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Stock broker
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A stock broker or stockbroker is a regulated professional who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors.
rder to become a stockbroker in the United States, a candidate must pass the General Securities Representative Examination (also known as the "Series 7 exam").
In the UK, brokers are required to pass the SII () Certificate in Securities, this qualification is achieved by passing two exams: Either Unit 1: FSA Financial regulations or Unit 6 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.
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Encyclopedia
A stock broker or stockbroker is a regulated professional who buys and sells shares and other securities through market makers or Agency Only Firms on behalf of investors.
Requirements
In order to become a stockbroker in the United States, a candidate must pass the General Securities Representative Examination (also known as the "Series 7 exam").
In the UK, brokers are required to pass the SII () Certificate in Securities, this qualification is achieved by passing two exams: Either Unit 1: FSA Financial regulations or Unit 6 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 1 or Unit 6 identifies individuals as having attained FSA Approved Person Status.
Services provided
A transaction on a stock exchange must be made between two members of the exchange — an ordinary person may not walk into the New York Stock Exchange (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.
History
Philadelphia was the center of American finance during the first forty years of the new United States. In 1790, the country's first stock exchange was founded there and Chestnut Street was home to the nation's most powerful financial institutions. However, in the 1820s a shift to New York City began and for more than one hundred and fifty years Wall Street has been synonymous with the stock brokerage business. Some sources suggest that historical top-level brokers and a number of other firms rose to prominence over that time, with the top-ranked brokerages in the early 1950s being:
- Merrill Lynch
- Paine Webber & Company
- Morgan Stanley
- Goldman Sachs
- Bear Stearns
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 from the market, executes and settles the trade.
Today, most of the once well-known corporate brand names including mid-sized firms such as Smith Barney have been swallowed up by global financial conglomerates. Only a few firms remain independent, such as Edward Jones Investments, Stifel Nicolaus, Oppenheimer & Co, JP Turner & Company and Raymond James. Discount brokers (such as E*TRADE, Scottrade, TD Ameritrade, and Charles Schwab) have taken a large share of the business by offering highly discounted commissions. Discount brokers may offer limited advisory services, but their primary focus tends to be servicing self directed retail accounts.
Similar roles
Roles similar to that of a stockbroker include investment advisor, and financial advisor. A stockbroker may or may not be also an investment advisor, and vice versa.
The Certified Financial Planner designation initially offered by the American College in Pennsylvania is considered by many to be the next educational step a stockbroker can take in order to be considered a legitimate and ethical financial consultant. Though not strictly true, it is still vital to assert the authority taken.
Acting as a principal
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 principal capacity sometimes call themselves dealers, stock traders or simply traders. A stock broker is just the main part of being a City Trader. Other types of City Trading include working in the Foreign Exchange.
Transactions by stock brokers in the US and UK
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 client, the broker informs the client and charges the client a markup or markdown from the prevailing market price.
In the UK: Stock brokers act the same in the UK as in the US, except that when trading in a principal capacity with a client, the broker is obliged to inform the client and no commission is charged.
Other jurisdictions are thought to have similar rules.
Brokerage terms
Front office: This is a description of the part of a brokerage firm that is "client facing". The sales staff, brokers and traders are part of the front office. Functions of the front office include acquisition and entry or fulfilment of client orders, and investment for the firm's account.
Middle office: This is where regulatory reporting is done, risk is managed, and P&Ls are calculated.
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 to ensure they can be delivered, is usually included in the back office as well.
Bull: A bull is somebody who thinks values will rise in the near to medium term.
Bear: A bear is the opposite to a bull.
