About Brokerage Companies

Brokerage companies engage in buying and selling stocks for investors.

Brokerage companies work with investors purchasing stocks and bonds. The brokerage company's job is to bring both buyers and sellers together, acting as the middle man between a company selling shares of stock and investors looking to invest in the company. Brokerage companies can also provide other services to their customers, including investment advice and setting up limited banking accounts.

Duties

Brokerage companies make money by charging a commission on the shares they sell or buy. They also charge commissions on the other securities they handle. If you have a brokerage account set up with the company and you borrow money from the account, the brokerage company makes money from earned interest. They also make money by charging for any administrative services provided, including setting up an individual retirement account. Companies also keep the investor apprised as to the relative financial health of the investments.

SIPC

The Securities Investor Protection Corporation registers brokerage companies, providing protection to consumers by guaranteeing a return on some or all of the investment in the event the brokerage company goes out of business. The SIPC does not offer protection for bad investments, only for returning money provided in the account when the brokerage company files bankruptcy. If a brokerage company does not have SPIC coverage, the investors' accounts are not financially secure.

Churning

Some brokerage companies engage in an activity known as "churning." Since the brokerage company makes money whenever a trade takes place, churning is the practice of buying and selling stocks in order to make money from the trade. Churning is both illegal and unethical.

SEC

The U.S. Securities and Exchange Commission is responsible for oversight of brokerage companies. Charged with making sure investors are not deceived or misrepresented in security sales, the SEC has broad authority to fulfill its obligations. One of the areas that the SEC monitors within brokerage companies is "insider trading." If someone within a brokerage firm finds out information not available to the public, it is illegal to buy or sell stocks based on that information.

Electronic Trading

There are electronic brokerage firms that serve the same function as brick-and-mortar companies. Companies such as E*Trade allow individuals to set up brokerage accounts at cheaper rates than traditional brokerage companies. While the electronic brokerage firms might not offer as much personalized service, they can save the investor money during trading.

References

• Dummies.com: What Does an Investment Broker Do?
• Securities Investor Protection Corporation: The SIPC Mission
• "U.S. News and World Report"; Is Your Broker Looking Out for Your Best Interest; Kelly Campbell, November 2010
• U.S. Securities and Exchange Commission: The Laws That Govern the Securities Industry
• "Fox Business"; E*Trade Reports Trade Volume; Abigail Forget; February 2011