What Does A Stockbroker Do?Understanding the work of a stockbroker is to understand much about the workings of a stock market. When trying to understand what a stockbroker does, it is important to think of them as enablers, smoothing the way of the market. As in so many areas of commerce, buyers and sellers do not know each other and need a 'middleman' (or woman) to connect them. In the stock market, this role is conducted by brokers and brokerages. Stockbrokers generally offer one or more of three possible levels of service. These are execution only, advisory management and discretionary management. Links to descriptions of these services can be found at the bottom of this page. The role of a stockbroker was previously one involving restricted access to information. The inability of the general public to access this information provided the edge from which a broker could profit. This edge may have involved insider information, though this practice has been illegal for some years. Instead, this edge enabled brokers to charge a small commission on both sides of every trade (and a dealing fee on top!) known as the bid / offer spread. This 'spread' is usually very narrow on large quoted companies. Firms in the DJIA or FTSE 100 are very liquid - reducing the potential profit margins. But smaller companies in which there is much less demand and fewer brokerages operating offer the potential for a larger spread. At the low end, a spread might be 1% or 2%, but in the smaller companies, it might be as high as 5%. Stockbrokers are often in a position where they hold shares on their books whilst looking for a match. This means that they can sometimes find - in volatile markets - that they can make profits or losses on these holdings. However, as you might imagine, the aim of all brokerages is to balance their books constantly. The advent of the internet has reduced the information gap and it is now possible for individuals to have access to instant prices. In fact, some services - known as level 2 - offer information which is almost identical to that of a brokerage. This narrowing of the information gap has enabled internet stockbrokers to offer very low cost trading options and cut into the margins of traditional firms. Hopefully, this page has helped to answer, "What does a stockbroker do?" for you. The following pages provide more details:
|