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A stockbroker is a person or company who buys and sells stocks on behalf of another person or company. Stockbrokers earn their living by charging a commission on the purchase and sale of stocks.

Function

A stock broker is useful in matching up stock buyers and sellers. A transaction on a stock exchange must be made between two members of the exchange - a typical person may not walk into the New York Stock Exchange (for example), and ask to trade stock. Such an exchange must be done through a broker.

In addition to actually trading stocks for their clients, stock brokers may also offer advice to their clients on which stocks, mutual funds, etc. to buy.

Online

Some newer brokers offer transaction services online in the form of a website interface. They usually offer low commissions, as low as one or two USD, and fast transaction rates, up to two seconds. The latest development has been the introduction of entirely free stock trading.

Tips for using a stock broker

Some people prefer to use and pay for the services of a broker because they feel more comfortable making decisions about their finances with the interactive guidance of a licensed professional.

When using a stock broker for financial guidance, one must be made aware that they do get paid on a commission, based on the stock/mutual fund they sell, and also through Class Distinction/Operating Expense Fees/Services Fees/Shareholder Fees. Thus, a conflict of interest arises concerning a stock broker who offers his/her service as a financial planner, because their revenue is generated as a direct result of your investment in the stock/mutual fund that they broker to you. Thus your return on investment may not be as great, and the advice they give you might not be in your best interest. However, some mutual funds and stocks can only be purchased through a broker: in such cases their services are required to purchase the financial instrument in question.

A word of warning: If you receive a call offering you shares at what seems an unfeasibly good deal (e.g., an imminent IPO which will cause the price to 'go through the roof'), then you are probably being contacted by a boiler room. These are typically not registered with the FSA and could be in a foreign country where fraud laws are lax. If you suspect that you have been contacted in this way, see Boiler room (business) for more information.

The pitch follows this pattern:

   1. Privileged information- this takes the form of a tip, insider knowledge he is not allowed to divulge of a big corporation going to invest in a minnow or in this case a takeover by a company he is allowed to mention.
   2. A good story related to a product in demand: oil, digital video etc.
   3. The need to get in early at a privileged price.
   4. He will hold the block of shares giving you time to research the company.
   5. There is a 12 month period when you are not allowed to sell.
   6. When he phones again he assumes you are going to buy, asks for your national insurance number to prove your identity and transfers you to administrator who takes details for a stock purchase application.

Acting as a principal

Stockbrokers also sometimes or exclusively trade on their own behalf, as a principal, speculating that a share or other financial instrument will increase or decline in price. In such cases the term broker makes little sense and the individuals or firms trading in a principal capacity sometimes call themselves dealers, stock traders or simply traders.

Transactions by stock brokers in the US and UK

In the US: When acting as an agent, the stockbroker typically charges the client a flat fee and/or a percentage-based commission for undertaking the trade, and the price quoted the client must be the best price available in the market. When acting as a principal, the trade could be with another market participant or one of the stockbroker's clients. When trading in a principal capacity with a client, the broker informs the client and charges the client a markup or markdown from the prevailing market price.

In the UK: Stock brokers act the same in the UK as in the US, except that when trading in a principal capacity with a client, the broker is obliged to inform the client and no commission is charged.

Other jurisdictions are thought to have similar rules.