Depending on what type of investing you plan to do, you might need to hire a broker to handle your investments. Brokers work for brokerage houses and have the ability to buy and sell stock on the stock exchange. You may wonder if you really need a broker. If you intend to buy or sell stocks on the exchange, the answer is yes, you must have a broker.
Stock brokers are qualified and regulated professionals who buy and sell shares and other securities through market makers on behalf of investors. In order to become a stock broker in the United States, a person must pass exams such as the General Securities Representative Exam, also called the “series 7 exam”. Also, most brokers have a background in business or finance, with a Bachelors or Masters Degree.
It’s important to differentiate between a broker and an analyst. A stock analyst basically analyzes the stock market, predicts what it will or won’t do, and predicts how specific stocks will perform. Keep in mind that it’s fairly common for some brokers to also be analysts and vice versa.
Stock analysts basically do a lot of research and make recommendations to help companies and clients make investment decisions. They read company financial statements, analyze commodity prices, sales, costs, expenses, and tax rates to determine a company’s value to help project its future earnings. Sometimes the analyst will meet with company officials to gain an insight into the company and determine how effective the company’s management is. Analysts usually study an entire industry, assessing the current trends in business practices, products, and industry competition. They also keep current with regulations and policies that affect the industry and monitor the economy to determine its effect on earnings.
Putting all this together, analysts write reports and make presentations citing their recommendations on whether or not to buy or sell a particular investment or security. Analysts summarize their reports with ratings such as “buy”, “sell”, “market perform”, “overweight”, “hold”, etc.
Stock brokers, on the other hand, are usually there to follow instructions to buy or sell stock, not necessarily to analyze them. Stock exchange transactions must be made between two members of the exchange. Basically, the typical person can’t just walk into a stock exchange and make trades.
Stock brokers perform three types of services: execution only, advisory dealing, and discretionary dealing. Execution-only, or discount brokers, just carry out the client’s instructions to buy or sell, nothing more. Advisory and discretiony dealing is done by full service brokers who do research and provide advice. In advisory dealing, the broker acts as an advisor and advises the client on which shares to buy and sell, but leaves the decision making up to the investor. In discretionary dealing, the stock broker knows the client’s investment objectives and then makes the decisions on that client’s behalf.
In most cases, brokers get paid from commissions on transactions made for their clients. Brokers usually earn a flat per transaction percentage of each transaction they perform.
If you are new to investing, you may need to go with a full service broker to ensure that you are making wise investments. They can offer you the skill that you lack at this point. However, if you are already knowledgeable about the stock market, all you really need is a discount broker to make your trades for you.