Investment broker

Last updated April 09, 2019

Investment brokers are individuals who bring together buyers and sellers of investments.^[1] They usually are required to be licensed to act on behalf of buyers and sellers of stock. They charge a commission on trades that they execute on such instructions from buyers and sellers.

To invest is to allocate money in the expectation of some benefit in the future.

The stock of a corporation is all of the shares into which ownership of the corporation is divided. In American English, the shares are commonly known as "stocks." A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company's earnings, proceeds from liquidation of assets, or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders.

Commissions are a form of variable-pay remuneration for services rendered or products sold. Commissions are a common way to motivate and reward salespeople. Commissions can also be designed to encourage specific sales behaviors. For example, commissions may be reduced when granting large discounts. Or commissions may be increased when selling certain products the organization wants to promote. Commissions are usually implemented within the framework on a sales incentive program, which can include one or multiple commission plans.

Types of investment brokers

Discount broker
Prime brokerage
Online broker
OTC broker
Exchange broker

Prime brokerage is the generic name for a bundled package of services offered by investment banks, wealth management firms, and securities dealers to hedge funds which need the ability to borrow securities and cash in order to be able to invest on a netted basis and achieve an absolute return. The prime broker provides a centralized securities clearing facility for the hedge fund so the hedge fund's collateral requirements are netted across all deals handled by the prime broker. These two features are advantageous to their clients.

Main points in activity

Brokerage activity is carried out by a broker who is a professional securities market participant.
Rights and duties of a broker and his client shall be stipulated in the agreement on brokerage services and in the instructions given to the broker by the client in accordance with this agreement.
Mandatory requirements to the agreement on brokerage services shall be set by the National Commission.
Brokers shall transfer the power of attorney for carrying out transactions only to brokers. The transfer is allowed if it is stipulated in the brokerage services agreement or in cases when a broker is forced to do so in order to protect the interests of his client with the notification of the latter.
Transfer of power of attorney shall be carried out in compliance with legislation.
The broker shall execute clients' instructions in good faith and on terms favorable for the client and in the order in which they were received, unless the agreement with the client or his instruction envisions otherwise.
Security transactions executed by the broker upon the clients' instruction should be executed with priority over the dealer transactions of the broker, in case these two types of activity are combined, or over transactions executed by the broker upon instruction of its affiliated persons.
In the event that the broker has an interest which prevents him from executing the client's instruction on the terms most beneficial for the client, the broker shall immediately notify the latter of such an interest.
In the event that a conflict of interests between the broker and his client, of which the client was not notified before the broker received the respective instruction, led to execution of the instruction to the detriment of the client's interests, the broker is obliged to compensate for the losses from his own account as set forth in civil legislation.
The broker shall compensate in full for the losses incurred by a client as a result of non-execution or improper execution by the broker of his obligations under the agreement on brokerage services.
In the event that the broker is deemed insolvent (bankrupt), the property that he holds under agreements on brokerage services and which belongs to his clients shall not be included in tender stock.

Main functions

An intermediary between seller and buyer
To make transactions on behalf of and paid by the client or on his behalf and at the expense of the client
To inform and consult the client, especially about risks
To insure client's operations
Infrastructural support of operations with securities

Types of orders

Limit order - instructs your broker to buy or sell only the stock is at the price you have named, or better.
Stop-loss orders are similar to limit orders in that the trade is not to be executed unless the stock hits a price limit. In this case, however, the stock is to be sold if its price falls below a stipulated level. As the name suggest the order lets the stock be sold to stop further losses from accumulating. Symmetrically, stop-buy orders specify that the stock should not be bought when its price rises above given limit.

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References

↑ All About Investing, Esme Faerber, ISBN 0-07-145752-6

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[1] All About Investing, Esme Faerber, ISBN 0-07-145752-6