The Role of the Broker -Learn to Earn_ A Beginner’s Guide to the Basics of Investing and Business.
Let’s say you have the resources to buy enough shares so it makes sense to go the regular route—through a broker. If you’re serious about investing, eventually you will reach this point. The broker is your conduit into the stock markets on which the fate of the world now depends.
Since there’s no way you can walk into a stock market and buy and sell shares on your own, you have to work through a broker at a brokerage house. You’ve heard the names: Merrill Lynch, Smith Barney, Dean Witter, Paine Webber, Charles Schwab, and so forth. Schwab is a living person, and Witter a deceased one, but the rest of these names are composites. There was a Mr. Merrill and a Mr. Lynch, a Mr. Smith and a Mr. Barney, a Mr. Paine and a Mr. Webber, and so forth.
Brokerage houses such as these try to convey the impression they go back very far in history and are quite stable, when in fact they’re always merging and changing their names. It’s a very volatile business with many marriages of convenience, and casualties along the way.
All major brokerage houses handle stocks, bonds, and mutual funds, and they all have to abide by the same rules laid down by the government. But beyond that, they are quite different. The so-called full-service brokers, such as Merrill Lynch or Smith Barney, charge higher commissions than the “discount brokers,” such as Schwab. Then there are the “deep-discount brokers,” that offer fewer services.
The extra money you pay a full-service broker entitles you to the brokerage firm’s advice. As a rule, discount brokers don’t offer advice. They just buy and sell on your instructions.
Here you have another decision to make. Along with picking your first stock, you have to pick a broker. The best way to do this is to talk to several in your area—especially brokers who are recommended by your friends or relatives. If you don’t like the first one you meet, there are plenty of others around. Some are very experienced and know a great deal about investing in stocks, while others have just come out of a short training course and know very little. Having a good relationship with a broker is part of the fun of investing.
Once you’ve settled on the brokerage house and the broker, the next step is opening an account. This brings us to another snag: Unless you’re twenty-one, you can’t have your own account. In most states, the investing age is the same as the drinking age. You can drive a car at sixteen, and join the Army at sixteen, but you’re not allowed to do business with a broker until you’ve reached the “age of majority.”
You can get around this “age of majority” problem by setting up an account with a parent or a guardian who can act as “custodian.” This is like having a restricted driver’s license, where you control the vehicle but there’s an adult in the passenger’s seat to cheer you on, or to yell when you veer off course.
Let’s say you’ve opened the custodial account, signed the necessary papers, given the broker whatever amount of money you intend to invest, and told the broker you’re interested in Disney. A good full-service broker will punch up Disney on the special computer that brokers have and read you the recent news about the company.
He or she will also give you the research reports on Disney prepared by the in-house expert, or analyst, who keeps tabs on the company. If they do their job right, analysts can be very valuable sources of information.
It’s possible that the analyst doesn’t like Disney at the moment, or thinks it’s overpriced, or that low attendance at the theme parks will hurt the company. It’s also possible that your broker will try to talk you out of Disney and into some other stock the brokerage house likes better.
But if you’ve done your homework and you still think Disney is a good buy, then you might as well stick to your guns and insist on buying it. After all, it’s your money.
The next thing to consider is the price you want to pay for Disney. Again, you have a choice to make. You can buy a stock “at the market,” which means you’ll get whatever the price happens to be at the moment your order is sent to Wall Street. Or you can put in a “limit order” for a specific price and hope somebody will take you up on it. That’s the chance you take with limit orders: You are waiting to buy at a certain price, which you may or may not get.
Let’s say your broker has consulted on his computer and informed you that Disney is trading at fifty dollars a share. You decide to put in your bid “at the market.” The broker transmits your order through the computer and into the New York Stock Exchange.
The New York Stock Exchange (NYSE) is the oldest and most prestigious stock exchange in the world, located just off Wall Street at 82 Broad Street, in a fancy building with Greek columns in front that reminds you of a courthouse or a post office. There are other stock exchanges, but the NYSE is where Disney is “listed”—meaning that shares of Disney are always on sale there.
If you’re in New York sometime and you’ve got nothing better to do, the NYSE is worth a visit. The tour begins in a room full of photos and display boxes where you can push buttons and learn the story of how the stock market got started under a tree in 1790. You’ll hear about how the pioneer speculators and horse traders stood under this tree in the open air, buying and selling horses, wheat, sugar, you name it, in a noisy, nonstop auction. After the Revolutionary War was won by our side, these traders got the chance to auction off the IOUs issued by the government to pay for the war. This so-called scrip was the first financial commodity ever sold in a marketplace in the United States.
Long before that, a wall was built along Wall Street to keep invaders out, which is how the street got its name. The traders under the tree were a hardy bunch, but after a while they got tired of standing out in the rain and snow, so they moved indoors to the local coffeehouses, where at least they had a roof over their heads. As business picked up, they rented space in nearby basements and lofts until they found a long-term rental and stayed there. In 1864, they built the building that’s been the home of the NYSE ever since. It’s no more than a Frisbee toss from the spot where the original tree once stood.
