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Chad Mason Instructor: Malcolm Campbell English 1102 February 12, 2014 Stockbrokers: Separating the Wolves from the Sheep

Money, greed, and controversy I! you"ve seen the recent bo# o!!ice hit The Wolf of Wall Street, chances are these are some o! the $ords that come to mind $hen thin%ing o! the notorious pro!ession o! being a stoc%bro%er &he movie portrayed the speci!ic 'ourney o! (ordan )el!ort, a !ormer *toc%bro%er $ho ran pump and dump schemes that cost his clients hundreds o! millions o! dollars !or his o$n bene!it &his led many vie$ers to believe that all stoc%bro%ers ma%e their money immorally and $ith no regard !or society $hatsoever, yet, are there stoc%bro%ers $ho ma%e their living the right $ay and still obtain great success+ &his essay see%s to decipher the positives and negatives o! hiring a bro%er, !ind an e#planation o! $hat separates the success!ul stoc%bro%ers !rom the many that !ail, and i! they can achieve this success $ithout sacri!icing their moral values Key Terms &o understand many o! the terms and concepts throughout this essay it $ould be help!ul to !amiliari,e yoursel! $ith some o! the vernacular used everyday on -all *treet Boiler Room: . non/reputable bro%erage !irm that uses high/pressure telephone sales tactics, scripts, and an uneducated, immoral $or%!orce to push dubious securities &he boiler room bro%erage era sa$ its pea% in the 1000"s as the !irms made mar%ets in manipulated stoc%s and made secret payments to the bro%ers $ho pushed them 1)ac%stage -all *treet, 23

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Broker: *omeone $ho earns commission !or providing the lin% bet$een buyers and sellers )ro%ers generally ta%e little to no ris%, as they match buyers $ith sellers 123 Capital Gain: &he amount by $hich an asset4s selling price e#ceeds its initial purchase price . reali,ed capital gain is an investment that has been sold at a pro!it .n unreali,ed capital gain is an investment that hasn4t been sold yet but $ould result in a pro!it i! sold Capital gain is o!ten used to mean reali,ed capital gain 143 Dividend: . payment by a company to shareholders o! its stoc%, usually as a $ay to distribute pro!its to shareholders 143 Do !ones "nd#strial $verage %D!"$&: 5rice/$eighted average o! 20 actively traded shares o! blue/chip 6* industrial corporations listed on the 7e$ 8or% *toc% E#change 143 '(#ity: &he ris% sharing part o! capital or the sta%e in $hich the investor o$ns in the company 143 ')change*traded f#nd %'T+&: .n inde# !und that is traded on the stoc% mar%et 193 ,rice-'arning %,-'& ratio: . !igure indicating the investor con!idence a company en'oys &his is calculated by the current share price divided by the most recent !igure !or the earnings per share, the higher the !igure, the more con!ident the investors 1:3 .ield: &he return on an investment 8ields on bonds move inversely to prices 1103

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What is a stockbroker/ It is !irst important to note $hat e#actly it is that a stoc%bro%er does )ro%ers are people $ho handle customer"s transactions and are in control o! buying and selling securities &hey act sort o! as a middleman, such as a retail store that o!!ers your !avorite brand o! clothing .ccording to the 7e$ 8or% *toc% e#change, $hich is the largest e;uity/based e#change center in the $orld, stoc%bro%ers have been around since 1:00, $hen the government issued <=0 million in bonds to help repay $ar debt !rom the >evolutionary -ar, this mar%ed the birth o! the 6nited *tates investment mar%ets &he main !ocus o! being a bro%er is that it is a sales 'ob )ro%ers ma%e their living by receiving a commission !or the trades they process &hey must be able to identi!y trends and relationships in the mar%et, !or e#ample, i! the price o! corn goes up, ho$ does this a!!ect the car industry+ .ccording to the ?uman Capital >esearch Collaborative, a partnership $ith the Federal >eserve )an% o! Minneapolis, the *ecurities and E#change Commission 1*EC3, $hich oversees and regulates all trades in the 6nited *tates, states that to be a stoc%bro%er in the 6nited *tates, you must pass t$o licensing e#aminations !rom the 7ational .ssociation o! *ecurities @ealers 17.*@3: the *eries : and the *eries A2 &hese e#ams prove that a bro%er is in!ormed about $hat he or she is selling and %no$s all the regulations and la$s in the securities industry &he %noc% against bro%ers is that their interests may not al$ays align $ith their clients, they ma%e a commission on the amount o! money that they can get their customer to invest, so the incentive is not necessarily to ma%e their clients the most money, but instead to get them to invest as much as possible &his has led to much o! society portraying a negative image upon bro%ers, especially a!ter the !inancial crisis o! 200= $here much o! the blame $as put on the greedy culture o! -all

