Brokers: How do they make money and which kind should you choose? Chapter 4 Brokerage Houses Investment firms that are members of a stock exchange. Brokers Handle buy and sell orders placed by individual or institutional clients for a commission. Must pass a test on securities law. Dealers Buy and sell securities for their own accounts or the firm’s accounts rather than for a client. Traders Buy and sell stocks for their own portfolios How A Broker Makes Money Two Types of Fee Structures: The broker gets paid when you make transactions - commissions OR Compensation based on the amount of assets under their management Advantages and disadvantages? What kind of Broker is the best for you? Full-Service Broker Discount Broker Deep-Discount Broker Full-Service Brokers A full-service broker provides: day by day dedication to your portfolio recommendations on what stock to buy or sell research and investigation of new opportunities attention to balancing your portfolio to match your needs The Three Divisions of FullService Firms Retail division Your broker works in this division exists to sell stocks to investors Research Division made up of analysts who study stocks Investment Banking Division helps companies go public Discount Brokers These services came about in 1975 when the SEC changed the rules of the rate structure charged by brokers under the new rules brokers could charge whatever they considered appropriate for each transaction Because of increasing technology these brokers are able to charge less What does a Discount Broker Do? They are retail-oriented they don’t have investment banking divisions or research divisions offers little or no investment guidance some provide news and research services Deep-Discount Brokers Offer the lowest possible prices (up to 90% discount on full-service rates) Offers NO investment advice OR research tools What Kind of Service is the Best? When you’re choosing a broker you’ve got to determine what kind of service is important to you and how much you’re willing to pay for it! Some Questions to Ask a Potential Broker Get references about the company and the individual broker Ask questions about the broker’s investment style See the broker face to face to discuss your investment goals Ask if the broker is willing to discuss your investments with other professionals who help manage your money More Questions for your Broker Evaluate how quickly your broker responds to your phone calls Get specific numbers when you ask to see the company’s commission schedule Ask about the interest rate the firm charges for margin accounts