Explanation of a City Trader's Job
Stock broker: A stock broker would deal with shares. Shares and stocks have the same definition; a share is a unitized ownership stake in a company's equity. A stock is a piece of money – a share of a company – that a few years ago were represented on a document, and nowadays records are kept electronically. A stockbroker possesses a number of shares; however he or she can choose how many of these he or she wishes to trade, so that perhaps some can be kept for him or her. Keeping an amount is understandable, because stock-broking is a risky business. This is because the prices that shares are worth are constantly increasing and decreasing, depending on how much money the company you are dealing with, is producing. For example, say a stockbroker buys a share from a dealer, for $1, and then sells it to a client for x sum of money. The next day, the price for that same share value, decreases (the company is not producing as much money), so that it's now worth 50p. The stockbroker had spent $1, however, which was 50p too much: he or she has just lost 50p. That's how stockbrokers lose money. They then continue trading at what they think are suitable times – when it is unlikely for the price of a share to alter (to start with he or she could buy that share back for 50p and sell it again, to another client).
Foreign Exchange Members: These city traders deal with currencies. Their clients are usually called "market makers" (literally makers of markets: shopkeepers are a common example) and are the people they use to earn money. Currencies are traded, for example: the stock broker can give his/her client $1, and the client can give him/her £1 in return, as long as such a deal was discussed and agreed to (as mentioned previously, the person who makes the final decision as to what the deal is going to be depends on the position of the stockbroker - in Advisory dealing, for example, the investor makes the concluding decision.) In this case the city trader gains profit (because he/she gains £1, that is worth more than what he/she gave [$1]), but indeed often the market maker does too (that's how they earn their money). For example, it would be perfectly possible for the city trader to hand over £1 and let his/her client give back only $1. N.B: You have to bear in mind that very large sums of money - not the example of $1 and £1 above - are exchanged.
Bond-dealers:A bond-dealer is a city trader who lends a sum of money to a stock (section of a company). If a company owns £1,000,000, and this was due to a million bondholders each lending £1 to the stock, than each bondholder lends a bond of £1.
Traders at hedge funds and on banks' proprietary trading desks trade via market makers (the banks).
You have to bear in mind that these city traders do not have clients at their desk(s) to perform the deal - the Foreign Exchange (for example) keep aware of the various money-exchanges through software on the computer, a particular and more popular one being known as "CREST". Other methods of dealing include using the phone.
There are other occupations within the title of being a "city trader", but these are the main three, in
which the first is most common.
Famous stock brokers
- Larry "Buster" Crabbe - Actor and former Olympic swimmer, Crabbe became a stockbroker and businessman after a career in film.
- Brian Dennehy - An actor, Dennehy worked as a broker for a time at the same firm as Martha Stewart.
- Jerry Doyle - Known to many as "Michael Garibaldi" on Babylon 5, was a stock broker for 10 years.
- Christopher Gardner - A man who averted homelessness and became a multi-millionaire, his struggle to attain his first job as a stock broker is the subject of the 2006 Will Smith film, The Pursuit of Happyness.
- Paul Gauguin - French Impressionist Painter of the late 19th Century initially worked as a broker as a young man in Paris.
- Edward Francis Hutton - Founder of the firm known for its slogan: "When E. F. Hutton talks, people listen." In the late '20s and early '30s, Hutton was married to cereal heiress Marjorie Merriweather Post. Hutton's daughter with Post was actress Dina Merrill, the one-time wife of actor Cliff Robertson.
- Jérôme Kerviel - Rogue trader who caused a 7 billion dollar loss to his employer, French bank Société Générale.
- Nick Leeson - Rogue trader whose unchecked risk-taking caused the collapse of Barings Bank.
- Michael Milken - The financier came to fame at Drexel Burnham Lambert in the 1980s.
- George Murphy - Silent film and early talkies star Murphy worked for a time as a Wall Street runner.
- William A. Paine - co-founder of Paine Webber.
- Hemish Shah - Late English poker player, who left stocks for poker, going on to win a World Series of Poker bracelet.
- Martha Stewart - After she gave up modeling in the late 60s, Stewart worked as a broker on Wall Street for 7-8 years before launching her lifestyle business.
- John Vernou Bouvier III- Father of American former first-lady Jacqueline Kennedy Onassis.
- Lexington Steele - After Graduating from Syracuse University with a Degree in Arts and Science and a double degree in History and African American history he worked as a stock broker, in 1997 he started working in Adult Entertainment.
- Martha Stewart - was one of the first female stockbrokers on Wall Street after her modeling career.
See also
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