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*treet and put an e#ceedingly amount o! bro%ers out o! $or%, even prompting (ay Beno host o! the Tonight Show to 'o%e CMy *toc%bro%er as%ed me something very important today: paper or plastic+D @espite the ma'or hit the !inancial services industry too% a!ter 200=, stoc%bro%ers still seem to not only recover, but thrive, $hich has been a trend that has been prominent throughout history, $here bro%ers continually bounced bac% a!ter &he Ereat @epression and the stoc% mar%et crash o! 10=: Benefits of hiring a stockbroker In order to purchase securities, commonly re!erred to as stoc%s, some type o! bro%erage is al$ays re;uired &hese are divided into !ull service stoc%bro%ers and discount bro%ers Full service bro%ers are the pro!essionals and Eoldman *achs gurus o! the $orld that personally use their e#pertise to help pic% stoc%s and manage their client"s port!olio @iscount bro%ers are typical online accounts such as E-Trade that charge much less commission !or their services due to lo$ overhead costs, the do$nside is that customers must do their o$n research &his section o! the essay $ill discuss the bene!its o! having a !ull time service bro%er that provides services above and beyond e;uity sales &he !irst %ey advantage is that a !ull time bro%er can ma%e investment recommendations !or their clients . success!ul stoc%bro%er is clearly able to assess investment goals, create a timeline, and determine ho$ much money their client $ishes to invest &his is an advantage to the .verage (oe investor because the bro%er has typically devoted their $hole career to learning about di!!erent types o! investments and has many more resources and %no$ledge available to their disposal .nother %ey advantage is that a bro%er can help maintain and manage their client"s port!olio &he bro%er $ill go over their client"s investment goals to determine the direction and plan in $hich they should set . typical trait success!ul stoc%bro%ers also possess is

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that they can have a broad vision !or their clients port!olio and share the %no$ledge they have attained to their clients in order to bene!it all parties Cons of hiring a stockbroker -hen it comes to hiring a !ull service bro%er there are t$o main disadvantages that must be ta%en into consideration &he !irst one is that bro%ers ta%e a percentage o! money o! every trade their client ma%es &his can add up ;uic%ly especially $hen investing large amounts o! money, $here according to @r Ed$in Ehiselli, a pro!essor at the 6niversity o! Cali!ornia at )er%ley, one must beat the mar%et by 2 9F 'ust to ma%e a pro!it $hich is increasingly harder to do in an economic do$nturn 7o$adays one can save a large amount o! money using the $ide range o! online discount bro%ers that charge much less commission &he second one is that bro%ers can easily ta%e advantage o! their clientele by utili,ing their e#ceptional sales ability to invest in stoc%s that are o! poor value 'ust so they can receive their commission chec%s &his e#ample is easily depicted in the earlier mentioned bo# o!!ice hit The Wolf of Wall Street. Bead character (ordan )el!ort manipulated clients into buying penny stoc%s that are almost all o! the time lo$ ;uality stoc%s that are e#tremely volatile due to being traded at such lo$ price points )el!ort $ould drive their prices up by getting his clients to invest a great amount o! money in these stoc%s there!ore driving the prices s%y/high and $ay past their true value, at the same time )el!ort $ould also create accounts in other names $here he $ould simultaneously be short selling these stoc%s, $hich is betting a stoc% $ill go do$n, so $hen they reached pea% prices he then proceed to pull all o! the money out o! the stoc%s causing himsel! to gain enormous pro!it $ith the declining prices $here his clients that invested into them long term $ould lose almost all o! their o$n money, this is commonly re!erred to as a boiler room

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Rise of the disco#nt brokerage It"s no secret that technology is changing the $ay society !unctions, and the rate at $hich $e evolveG this is especially true in the bro%erage industry &he demand !or stoc%bro%ers has decreased signi!icantly since the dot/com era, than%s to the internet and mobile apps it is no$ much more simple and cost e!!ective !or customers, $hich has caused them to do most o! their investing online In a Forbes article titled "Are Stockbrokers Now Dinosaurs?" Wall Street attorney Jake Zamansky delves into the idea that stockbrokers may become replaced by the advancing technology that is starting to come to the forefront of the finance world. Facts to support this statement include research done by the Chicago based investment research firm Morningstar, which reported that in 2012 exchange trade funds sold by the likes of online discount brokers actually outperformed broker selected mutual funds by over 1.1%. This is not to even mention that the online discount firms are MUCH cheaper to operate, Zamansky states that the online firms only take a fraction of commission usually around 0.1% of the investors earnings while brokers usually take home at least 1% commission, that means it costs the average investor ten times more to invest with the human broker! The article goes on to explain that people are starting to lose trust in Wall Street due to consistent economic let downs, The move shows growing investor distaste for volatility, as the dot-com crash in the early 2000s, the financial crisis in 2008 and recent botched episodes such as Facebooks. initial public offering have shaken investor confidence, wrote Wall Street Journal reporter Kirsten Grind. Many argue that stockbrokers can provide an advising role to their investors that online brokerages cannot offer, but this is not necessarily true. New technology can provide instant access to SEC filings and company information for potential investments on the New York Stock Exchange, many of the discount brokerages also have

