Various financial sectors play a crucial role in ensuring the capital markets run smoothly. Among them are two critical functions: investment banking and stock trading. While the two roles may appear to intersect in certain areas, the question remains, is a Stock Broker similar to an Investment Banker?
A Stock Broker is not the same as an Investment Banker. A Stock Broker is a professional that helps clients purchase financial securities for a commission. On the other hand, Investment Bankers are professionals that raise capital for companies from initial public offerings or private players.
The difference between the two mainly deals with the type of people they interact with and the tasks they perform in their position. This article will further explain the roles of Investment Bankers and brokers in-depth to give you a better insight into their similarities and differences.
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Who Is a Stock Broker?
People also know Stock Brokers act as investment advisers or registered representatives. They purchase and sell securities on behalf of a client. A broker has enough training on how to gather information about stocks, mutual funds, pension plans, and any other similar financial instruments.
They use this data to test if the financial instruments are investment-worthy. Every investor wants to gain great financial success. Stock Brokers can help you make more returns than you would when trading stock on your own.
However, work with a brokerage service that aligns with your financial goals. Be careful when choosing a Stock Broker, as it can mean the difference between gaining an additional stream of income or a loss of your hard-earned money coupled with disappointments.
There is no guarantee that your investment will always bear fruits. However, a step towards success is by working with a trustworthy and reputable Stock Broker.
Types of Stock Brokers
There are two types of brokers you can choose to work with; those that deal directly with clients and those that act as intermediaries to a bigger broker. Working with the latter may not be bad, but people hold regular brokers in much higher regard.
Brokers further break down to either full-service brokers, discount brokers, or online brokers.
- Full-service brokers are licensed dealers that provide individual advice and recommendations about stocks to an investor. They are a one-stop-shop for investment advice and management. They are especially valuable to anyone who does not have the time to deal with complicated estate planning or tax issues. However, they receive a very high commission for their services.
- Unlike a full-service broker, discount brokers do not analyze securities or provide investment advice, but they can buy and sell securities at a much discounted rate.
- On the other hand, an online broker, also referred to as a direct contact broker, gives services to day traders that have the lowest commissions. The commissions are usually priced based on every stock.
Do Brokers Have a Fiduciary Duty?
Stock Brokers have a fiduciary duty towards their clients. Clients trust brokers to help them attain their financial goals, but sometimes, a broker can break this trust and act against the interests of their clients.
One of the principal reasons is because their first loyalty goes to their employer. If the organization demands high sales at any cost, even trustworthy brokers can practice rogue tactics.
New and less successful brokers are more prone to such kind of pressure since they do not want to lose their jobs for not meeting their quotas.
Therefore, as much as you want to trust your broker, be smart enough always to question their investment advice. Compare the securities they offer with other options and also consider the cost.
Below is a video explaining some business laws, including fiduciary duty:
Who Is an Investment Banker?
An Investment Banker is a glorified middleman. They bring two entities together and help to facilitate their transactions. An Investment Banker deals with several financial products. Some of their roles revolve around:
- Mergers and acquisitions: An Investment Banker helps two firms that are looking to merge by advising on several matters affecting the transaction, such as the pricing and the options available. They can also solicit offers and close transactions.
- Equity/Debt sales: Investment Bankers act as intermediaries between companies and investors during an initial public offering (IPO). They help to underwrite new stock once the company goes public and seeks equity funding. By underwriting, it means that the company gets to buy a certain amount of the new stock and sell them again through the stock exchange market.
- Financial advisor: Investment Bankers can act as financial advisors to companies that are looking to raise capital. They analyze the current market and recommend the best method to use to raise funds. It can either be by borrowing from the public by issuing bonds or selling ownership of the company through the stock market.
While an Investment Banker’s primary functions are to advise companies and help them raise money through various means, they also perform various other tasks.
Some of these include gathering information about companies, executing stock and bond transactions on behalf of the client, managing large company portfolios, and scrutinizing financial products before selling them to investors.
Difference Between an Investment Banker and a Stock Broker
You should not confuse an Investment Banker with a Stock Broker or financial adviser. A Stock Broker gives clients financial advice relating to the buying and selling of securities.
An Investment Banker does not give opinions when selling stock to raise money. They only provide the necessary information to both parties involved in a transaction and allow them to make their own decision on whether to go forward with the trade.
Investment Bankers, just like the brokers, have an essential role to play in the capital markets. However, they have attracted plenty of criticism because of their conflict of interest. This conflict of interest arises when the Investment Bankers have access to the confidential information of their clients.
They can choose to give the information to their firm’s traders, who may exploit the knowledge to get an unfair advantage. Another conflict of interest arises where Investment Bankers are accused of pressuring analysts to rate their securities higher so that clients can find them favorable.
Should You Become a Stock Broker or Investment Banker?
There are specific advantages to becoming either a Stock Broker or Investment Banker. As a Stock Broker, you can enjoy good pay from your commissions. However, the amount of salary you receive depends on your effort.
It also allows you to help a client invest, grow, and manage their money. The experience you would learn from it is of great significance, as it can help you secure even bigger clients and become their financial advisor.
You can also opt to become an Investment Banker as its pay is also excellent. Since you are working for a big corporation, you do not have to worry about the pay. Sometimes, it can be exceedingly even to a new Investment Banker. However, the perks are great as the company provides you with anything you need as you execute your tasks.
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Conclusion
As you can tell from the information above, the primary differences between an Investment Banker and a Stock Broker lie in their functionality and the core operations that they manage.
A Stock Broker is a professional that buys and sells shares on behalf of the client. You also become a financial advisor and help clients manage their finances for a commission.
If not, you can also opt to become an Investment Banker. Your role becomes that of helping other corporations earn more capital through facilitating transactions between two parties. Either way, when you’re responsible for handling money that belongs to a client, always do well by them first.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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