© 2016 Shmoop University, Inc. All rights reserved.

The Real Poop

Need to brush up a bit before you dive into the financial services world? Take a peek at our Finance Learning Guides to make sure your knowledge is up to snuff.

"Pssst. Buddy. Have I ever got a stock for you! Remember me from the Wu bat mitzvah?"

Stockbrokers broker stocks (and usually bonds and groups of stocks and bonds called mutual funds and index funds). And it's important to note the word "broker" here. "Broker" means that they buy and sell the shares for their own account. They might buy GOOG from you for $500, but if you want to buy it, it'll cost you $502. They keep the $2 spread for the effort and paperwork and NBA game tickets they sent you at Christmas.

A sales agent has a slightly different twist in the way they do business. They just take a commission. You buy GOOG at $500. But you then get tacked on a $2 commission. Slightly different but important nonetheless. Either way, that’s one less scratch-off ticket you’ll be able to afford.

Like any other sales person, the power comes from size, volume, girth. If you sell a lot, you generate a lot of commissions for the firm and you keep an escalating percentage of those commissions the bigger you get.

How do you get those sales to happen? You hustle. You beg. You cajole. You basically kiss a lot of tushy. Because for most, the service you offer is an absolute commodity. A hassle. And brokers are wrong at least as often as they are right. Their goal is to move volumes of shares—not to be good investors. So the incentives are different and they often don't align with clients.

You may ask then, "How do these people keep their clients if they are generally bad investors?" Lakers tickets. Sometimes Knicks. Avenue Q if that’s your thing. Brokers don't necessarily try to screw clients. They are just projectiles of their firms. They are what Bud Fox did in Wall Street. Eventually, his money slept.