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recommended picks and background information on every available stock, just by looking at ones mobile phone an investor can see their investments progress and track their returns in realtime while receiving information such as the stocks yield and P/E ratio. Traits of s#ccessf#l stockbrokers Eood bro%ers are in as high o! demand as ever Hnly 22F o! investors actually beat the mar%et and the @o$ (ones Industrial .verage 1C773 In order to turn into one o! the multi/ millionaire -all *treet big shots that all bright eyed M). graduates dream o!, one must possess a !e$ %ey traits that are vital to success -hile the stories mentioned be!ore o! corruption and schemes $here $ealthy bro%ers s$indle their clients out o! money, this is an absolute rarity and is almost al$ays caught by the !ederal government In order to truly be success!ul, bro%ers must achieve their number one goal o! gro$ing their clients port!olio I! the bro%er is doing a poor 'ob o! ma%ing their clients money they $ill ;uic%ly lose these clients and develop a poor reputation that is hard to recover !rom *toc%bro%ers are $eeded out ;uic%ly and must endure long hours and high pressures especially in the !irst !e$ years o! their career It is important to develop a deep understanding o! the mar%et, it ta%es years o! studying and hands on e#perience to get a grasp o! ho$ the stoc% mar%et $or%s and start to discover its pattern o! behaviors *trong interpersonal and communication s%ills are also necessary in order to thrive . stoc%bro%er"s paychec% depends on their ability to sell people, especially those o! high net $orth that include CEH"s o! corporations that may be hard to reach Many times one must go through their secretary !irst $ho has the po$er to put them through or not, it is the bro%ers 'ob to charm their $ay into strong relationships $here a client chooses them over the vast variety o! their competition . good stoc%bro%er must %no$ ho$ to handle re'ection &he ma'ority o! their business is calling

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prospective clients on the phone trying to get them to give their money to a random stranger, !or every account they open they are re'ected a countless number o! times, persistence is %ey and the best ma%e it di!!icult !or those people to say no .nother role a stoc%bro%er plays is being able to e#plain concepts that may be hard to grasp &he average investor has very little idea o! ho$ or $hy the mar%et moves the $ay it does and it can be di!!icult to e#plain the speci!ic 'argon and %ey terms that are used in the investing realm It is not necessary to hold any degree to become a stoc%bro%er, ho$ever no$adays many employers $on"t even let you in the door $ithout an M). !rom a top target school, competition is !ierce and one must be able to di!!erentiate themselves one $ay or another, this includes investment e#perience or that o! similar 'obs that hold a bac%ground in !inancial services Bastly, the best stoc%bro%ers possess a sic%ening $or% ethic, it is common !or bro%ers to $or% $ell over 100 hours a $ee% 1-all *treet (ournal 20003, only the most dedicated rise to the top, i! one can provide that $ith a high intellect and %nac% !or investing, they have a bright !uture ahead o! them as a stoc%bro%er

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Comments: 1 -or% cited+ 8ou probably 'ust haven"t added it yet I"m guessingI 2 I li%e the $ay you gave de!initions because not everyone has %no$ledge o! those terms It made the essay easier to understand 2 I really en'oyed your commentary It sounded li%e you had become an e#pert on your topic and had done some e#tensive research 4 I thin% there needs to be a parenthetical citation at the end o! this .ccording to the 7e$ 8or% *toc% e#change, $hich is the largest e;uity/based e#change center in the $orld, stoc%bro%ers have been around since 1:00, $hen the government issued <=0 million in bonds to help repay $ar debt !rom the >evolutionary -ar, this mar%ed the birth o! the 6nited *tates investment mar%ets 9 I really li%e the $ay you started the essay $ith 2 $ords that grabbed the readers" attention and made them $ant to %eep reading I also li%e ho$ you re!erenced The Wolf of Wall Street because a lot o! people have seen that so it ma%es them $ant to read !urther to hear $hat you"re going to be discussing >eally good 'obII I didn"t !ind any noticeable grammatical errors and it $as very interesting to read I didn"t get bored $hile reading at all and I li%e the $ay you ended by e#plaining $hat it ta%es to become a stoc%bro%er 8ou had a lot o! really credible sources Hverall, really a$esome essayI