financial advisers and stock brokers

http://www.consumerismcommentary.com/2007/09/21/financial-advisers-and-stock-brokers-whats-the-difference/

You would think that the roles and responsibilities would be clear and there would be a strong line between individuals who call themselves financial advisers and those who call themselves stock brokers. The obvious answer is that advisers give impartial advice based on the best interest of the client and brokers sell products as a third party.

Advisers are sworn to put their clients’ interests ahead of their own, thanks to the Investment Advisers Act of 1940. This Act defines an adviser as, “Any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.” The Act also precludes brokers from being considered investment advisers.

In that case, what is a broker? The act also provides this definition. A broker is, “Any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank.” The key word is effecting, which astute readers will realize is not the same word as affecting. Brokers make the trades happen. Today’s brokers are “broker-dealers,” meaning they make the trades happen, and they sell financial products to customers for a fee.

Exchange, OTC, Third Market

Where stocks trade - Exchange, OTC, Third Market

http://ola.orcasnet.com/olt/help/ehelp13.html

As mentioned a little earlier, one of the benefits of owning common stock is liquidity and that liquidity comes from a very active marketplace.

In the United States, the securities markets are first separated into two major market categories: primary and secondary.

The Primary Market is when a company sells their shares to the public for the first time in an Initial Public Offering (IP0). The company itself receives the proceeds from an IP0.

The Secondary Market, on the other hand, is where trades are made between investors who are now the ones to get the proceeds, not the companies who originally issued the shares in IPOs.

The Secondary Market is broken down into four component markets, only three of which will be of immediate interest to investors.

The Exchange or "Auction" Market
This market includes the New York Stock Exchange and the American Stock Exchange as well as the various "regional" exchanges such as the Philadelphia Stock Exchange and the Pacific Exchange. Stocks trading on any of these exchanges are said to be "listed" on those exchanges. That means they meet the various requirements imposed by the exchanges. At the same time, there is in the word "listed" an homage to times past when the names of stocks actually were written down by hand on large wallboards for all brokers to see. To this day, for example, the NYSE is still called "The Big Board."

The Over-the-Counter Market (OTC)
Unlike the exchanges which all occupy actual bricks-and-mortar physical addresses, the OTC market is an association of broker/dealers connected by computer and telephone networks who trade "unlisted" securities. Further, the OTC Market is usually broken down into three component markets including National Market Stocks, those being the best known and financially stable OTC companies; Small Capitalization Stocks, meaning riskier emerging growth companies; and finally, the speculative "Pink Sheet" or "Bulletin Board" stocks. The OTC market is regulated by both the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA). Unlike the auctions on the exchanges, OTC trades are negotiated. Most OTC broker/dealers follow price changes on the FINRA's automated quotation system which has become well-known to many investors by its acronym, "Nasdaq".

The Third Market
Here nonexchange member broker/dealers and institutional investors trade over the counter in exchange-listed securities. Any listed security can be traded in the Third Market. Each trade must be reported to the Consolidated Tape within 90 seconds. Third market trades closely reflect the trading activity of any given stock on its primary exchange.

orders for listed stocks are executed in the Third Market or on Regional Exchanges.


The Third Market in action

Many orders for listed stocks are sent to a broker/dealer in the Third Market for execution. The Third Market is part of the overall OTC market. Specifically, it is a telephone and computer network of broker/dealers who are registered with the FINRA to make markets in exchange-listed securities.

When your market buy order gets to the market, the market maker immediately "fills" it at the best price then available. We use the word "immediately" because that's when market orders are filled. The so-called "best price" is continuously tracked as it changes throughout the day by computers in every broker/dealer office.

Your limit triggers and short sale ticks

In the system, it is the price activity on the stock's primary exchange that always determines when the various limit orders can be executed as well as short sales, and it is the movement of the stock on the primary exchange that triggers the uptick rule for your short sale.


The OTC Market

The OTC market works a bit differently than the Third Market.

Since the OTC trades "not listed" securities there is no bookmarking because the stock isn't traded on an exchange.

In the system, investors are guaranteed a trade at the best bid and ask price available when the order reaches the OTC market maker. This price is known as the "inside price". It is also called the "National Best Bid and Offer" (NBBO) because it represents a composite of prices from broker/dealers throughout the country.

On Market orders, the NBBO is good for a minimum 100 shares. Above that, the greater the size of the order, the greater is your chance of being filled in partial executions at higher prices.

On limit orders, the NBBO is still good for a minimum of 100 shares but you're still risking partial executions. However, in this case, you do not have the additional concern of rising prices to contend with. Some investors place AON (all or none) restrictions on their order to avoid partial executions.

You can also enter limit orders and sell short in the OTC market just as you would for listed stocks.

Merrill Brokers and 'Discount Brokers'

Merrill has a strong sales organization and a great record of coming up with new products. It was the company that invented the cash management account a generation ago, combining brokerage and banking services in a single product.

And, as a full-service investment bank doing business with corporate clients, Merrill can give brokerage customers an inside track on the stock and bond offerings it underwrites. In addition, it has more than 400 analysts on staff producing the kinds of reports investors crave.

But Merrill faces an enormous challenge remaking its corporate culture. Stockbrokers making hundreds of thousands of dollars or more annually may be reluctant to steer clients to cheap Internet stock trading. And it is saddled with the huge overhead of a traditional Wall Street firm.

Internet trading ``directly threatens Merrill's broker culture and they have to lower their cost structure,'' said Goldman Sachs analyst Richard Strauss. ``But do I think they will get their act together ultimately? Yes.''

Discount Brokers provide stock research and access to public offerings mainly through alliances with outside investment banks.

There are still some stockbrokers who fleece their clients, just like the cigar-chomping, feet-on-the-desk villains of Schwab lore. In reality, Merrill has been moving toward a more customer-friendly way of doing business for a long time. For example, the firm now puts more client money into outside mutual funds than its own proprietary funds.

``They are perpetuating a stereotype of our financial consultants a la the 1970s,'' said Merrill's Thomson.

Broker and Dealer

The difference between a broker and a dealer

A broker does not sell you stock or buy stock from you. A broker acts as your "agent," in effect putting you in touch with the other half of the trade you want to make. And for that service, the broker charges you a commission. acts as a broker.

A dealer, on the other hand, can and does act as a "principal," actually taking stock out of its own dealer inventory and selling it to you. Normally, in this transaction, the dealer charges an investor a net price which includes a "markup" on shares purchased or a "markdown" on shares sold. In any given trade, the broker/dealer can charge a commission or a markup but never both.

Another name frequently used instead of broker/dealer is "market maker."

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