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Tuesday, November 07, 2006

Who’s He Working For?

If you have traded stocks in the past, then youknow that a stockbroker can play two different roles in the game.

1. He works as your agent. In this case, he is providing you with service and your goals are his goals. He works as your agent to handle the buying as the selling of your stocks. Usually, people are hands off in this situation meaning that they will tell their broker what they would like them to do and the agent does just that. In other cases, the broker will have more or less power to make decisions. That’s not what is important here. What is important is the fact that he is working on your behalf.

Of course, in this type of an agreement your broker is being paid from you. If and when he makes something happen and you end up gaining some money, he gets a cut of it. Or, you will pay him no matterwhat type of situation he is making for you. Nevertheless, you basically pay your broker in this agreement. He is paid a commission for working for you here.

2. He is working as the principal. In this case, the table is turned even if you do not realize it. Here, he is not working with you as a partner so to speak, but he is working at helping you to sell your shares, or buy shares, in stocks from him or through him. In this case, he is not just your agent but can be the agent for the buyer/seller of the stock as well.

In this case, he is not receiving a commission from you. Rather, he is getting his funds from the spread. Here, he is buying as well as selling stocks at just the right time to make the best amount of money. If you are working with a broker on these terms, his contract should say right on the front of it that you are working as a principal arrangement. Here, remember that your broker is now working for his benefit more so than yours.

As you can probably see, the stock broker that is working for you is one that is looking out for your own good. The one that is working for his own bottom line may not be as honest or provide as benefiting information to you. That is not to say that he will cheat you or otherwise cause problems for you. Rather, he is more likely to have other goalsin mind rather than just your commission payment to him.