Understanding Stockbrokers in Today's Financial System
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Understanding Stockbrokers in Today's Financial System

4 Min.

A stockbroker manages stock trades for clients. Online brokers automate most trades, cutting fees. Wealthy clients prefer full-service brokers for advice and portfolio management.

Basics

A stockbroker, also known as a registered representative or investment advisor, executes market orders for clients. They work for brokerage firms, handling transactions for individuals and institutions, and usually earn commissions. Brokerage firms and broker-dealer companies are collectively referred to as stockbrokers, encompassing both full-service and discount brokers. Discount brokers, commonly online, execute trades without personalized advice, often with free or low-cost commissions. Some online brokers provide premium services for higher fees.

Stockbrokers in the Financial System

To trade stocks on major exchanges like the New York Stock Exchange (NYSE) or NASDAQ, membership in the exchange or a member firm is required. These entities are often licensed as brokers or broker-dealers by the Financial Industry Regulatory Authority (FINRA).

Though direct stock purchases from issuing companies are possible for individual investors, working with a stockbroker simplifies the process. In the past, accessing stock markets was costly, and feasible mainly for wealthy or institutional investors like pension fund managers. They used full-service brokers, paying significant fees for trades.

The rise of discount brokers offering affordable, rapid, and automated online market access can be attributed to the internet and technological progress. Apps like Robinhood and SoFi have even enabled micro-investing and fractional shares. Today, most accounts are managed by owners through discount brokers.

Stockbrokers Today

Brokers at discount firms serve as voice agents or branch officers, assisting clients with quick questions or premium subscriptions. Others operate within investment banks or specialized brokerages, managing substantial orders for institutions and high-net-worth individuals.

A new trend is roboadvisers, algorithm-based investment tools available through apps or websites, offering cost-effective and minimal interaction services. Additionally, apps like Robinhood and SoFi empower micro-investors, enabling even fractional share purchases.

What You Need to Work as a Stockbroker

Typically, a bachelor's degree in finance or business administration is required for stockbrokers. In addition, they must have a solid understanding of financial laws, accounting, economics, financial planning, and forecasting. It is becoming increasingly important for stockbrokers to hold recognized global credentials, such as the certified financial planner (CFP) and chartered financial analyst (CFA) designations, as indicators of financial expertise. Successful stockbrokers excel not only in market knowledge and investing skills but also possess exceptional interpersonal abilities to foster strong and lasting sales relationships.

Licensing Requirements by Country

Stockbrokers have distinct credentialing standards in every country. Here are examples from different countries.

  • United States: Registered brokers in the U.S. need FINRA Series 7 and Series 63 or 66 licenses, sponsored by a registered investment firm. U.S. floor brokers must also be members of their exchange.
  • Canada: Aspiring stockbrokers require employment at a brokerage firm and must finish the Canadian Securities Course (CSC), Conduct and Practices Handbook (CPH), and 90-day Investment Advisor Training Program (IATP).
  • Hong Kong: Applicants need employment at a licensed brokerage and must pass three Hong Kong Securities Institute (HKSI) exams, followed by regulatory approval.
  • Singapore: Trading representatives must pass four Institute of Banking and Finance exams: Modules 1A, 5, 6, and 6A. Licensing is governed by the Monetary Authority of Singapore (MAS) and the Singapore Exchange (SGX).
  • United Kingdom: Stockbroking is tightly regulated; brokers must attain qualifications from the Financial Conduct Authority (FCA), tailored to their role and employer.

Discount vs Full-Service Broker

In the past, discount brokers focused on trades, while full-service brokers offered comprehensive financial services like research, advice, and portfolio management. With online brokerages reducing commissions to zero, discount brokers now offer additional services like research alongside execution.

Conclusion

Stockbrokers play a crucial role in the financial system by executing market orders for clients. With the rise of discount brokers and algorithm-based investment tools, the industry has become more accessible to individual investors. However, successful stockbrokers still need to possess exceptional interpersonal abilities and financial expertise, as well as meet the licensing requirements of their respective countries.

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