known and established companies,
including
Salomon Smith Barney
Morgan Stanley
Goldman Sachs
Merrill Lynch
For all their eminent reputations, however, brokerage firms use a substantially different track
for selling stock than the average investor would think. The company that uses the
expression about making money the old-fashioned way earning it isn't lying. They just
didn't specify for whom they were making that old-fashioned money.
Bluntly put, stockbrokers have to make a living, too. And that lifestyle isn't cheap. Did I
mention that full service brokers also charge the highest commissions? I've heard of full
service brokers who charge up to $75 per transaction. Even though the average investor may
be aware of these commissions, what goes largely unsaid is the other ways in which
stockbrokers make money or further their business.
You should know upfront that in all fairness, full service brokers and brokerages have their
uses and place within investment. Many people, for a variety of reasons, do utilize the
services of full service brokers and brokerages and do very well by them.
For example, someone with enough money in the market to prohibit the time needed to
effectively keep track of investment trends (because the person is using all that time to make
the money that's being invested) would make a good candidate for a full service broker.
Also, someone who was planning to buy and/or sell on a daily basis is an example of
someone who might fare well using the services of a broker. Although this type of client,
however, would still do well to consider excessive service fees involved in these kinds of
services. In addition, most stockbrokers aren't dishonest and do play upfront with their
clients. After all, unhappy clients will leave sooner or later, so it's in the stockbroker's best
interest to keep them happy.
The average stockbroker, however, does have to make a living. So, for example, a
stockbroker with his or her huge wealth of knowledge tells you that purchasing stock in XYZ
Company is the single best thing you can do. You invest as the stockbroker tells you to; after
all, who are you to second-guess the stockbroker? You're a dentist with little or no knowledge
of how all this works, whereas the broker has years of experience and access to a substantial
amount of firm research usually from within the brokerage house itself. So, the stockbroker
takes a commission for placing the purchase order. The stockbroker is happy; you're happy.
What could be wrong?
Did the stockbroker mention that the reason you should buy XYZ Company stock is also
because he or she needs to sell a certain amount of XYZ Company's stock in order to retain
his or her account, and the broker was running pretty close to the end of the month without
having reached that quota? Or did the stockbroker mention that the company is giving him or
her a cut of the sale out of the backside for each share the broker places with a client? The
stockbroker wasn't lying about XYZ Company stock being the best purchase you could make.
The broker just failed to mention that the payday was his or hers, not yours.
Also, the "research" that you thought would make a difference, and that went largely
unnoticed in this transaction was flawed anyway. The analysts who compile this research are
under extraordinary pressure from upper management as well as from the clients themselves
to back up the interests of the company. Not necessarily to lie, mind you, but to present the
information in its best or in the case of the competitor, the worst possible light.
CAUTION
A full service broker usually manages his or her client's account directly and charges
the highest commissions.
And finally, from personal experience, many people develop a good working relationship with
their brokers and a strong sense of loyalty keeps them as clients. Even in these situations,
however, be aware of the whole story.
The Loyal Loser
For example, I personally fall into that last category. A couple of years ago I hired a full
service broker from a well-known firm for some of my accounts. She was a nice young
person, and I liked her so much that I was loath to leave her even though I consistently lost
money with her management. I took the losses without saying a word, because I figured we
were friends. So did she until she got a promotion and turned over all her portfolios to a
replacement. The new broker was even nicer and friendlier than the first, but she was a
goner before she unpacked her nametag. I closed my account immediately.
The point here is that I was looking to make a profit, not new friends. The first broker, really,
was a nice person, and probably used a lot of that friendliness to keep clients such as me.
She certainly wasn't keeping clients because of the profits we were making.
As for the second broker, I never lost a cent, but that was because I finally wised up to the
fact that I was keeping these professionals on my payroll because they were friendly, not
effective. Who would keep a plumber on staff when all the faucets still leak? In all fairness,
the replacement broker may have been poised to make me a great deal of profit, but I had
decided by that point to take control of my money and manage it myself.
Cutting Your Losses
I lost a friend, but I'm not losing money anymore. I should also point out that the investments
I made on my own during that time made excellent gains. And what's most relevant about
that example isn't so much the broker story as it is the fact that I made more money by
managing my own investments. Had I lost more money through my own transactions, that [ Pobierz całość w formacie PDF ]