A
stock broker or
stockbroker is a regulated professional
brokerA broker is a party that arranges transactions between a buyer and a seller, and gets a commission when the deal is executed. A broker who also acts as a seller or as a buyer becomes a principal party to the deal...
who buys and sells
shareA joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...
s and other
securitiesA security is generally a fungible, negotiable financial instrument representing financial value. Securities are broadly categorized into:* debt securities ,* equity securities, e.g., common stocks; and,...
through
market makerA market maker is a company, or an individual, that quotes both a buy and a sell price in a financial instrument or commodity held in inventory, hoping to make a profit on the bid-offer spread, or turn. From a market microstructure theory standpoint, market makers are net sellers of an option to be...
s or Agency Only Firms on behalf of
investorAn investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s. A broker may be employed by a
brokerage firmA brokerage firm, or simply brokerage or broker in context, is a financial institution that facilitates the buying and selling of financial derivatives between a buyer and a seller...
.
Services provided
A transaction on a
stock exchangeA stock exchange is an entity that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events including the payment of income and...
must be made between two members of the exchange—an ordinary person may not walk into the
New York Stock ExchangeThe New York Stock Exchange is a stock exchange located at 11 Wall Street in Lower Manhattan, New York City, USA. It is by far the world's largest stock exchange by market capitalization of its listed companies at 13.39 trillion as of Dec 2010...
(for example), and ask to trade stock. Such an exchange must be done through a broker.
There are three types of stockbroking service.
- Execution-only, which means that the broker will only carry out the client's instructions to buy or sell.
- Advisory dealing, where the broker advises the client on which shares to buy and sell, but leaves the final decision to the investor.
- Discretionary dealing, where the stockbroker ascertains the client's investment objectives and then makes all dealing decisions on the client's behalf.
Similar roles of the stock broker
Roles similar to that of a stockbroker include
investment advisorThe term Investment Advisor is an individual or firm who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities...
, and financial advisor. A stockbroker may or may not be also an investment advisor, and vice versa.
Acting as a principal
Stockbrokers exclusively trade on their own behalf, as a principal, speculating that a
shareThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
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 principal capacity sometimes call themselves dealers,
stock traderA stock trader or a stock investor is an individual or firm who buys and sells stocks in the financial markets. Many stock traders will trade bonds as well...
s or simply traders. There are many other types of traders within capital markets, for example trading within the
foreign exchange marketThe foreign exchange market is a global, worldwide decentralized financial market for trading currencies. Financial centers around the world function as anchors of trading between a wide range of different types of buyers and sellers around the clock, with the exception of weekends...
.
Canada
In Canada, stock brokers are called "Licensed Representative" or "Investment Representative". In order to be licensed to trade on stock exchanges a person has to complete Canadian Securities Course (CSC) 1 & 2 and Conducts and Practices Handbook (CPH). This will equip an employee to trade all instruments except derivatives and futures. In order to trade derivatives and future, a person has to obtain respective licensing for these instruments.
Hong Kong
To become a representative one has to work for a licensed firm and pass 3 exams to prove one's competency. Passing a fourth exam results in obtaining a 'specialist' license. All tests can be taken with the HKSI. However, passing all tests doesn't result in automatically obtaining the license. It still needs to be approved by the financial regulatory body.
Singapore
In Singapore to become a trading respresentative, you need to pass 2 exams from Institute of Banking and Financial. The 2 exams are Module 1A and Mod 6. After you pass the exams, you need to apply for the license through MAS and SGX.
United Kingdom
In the UK, brokers are required to pass the XII (
Chartered Institute for Securities & Investment) Certificate in Securities, this qualification is achieved by passing two exams: Either Unit 1: FBI Financial regulations or Unit 10 Principles of Financial Regulation for MiFID compliant retail trading, and either Unit 2: Securities, Unit 3: Derivatives or Unit 4: for both Securities and Derivatives. Passing Unit 10 or Unit 52 identifies individuals as having attained FSA Approved Person Status.
United States
While the term "stockbroker" is still in use, more common terms are "broker," "registered rep." or simply "rep." — the latter being abbreviations of the official
Financial Industry Regulatory AuthorityIn the United States, the Financial Industry Regulatory Authority, Inc., or FINRA, is a private corporation that acts as a self-regulatory organization . FINRA is the successor to the National Association of Securities Dealers, Inc. ...
(FINRA) designation "
Registered RepresentativeA Registered Representative, also called a General Securities Representative, a Stock Broker, or an Account Executive, is an individual who is licensed to sell securities and has the legal power of an agent....
," obtained by passing the FINRA
General Securities Representative ExamThe General Securities Representative Exam, commonly referred to as the Series 7 Exam, is a required exam to become a Registered Representative of a broker-dealer in the United States....
(also known as the "Series 7 exam") and being employed ("associated with") a registered
broker-dealerA broker-dealer is a term used in United States financial services regulations. It is a natural person, a company or other organization that trades securities for its own account or on behalf of its customers....
, also called a
brokerage firmA brokerage firm, or simply brokerage or broker in context, is a financial institution that facilitates the buying and selling of financial derivatives between a buyer and a seller...
, typically a FINRA "member" firm. More restrictive FINRA licenses or series exams exist for brokers or reps who do not need the full array of capabilities with the Series 7 (see
list of securities examinations). Variable products such as a variable annuity contract or
variable universal life insuranceVariable Universal Life Insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner...
policy typically require the broker to also have one or another state insurance department licenses.
See also
- Boiler room (business)
In business, the term boiler room refers to a busy centre of activity, often selling questionable goods by telephone. It typically refers to a room where salesmen work using unfair, dishonest sales tactics, sometimes selling penny stock or committing outright stock fraud...
- Boutique brokerage
A boutique brokerage is a type of brokerage company, that acts much the same as a boutique shop, just like a fashion boutique. They often do not charge fees, instead taking a percentage of any profits generated....
- Floor broker
A floor broker is an independent member of an exchange who can act as a broker for other members who become overloaded with orders, as an agent on the floor of the exchange. The floor broker receives an order via Teletype machine from his firm's trading department and then proceeds to the...
- Prime brokerage
Prime brokerage is the generic name for a bundled package of services offered by investment banks and securities firms to hedge funds and other professional investors needing the ability to borrow securities and cash to be able to invest on a netted basis and achieve an absolute return...
- Securities market
Securities market is an economic institute within which take place sale and purchase transactions of securities between subjects of economy on the base of demand and supply....
- Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...
- Stock market data systems
Stock market data systems communicated market data—information about securities and stock trades—from stock exchanges to stock brokers and stock traders.-History:...