Stock Trading and Other Things

For the most part, are stock brokers fully invested in the recommendations they make?

Intuitively, it would seem that if a stock broker made a recommendation to invest in a certain stock to a customer, they too would be invested in that same stock because it would neccessarily mean they think the stock is in the best place to invest money. How can a stock broker make a recommendation and not want to be invested in it as well?

Public Comments

1. Stock brokers get theri money on buy and sell fees. They love the curn of day traders and those that want to short, make stops ect. They could make a fortune if the market were to crash and everyone sold to get out.

It also might be illegal (after all pump and dump boiler rooms are illegal) or unethlical to have brokers to steer people to buy stocks they own. Imagine if the broker were to buy stocks of XYZ, then he gets people to buy the stock in that company driving the price up. Then he sell and makes money.

2. NO... most brokers don't own the stocks they sell you. At most firms that have sales meetings and the manager tells the reps to hit the phones and sell the customer XYZ today. The reps are there to make commissions. So if they want to stay, they push that stock. A rep who is a big producer could most likely avoid that because the firm is only interested in the profits, so as long as he produces they are happy. a cynic would say that the firm buys in these stocks into inventory at cheaper prices prior to recommending them to customers.... they sure do.

now there are some reps who will not play those games and they might not own the particular stock they recommend because it does not fit with what they need to do, but it might be good for your portfolio. those guys are harder to find, they are out there however.

I only do my own investing because of all of the above.

3. A stock broker cannot advice you to buy or sell anything. They can provide "ideas."
Brokers only earn commission in transactions. Believe me when I say that the broker will only use a computer program and a couple of questions to put you in the funds the company sponsors. Some mutual funds can only invest in "buy" rated companies designed by their houses. Thus, the weighting of recommendations.

He will make no effort to put you in good companies. Unless you have $2 millions or more. When you have that equity the broker will put the money in managed accounts where professionals are in charge.

That is why I use a discount broker.

4. Most stock brokers own mutual funds instead of stocks. It keeps them from touting their own holdings and they've seen firsthand how difficult it is to pick good stocks.

5. As a broker and a branch manager for 15 years, the answers to your question amaze me!! There are a lot of misconceptions in those answers.

No, most brokers do not own the stocks that they recommend for their clients.

There are many reasons for this. There are compliance and regulatory reasons. If a firms analyst changes a recommendation on a stock, then the security gets placed on a restricted list and is off limits to the broker for a period of time. Another reason is conflict of interest. You would never want your broker to have the thought of front running, i.e. buy a position in a stock and then call all his clients to push it up or conversly on bad news, get himself out first and then call you to get out.

In my opinion, the main reason is that in order for the broker to deliver good, objective advice, the broker needs to remain logical and level headed. This is why clients use brokers. It is your money in the market so you are naturally going to be emotional about it. He cannot do this if he has his own money in the stock and he also becomes emotional about it.

There is an old expression in the brokerage business that says, "the client gets his yacht and then you get yours". What this means is that the client always comes first. Any successful, experienced broker lives by this.