Definition
A Stockbroker is a professional who facilitates the buying and selling of securities on a stock exchange on behalf of clients, and earns commission in return for these services. Stockbrokers are instrumental in executing trades and providing investment advice, particularly to institutional investors. The role and operational latitude of stockbrokers underwent significant changes post-October 1986 due to the financial reforms known as the “Big Bang” in the London Stock Exchange.
Examples
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Institutional Investor Trade Execution:
- An institutional investor may want to purchase a large amount of a certain stock. They engage a stockbroker to execute this trade efficiently and advise on the best timing to enter the market.
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Retail Investor Portfolio Management:
- A retail investor seeking to manage a diversified portfolio might hire a stockbroker to execute trades and offer periodic investment advice tailored to their financial goals.
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Market Making:
- Modern London stockbrokers, post-1986 reforms, act as market makers where they buy and sell securities as principals, providing liquidity to the market and earning profits from the bid-ask spread in addition to commissions.
Frequently Asked Questions
1. What is the main role of a stockbroker?
The primary role of a stockbroker is to execute buy and sell orders for securities on a stock exchange on behalf of clients and provide specialized investment advice.
2. How do stockbrokers earn their compensation?
Stockbrokers earn compensation through commissions, which are fees for executing client trades and possibly through the bid-ask spread if they act as market makers.
3. What was the ‘Big Bang’ and how did it affect stockbrokers?
The ‘Big Bang’ was a series of financial reforms introduced in October 1986 in the London Stock Exchange that abolished fixed commissions and allowed stockbrokers to act as principals, transforming them into market makers.
4. Do stockbrokers provide investment advice?
Yes, stockbrokers traditionally offer investment advice, particularly focusing on institutional investors, though this feature is also available for retail clients.
5. What is the difference between a stockbroker and a market maker?
A stockbroker typically acts on behalf of clients to execute trades, whereas a market maker trades on their own account to provide liquidity to the market. Some modern stockbrokers can perform both roles.
6. Are commissions fixed for stockbrokers?
No, following the ‘Big Bang’ reforms, fixed commissions were abolished, allowing stockbrokers to vary their commission rates competitively.
7. Can stockbrokers manage accounts for retail investors?
Yes, many stockbrokers offer services to retail investors, including account management, trade execution, and investment advice.
8. Is a license necessary to become a stockbroker?
Yes, becoming a stockbroker typically requires passing relevant licensing exams and being registered with appropriate financial regulatory bodies.
9. Do stockbrokers only deal with stocks?
No, stockbrokers can handle a variety of securities, including stocks, bonds, options, and mutual funds, depending on their expertise and client requirements.
10. How has technology impacted the role of stockbrokers?
Technology has significantly streamlined trade execution, information dissemination, and has facilitated direct access trading for clients, somewhat altering the traditional broker-client dynamic.
Related Terms
- Securities: Financial instruments representing ownership (stocks), creditor relationship (bonds), or rights to ownership (derivatives) that can be traded on a stock exchange.
- Stock Exchange: A marketplace where securities are bought and sold; includes exchanges like NYSE, NASDAQ, and LSE.
- Commission: A fee charged by a stockbroker to a client for services rendered in executing buy and sell orders.
- Principal: Acting on one’s own account in trading securities, as opposed to acting on behalf of clients.
- Market Maker: A broker-dealer firm that holds an inventory of securities and stands ready to buy and sell at quoted prices, providing liquidity to the market.
Online References
- Investopedia: Stockbroker
- The Balance: What Does a Stockbroker Do and How Do You Become One?
- SEC: The Markets and Market Participants - Brokers and Dealers
Suggested Books for Further Study
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“The Intelligent Investor” by Benjamin Graham
- A classic book on value investing and fundamental principles of investing.
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“The Little Book of Common Sense Investing” by John C. Bogle
- An insightful guide on passive investing and understanding market behavior.
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“Market Wizards: Interviews with Top Traders” by Jack D. Schwager
- A collection of interviews with some of the greatest stock traders and insights into their trading strategies.
Accounting Basics: “Stockbroker” Fundamentals Quiz
Thank you for embarking on this journey through our comprehensive accounting lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your financial knowledge!