After you’ve walked past the photos and the displays, and you’ve listened to a short spiel from a tour guide, you can head for the visitors’ gallery, which is the most interesting part. You’re looking down through a giant picture window, with a bird’s-eye view of the trading floor one hundred feet below, where all the action takes place. The trading floor looks as long as a football field, and just as hectic and noisy as a stadium on game day.
The players on the stock exchange are dressed in sneakers and multicolored lab coats, which are their uniforms. Hundreds of them are scurrying around, waving their arms and shouting to get one another’s attention, and the ones that aren’t scurrying are standing in huddles at different spots on the floor, called posts. At each post, there’s an overhead TV set, hung from a maze of girders and pipes that looks like exposed plumbing. It’s around these monitors underneath the exposed plumbing that the shares of more than twenty-five hundred different companies are being bought and sold while you watch.
You can see the Disney post from your perch in the visitors’ gallery, and if you took the elevator downstairs and managed to sneak past the security guards, you could be on the trading floor in no time, wading into the crowd to purchase a share of Disney in person. But it doesn’t work that way. Your order has to come in through the brokerage house to the traders in the lab coats. They do the actual buying and selling, sometimes for themselves, but mostly for customers like you, who have sent in their orders from all over the world.
The basic routine at the post hasn’t changed for decades. The best way to think of it is as a nonstop auction where the same item is continuously brought up for sale. In this case, the item is Disney stock.
Let’s say a trader at the Disney post yells out “1,000 at $497/8.” That means one of his customers wants to sell 1,000 shares of Disney for $497/8 apiece. If another trader at the post has a customer who wants to buy 1,000 shares at $497/8, the two traders make a deal. But it doesn’t always happen that way. It may be that nobody wants to pay that price at that particular moment. So the trader who’s selling the Disney has to lower the price to $493/4 or perhaps to $491/2, until he can attract a buyer.
Or it may be that there are buyers at $497/8, but nobody wants to sell at that price. In that case, the buyers have to raise their bids to $50 or $501/8, and so forth, until the bid gets high enough to attract a seller.
It goes on like this from 9:30 A.M. when the market opens to 4:00 P.M. when it closes, the prices of shares bobbing up and down from one minute to the next as the auction continues. A person called the “specialist” stands at the post in the middle of this commotion, listening to the bids and the offers, watching for the signals, matching the buyers with the sellers and keeping track of every deal.
At present, more than 1 million shares of Disney are bought and sold on the NYSE every day, along with 338 million plus shares of stock in the other twenty-six hundred listed companies. You may wonder how the lone Disney specialist standing at the post could possibly handle this volume of business. The answer is, he can’t.
Although most investors are not aware of it, 85 percent of the orders arrive at specialists’ posts via computer. Computers are handling more transactions both on the stock exchanges and off the stock exchanges. The trading departments of the Wall Street investment houses use computers to make trades directly with other trading departments. When you look down on the trading floor from the visitors’ gallery, you’re seeing a colorful spectacle that is fast becoming obsolete.
With a good computer network, you don’t need hundreds of people running around wearing out their sneakers and yelling themselves hoarse. All the bidding for stocks can take place on a screen, and most of it already does.
The NYSE has a special matchmaking system for small transactions such as yours. Your buy order for Disney is sent directly into the NYSE computer, where it is automatically matched with a sell order that comes in from somebody else.
Stock transactions are entirely anonymous. Unlike the deals you make at flea markets or garage sales, in a stock deal, you never come face-to-face with the other party. Maybe it’s just as well, because then you don’t have to sit there and listen to the seller of the Disney shares telling you why he’s getting rid of them, the way you do when you buy a used car from a neighbor.
There could be many reasons why the other party to the transaction is selling the stock that you’re buying. Maybe he needs the money to pay a college tuition bill, or to repaint the house, or to take a vacation. Maybe he doesn’t like the latest Disney movies, and he’s not as optimistic as you are about the future of the company. Or maybe he’s found another stock he’d rather own. But whatever his motivation for selling, it shouldn’t matter to you. If you’ve done your homework, you know why you’re buying.
After the computer has made a match between you and a seller, the news of the sale will move across the electronic tickertape that runs across the bottom of your TV screen on the financial networks. Have you ever watched that continuous string of numbers? Every one is the record of an actual stock deal. For instance, “DIS 50, $50,” means that 50 shares of Disney have just been sold at $50 apiece. So if you bought 50 shares at $50, the world would know about it, because your little “DIS 50, $50” would flash across on the TV screens and electronic display monitors in brokerage houses and investment companies from Boston to Beijing.
Andy Warhol, the famous painter of the Campbell’s Soup can (another great public company!), once said that with all the media around us, every person would be famous for fifteen minutes. Warhol was only joking, but every stock trade of fifty shares or more gets its five seconds of international fame.