Stockbrokers are licensed individuals or companies that facilitate the sale and purchase of securities. While a growing number of stockbrokers are competing with online discounters and robo-advisors, there’s still a role for people who can help investors increase their wealth. Read more here to learn about the types of stockbrokers, how they’re regulated, and how you can benefit from them.
What is a stockbroker?
Simply put, a stockbroker is a middleman between investors and markets. They buy and sell securities on behalf of their clients, handling stocks, bonds, exchange-traded funds, and mutual funds, among other investments.
Although stockbrokers need to have a wide range of skills to excel in the field, the most successful brokers possess three strong attributes:
- Analyzing. Stockbrokers should have a comprehensive grasp of financial products and markets. They need to be able to use quantitative tools to find the best investments for clients.
- Communicating. Stockbrokers need to have the ability to discuss sometimes-complex topics in language that everyday investors can understand and appreciate.
- Selling. Most stockbrokers earn money from commissions. If they can’t sell financial products, they don’t earn commissions -- and they’re soon out of business.
Individuals working as stockbrokers generally have college degrees in a business-related field and pass licensing tests after being sponsored by a regulated firm. The tests include the General Securities Representative Exam (also known as the Series 7 Exam) and the Securities Industry Essentials (SIE) Exam. Both tests are administered by the Financial Industry Regulatory Authority (FINRA), a private, nonprofit organization that regulates the securities industry.
According to FINRA, more than 628,000 people were registered as representatives in the industry in 2023, the largest number since 2018. Almost 3,300 firms were regulated by FINRA, marking a steady decline since 2006, when more than 5,000 firms fell under its jurisdiction.
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It’s worth noting that while there are clear differences among the types of stockbrokers, many companies offer all three types of services. Fidelity, Schwab, and Vanguard, for example, offer full-service, discount, and online options for investors.
Choosing a stockbroker
Because your money is important to you, The Fool recommends investors take care when selecting a stockbroker. We recommend a five-step process that will help you decide which stockbroker to choose:
- Your type. Do you want to buy stocks, bonds, mutual funds, or ETFs? Are you thinking about opening a retirement account, such as a Roth IRA or 401(k)? Decide how you want your money to work for you.
- Your priorities. Do you need a brokerage with lots of online bells and whistles, or would you rather speak to a human? Do you need a brokerage that specializes in a certain type of investment, or are you comfortable with a jack-of-all-trades?
- Your expertise. Are you going to want to use a brokerage that offers advanced tools, such as charts and other technical analysis tools? Or are you more comfortable with a stockbroker that can offer webinars and FAQs on the nuts and bolts of investing?
- Fees and charges. Will your stockbroker charge excessive or hidden fees? Although most stockbrokers these days offer commission-free trades, you should always read the fine print. An ETF, for example, may look good at first, but might also carry a high expense ratio that would eat into profits.
- Tinker. Assuming you’re handling most of your investments online, test drive the different platforms for stockbrokers that you’re considering. Some are more intuitive than others, but you’ll want to make sure that it’s easy for you to use, and that it offers the services you need. Most online brokerages will let you establish an account and give their platform a spin before you invest.
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