What is a stock broker?

A stock broker is a regulated firm that buys and sells stocks on behalf of a customer, charging them a fee for the service. The stocks are traded through a market maker on behalf of the customer.

What is a market maker?

A market maker is firm that links up the buyers and the sellers in an individual marketplace. For example, if you wanted to buy 100 shares in Microsoft corporation, you need somebody to be selling 100 Microsoft shares. Conversely if you wanted to later sell your 100 Microsoft shares, you would need somebody to buy them off you.

It’s similar principle to buying a car, then later selling it. You need to find somebody to buy the car from, then find a buyer when you want to sell the car.

It is the market makers job to link the buyers with the sellers. Market makers are able to quote buy and sell prices every second of the trading day. Generally the more liquid a market, the lower the spread will be between the ask and the bid price (buy and sell).

A market maker literally makes a market for a particular stock.

Services offered by stock brokers:

Execution only stock brokers
These brokers just offer the service of letting you buy or sell stocks for a fee.

Advisory dealing
These brokers do the same as an execution only broker, but also advise you on which stocks to buy and sell. You don’t have to take their advice though. Many of these services do not yield very good results, so be careful.

Discretionary dealing
This is where the stock broker determines the individual investors investment objectives and risk tolerance and then makes all the trading decisions for the client. If this is an option that you find appealing, be sure to do your research on individual brokers because a lot managers are well below par and may not perform to your satisfaction.

I believe it is also very important to fully be aware of all the fees the manager will charge for looking after your money. It is often the case that the fees will make too big a hole in any potential returns.

Choose your stock broker carefully

Stock brokering is a very lucrative business and the competition is growing all the time. Brokers are getting cheaper to try and get your business. They are also offering many additional incentives offering a number of free trades each month.