This article is an excerpt from the Shortform book guide to "The Intelligent Investor" by Benjamin Graham. Shortform has the world's best summaries and analyses of books you should be reading.
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What does a stock broker do? Should you get a stock broker if you invest money in stocks?
Many people wonder “what does a stock broker do?” If you invest often, you may consider using a stockbroker. But Benjamin Graham points out in The Intelligent Investor that brokers make money by trading more, and may not be the best use of your money.
Keep reading to find out the answer to the question “what does a stock broker do?”
What Does a Stock Broker Do? Stockbrokers and Brokerages
So, what does a stockbroker do for investors? The key point to remember about stock brokerages is that they make money when you trade, not when you make money. Therefore, brokerages try to make trading as easy and fast as possible, regardless of whether this is actually good for you.
In fact, since speculators nearly certainly lose money on average and in the long-term, if brokerages had their customers’ best interests in mind, they would make trading more cumbersome. But the least they often do is avoid outright encouraging speculation; otherwise, they throw up their hands, saying, “If customers want to trade using our tools, so be it.”
If you deal with any individual brokers, remember that they typically make their money on commissions, so beware of anyone promoting what smells of speculation. This can all help you answer the question “what does a stock broker do?”
Now that you know the answer to the question “what does a stock broker do?” you can also consider using investment banks to manage your stocks. Investment banks help companies “go public,” or offer shares to the public for sale. They typically serve as underwriters, meaning they buy the company’s newly issued stocks at a discount, then sell them to the public (thus offering a guarantee to the company that all their stock will be sold, and that the company will raise a certain amount of funds). They also provide marketing and regulatory services.
Investment banking is often seen as the most respected profession in finance, since they accomplish a goal of material societal value—helping companies procure investment to grow.
Today, you likely won’t deal directly with investment banks (unless they directly promote new stocks to you), but you are subject to their marketing. Like many financial advisors, the incentive of investment banks only overlaps partially with yours—they make money when the stock price goes up. Therefore, they will paint the most optimistic picture of future company performance.
Graham has already expressed his skepticism of new issues in general, given the enthusiastic salesmanship and that IPOs tend to happen when the environment is most favorable to the company. Resist the ebullient marketing and do your own analysis. Now consider the question “what does a stock broker do?” in comparison to investment banks.
Not that you know how much effort it takes to earn above-average returns, you should be skeptical of anyone who promises the same, whether they be your local banker, friends, or relatives. If they don’t have a long track record of strong performance and don’t put in the hard work to be judicious about investments, they shouldn’t be trusted anymore than you trust yourself.
S,o what does a stock broker do and what can they do for you? Now that you know the answer, you can make better decisions on how to manage your investments.
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- Key advice from what Warren Buffett considers the "best book about investing"
- The 2 major indicators you should use for evaluating stocks
- How you can use aggressive or defensive investing strategies