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A stock brokerage is a person or firm that performs transactions in financial instruments on a stock market as an agent of his/her/its clients who are unable or unwilling to trade for themselves. Common misnomers for this role are financial planner, financial consultant, or financial advisor.
Stockbrokers also sometimes or exclusively trade on their own behalf, as a principal, speculating that a share or other financial instrument will increase or decline in price. In such cases the term broker makes little sense and the individuals or firms trading in a principal capacity sometimes call themselves stock traders or simply traders.
History
Since the 1980s stockbroking firms have also been allowed to be market makers as long as the appropriate Chinese walls are put in place.
With the advent of automated stockbroking systems on the Internet the client often has no personal contact with his/her stockbroking firm. The stockbroker's system performs all the stockbroking functions: it obtains the best price from the market and executes and settles the trade.
Things one should know before consulting a Stock Broker
Using a stock broker for active management of a Stock/Mutual Fund Portfolio is totally unnecessary when a passive management alternative is available for long term investing within the confines of a Tax-Sheltered Retirement Accounts. However, many prefer to use and pay for the services of a broker because they feel more comfortable making decisions about their finances with the interactive guidance of a licensed advisor.
When using a stock broker for financial guidance, one must be made aware that they do get paid on a commission, based on the stock/mutual fund they sell be if from the following: Class Distinction, 12b-1 distribution fees, Loaded Fee such as entry or exiting fees i.e Deferral sales charges, etc. Thus a conflict of interest arises concerning a stock broker who offers his/her service as a financial planner, because their revenue is generated as a direct result of your investment in the stock/mutual fund that they broker to you. Thus your return on investment is not as great, and the advice they give you might not be in your best interest. However, some mutual funds and stocks can only be purchased through a broker: in such cases their services are required to purchase the financial instrument in question.
Cases
The following is the case in the UK: When acting as an agent, the stockbroker charges the client a flat fee and/or a percentage-based commission for undertaking the trade and the price quoted the client must be the best price available in the market. When acting as a principal, the trade could be with another market participant or one of the stockbroker's clients. When trading in a principal capacity with a client the broker is obliged to inform the client and no commission is charged.
The following is the case in the US: When acting as an agent, the stockbroker typically charges the client a flat fee and/or a percentage-based commission for undertaking the trade and the price quoted the client must be the best price available in the market. When acting as a principal, the trade could be with another market participant or one of the stockbroker's clients. When trading in a principal capacity with a client the broker informs the client and a charges the client a markup or markdown from the prevailing market price.
Other jurisdictions are thought to have similar rules.
Terms
Front office This is a description of the part of the firm that is "client facing". The sales staff, brokers and traders are part of the front office. Functions of the front office include acquisiton and entry of orders, fulfillment of the orders, and all the regulatory reporting for the orders.
Back office The back office is where the clearance processing of the trades is done. Transfer of securities and money and the tracking of "failure to deliver" is handled. Securities lending for a brokerage firm, wherein shares of a security that is being sold short are located to insure they can be delivered, is usually included in the back office as well.
Famous Stockbrokers
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