What is the role of stockbroker? Would you ring up a real estate agent that you hardly know and probably have never seen in your life and asked them, "What do you think I should buy today?" You could be sold a piece of real estate in the Back-of-Burke that is a little value, has no potential growth and you have Buckley's chance of finding tenant.
People just don't do that do they, they will inspect the properly and do their homework before they purchase. Yet most people will ring their broker up and say, "What you think I should buy today?" Regardless what the broker told them they would buy it without doing any homework or investigation. There are different quality shares that have higher or lower risks just like in the quality of real estate. Yet most people have no idea and treat the stock market like a gambling house. We will talk about the different quality of shares shortly but let's get back to the role of the stockbroker.
The stockbroker is a transaction agent. That means they get paid commissions to buy and sell on your behalf. Just like a real estate salesperson, insurance salesperson or car salesperson they get paid commissions on the transaction. In fact they will get paid whenever you buy and sell whether you make money or not. This does not make them bad people; it is simply that the public has the wrong perception of the broker's role. A broker is not paid to help you get wealthy but rather to assist you in transacting your shares.
This does lead to brokers doing some unethical things to their clients from time to time. I have seen in broker's office on a Friday afternoon after a long lunch that the brokers will have a competition. They will select a stock in the last hour of trade see you can sell the most to their clients. This is rare but does happen. Here is another example of what can happen. Imagine if a large company or managed fund decided the stock like BHP was going to fall. And this company or managed fund owners say 10 million shares of BHP and decided they want to sell. They would ring up their broker and struck them to sell 10 million BHP shares. What is so that the broker had done their analysis and also had the belief that BHP was going to fall.
With the brokers say to the client, "sorry we can sell your 10 million BHP shares because we believe is going to fall and we wouldn't do that to our clients." No way, the broker would rob the hands together and say wow I can retire on this. You see a broker get paid on commission, in fact they are employed only to transact. The brokerage house that employs them pays them to do that job because that's how they make a profit. So the broker needs to find a way to sell 10 million BHP shares at the best price possible.
This is done a number of ways. Firstly they can contact their private client base and tell them a good story wide BHP is going to go up and make them a profit. Also the brokerage house could put our report stating all the reasons wide BHP is going to be more profitable. Remember those newsletters that you get from the brokerage house you thought they came from the research and analysis department didn't you? Well they actually come from the marketing department. The next thing they can do is spin a good story to a journalist and get the masses to start to buy. By now you're probably thinking to yourself "that doesn't really happened does it?"
Let me give you an example: some time ago an ex-senior manager from Coles Myer had $750 million worth of shares to sell. If you try and sell that many shares all once it would cause a stock to fall rapidly. So he went to his favourite stockbroker and asked them what they could do. They came up with a marvellous plan, Coles Myer shares were trading around $8.50, and so they decided to offer their private clients the shares for 5% discount to market. What would you do if you were offered shares at 5% discount?
Of course most people would buy them because they know they could make 5% immediately. However most people don't sell straightaway because of greed. The brokerage house sold the whole $750 million worth of shares in less than a week without even letting the general public know. Guess what Coles Myer shares did in the following six months? They rose to $9.00 and then plummeted to a $6.00.