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Stock Brokers

(Would you buy a used stock from this man?}

Sorry, but here are a few facts you need to know about stockbrokers, including...

Why Brokers May Not Have Your Best Interests At Heart

Have you ever received a call from a stockbroker with a 'hot tip?' Did you ever stop to ask yourself, 'Should I be taking investment advice from a guy who earns $50,000 a year?'

Some brokers are excellent, but certainly your retirement is too important to leave to a glorified salesperson.

Since so many investors deal with one or more stock brokers and hang onto their every word of investment advice, we thought we'd borrow the pin the real estate market is now using and pop another balloon.

The truth is that stock brokers are quite often salesmen with little to no knowledge about investing. But they don't want you to know that.

Think about it logically. If you were an expert investor, would you spend years on a modest salary-plus-commissions, commuting to a cubicle every day to talk to total strangers on the phone? Or would you stay home and invest successfully for yourself?

Of course, we don't mean to imply that all brokers are glorified salespeople. Just most of them. Take this into consideration:

99% of all brokers never recommend to their clients that they SELL anything. And we don't mean sell a stock they're already holding that has failed to perform. We mean short sell, to deliberately sell a weak or declining stock in the expectation of making a profit.

After all, markets do go down, too. Experienced, professional investors routinely trade the market in both directions. As the saying goes, 'it's no big deal.' But not brokers!

Brokers virtually NEVER issue sell recommendations to their clients. It's always 'Buy!, Buy!, Buy!'

As the Nasdaq pulled a flaming power dive in early 2000, losing 75% of its value in just a few months, a chorus of brokers from coast to coast jumped on the phones each day and continued urging their clients to 'Buy!, Buy!, Buy!'

This sure sounds like the hallmarks of a salesman to us. The truth is that stockbrokers are not paid to learn about investing, they are paid to sell more stocks. The more time they spend selling stocks, the more money they earn. The more time they spend learning about investing, the less time they're spending selling. Most brokers' time would be better spent reading books on 'how to sell' than on 'how to invest'!

To understand why this is true, you need to go 'behind the scenes' and learn a little about how the division of labor breaks down in the typical brokerage house.

Investment firms (brokerages) have a research department, an operations department and a sales department.

The sales department (the one with the brokers in the cubicles) is not supposed to concern itself with exactly which stocks it is selling (pushing). That is for the research department to worry about.

The research department picks the stocks and sends a memo to the brokers who then phone their clients at home and say, 'Hey, I've got a hot stock tip for you'.

The folks in the research and operations departments aren't allowed to make sales calls, and the stockbrokers aren't allowed to make investment recommendations that haven't been approved by the research department!

In other words, brokers who deal with the public aren't supposed (allowed?) to think for themselves. This is how brokerage firms get around worrying about whether or not their brokers actually know anything.

Now you know how this works. But the good news is that you can become your own broker!

After all, who cares about your money more than you do?