In the late nineties the broking
industry was massively shaken up by the forces of
competition, especially the advent of internet trading
and cheap online broking services. Gone are the days
when brokers routinely charged around 2.5% to buy
and then another 2.5% to sell. It really makes you
wonder how traders ever made a living back then. Nowadays
many people use 'no advice' brokers and pay much less
than 1% per transaction. Online trading via the internet
has become the main way of buying and selling shares
and can be conducted through various online broking
firms which are easily found via a search engine.
If you are new to the market
though, or can find a good one, there can still be
value in paying the higher rates for a broker who conducts
research and offers client advice. One advantage of
a good advisory broker is that the principals of many
companies need good relations with brokers and therefore
often tell them stuff that may not be generally known.
Brokers, being in the industry, hear a lot of rumours,
both good and bad, that can be very useful.
The downside is that unfortunately
some brokers use clients for their own ends. If for
instance a Shark needed to get out of a stock urgently,
an unscrupulous broker might recommend that stock
to some of their Fish or Plankton to help out the
more valuable client. Other times a broker might have
a vested interest in the success of a float that their
company is underwriting and may sell shares in that
float to clients, whether they believe in the ultimate
success of the company or not.
Brokers also have interests
that can be at odds with the client. I have already
mentioned two of these in previous sections, keeping
clients invested in shares as opposed to other types
of investment despite the market being over-bought,
and profiting from excessive turnover of stock (known
as churning) whilst the client is obviously better
served by minimising turnover and consequently brokerage
Another thing to remember is
that many brokers are just salespeople, who pass on
the information and recommendations of analysts. Not
all of them are well versed in the history of markets,
world commerce, geopolitics, or even a lot of the
individual stocks in the speculative market sectors.
So when you ask your broker about a stock that someone
mentioned to you, do not imagine that you are necessarily
getting expert advice. Ask whether the firm has analysed
that stock and if not, ask the broker to justify any
An important area of broker skill is the taking and
executing of orders. There is a vast difference between a good and bad broker
A good broker will know when
to question your order and can occasionally stop you
from making a mistake. They will notice when your
order is running against the tide and will know when
to exercise their own discretion to save you money.
A bad broker will be proactive at the wrong times,
will not get the best price available, will not always
try and contact you if something relevant happens
that may affect your order and will often cost you
money that a good broker would have saved.
In my experience the best way
of choosing a broker is by recommendation. Try and
find either a professional trader or at least a Shark
who can point you in the right direction. One of your
acquaintances is sure to know a serious market player.
Do not take any old Fish's advice, as they might not
know the difference, whereas a Shark has probably
switched brokers several times before settling on
a good one.
NEXT ... Traders
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