A Beginner’s Guide to Investing: Everything You Should Know About Stockbrokers

If you’re new to investing and want to deposit some money into the stock market, you’re in luck. For the first time in history, practically anyone can begin investing for free, regardless of wealth or knowledge. Here’s what a stockbroker does, and how to become one.

A Beginner's Guide to Investing: Everything You Should Know About Stockbrokers
What Are Stockbrokers and How Can You Become One? (Photo: Getty Images)

Until recently, even the most basic discount online brokers charged profit-sucking per-trade commissions and those commissions were rarely discounted for anyone who wished to trade in real-time.

Even that was a tremendous improvement from the days when a call from a stockbroker was a status symbol reserved for people who could afford to pay a broker’s fees while still having money to invest.

Thankfully, those days are over for the average investor, but one thing hasn’t altered. Except in a few cases, the only way to invest in the stock market is through a stockbroker though there’s no reason to ever speak with one if you don’t want to pay for the luxury.

The Market’s Gatekeepers Are Stockbrokers

Though relatively obscure channels such as dividend reinvestment plans and direct stock purchases, it is feasible to buy stock without using a broker.

However, if average investors want to convert the funds in their savings accounts into ownership shares in publicly traded companies, they will need to engage the services of a certified stockbroker.

Before they can obtain the necessary license, stockbrokers must complete the Series 7 exam.

Once they have done so, they are qualified to buy and sell securities such as stocks on behalf of their customers you on exchanges such as the Nasdaq composite and the New York Stock Exchange.

What Can and Can’t a Stockbroker Do

Stockbrokers with a Series 7 license can deal not only stocks but also:

  • Securities issued by municipalities
  • Contracts with variable terms
  • Options
  • Investing in mutual funds

A Series 7 license does not allow them to broker transactions in the following markets:

  • Real Estate
  • Insurance products
  • Commodities
  • Futures

A Beginner's Guide To Investing: Everything You Should Know About Stockbrokers
What Does A Good Investment Mean? (Photo: Shutterstock.com)

Stockbrokers Are Salespeople Who Can Also Provide Investment Advice

The Series 7 test is extensive, covering topics such as retirement plans, taxation, investment fundamentals, options, packaged securities, equity and debt instruments, and much more.

Those who pass have shown a wide knowledge base and are legally permitted to advise their clients. Many people today, just like in the days before online investing, check in with their broker from time to time to ask for guidance and bounce ideas off them, just as many brokers still contact their clients with tips and opportunities.

This is known as a full-service trading account; more on that later. Brokers, whether full-service or not, are paid on a commission basis and do not have a fiduciary responsibility to their clients in the same way that registered financial advisers do.

They are not inherently dishonest, but they are salespeople employed by financial institutions and investment banks to sell securities. They have a built-in conflict of interest. They only get paid when you purchase.

New regulations went into effect on June 30, 2020, tightening the rules regarding conflicts of interest and the types of information that brokers must reveal to their customers. Its supporters argue that it provides investors with significantly more security.

Its critics argue that it does not go far enough. Stockbrokers can and do provide financial guidance in either case, but they are not financial advisors.

Discount Dealers vs. Full-Service Brokers

To buy and sell stocks, you must have a brokerage account, but your experience and the effect on your wallet will vary greatly based on whether you choose a full-service broker or a discount broker.

Full-Service Brokers Are Costly But Beneficial.

Full-service brokerage accounts, first and foremost, are for people with enough money to justify the cost.

They not only charge per-trade commissions, but they are much more likely to charge fees for things like balance minimums and account upkeep than discount brokers.

If a person has $100 to contribute after paying all expenses each month, it’s difficult to justify paying $20 per transaction to make that investment.

Guidance and shared information are the tradeoffs. Full-service brokers assist clients in developing strategies and are accessible to answer questions, provide advice, and present opportunities.

Discount Brokers Conduct Trades Nothing Else.

Discount brokers must be free or near to it to compete today. Automated for self-directed consumers.

They’re best for stock pickers or people who invest X amount of their salary in an index fund ETF each month. Stockbrokers never call with hot tips, but most provide education, news, and study tools.

M1 Finance and Firstrade are two of the top free discount brokers. Fidelity and Schwab, among others, give full-service and free brokerage accounts.

Check Out:

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