How to Become a Stockbroker

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Television and old movies furnished my childhood images of stockbrokers – men riveted to stock tickers who shouted “Buy!” and “Sell!” over antique phones. Stockbrokers worked for rich people and apparently lived in a constant state of excitement if not panic. My business education and years in the financial industry dispelled some of those stereotyped images, but with every big day on Wall Street, and there have been many in recently, I can expect a picture in the newspaper of frantic traders on the floor of the New York Stock Exchange. Is that what it means to be a stockbroker?

Brokers, Traders, Investors, and Advisers

While anyone can open a trading account with their own money at a firm such as E-Trade, Scottrade or Charles Schwab, buying and selling securities for others is a closely regulated activity. Investment or financial advisers must be registered with the Securities and Exchange Commission (SEC). Often states have additional requirements for investment advisers. Not all brokers are investment advisers, that is, a broker may or may not provide financial or financial planning advice, but anyone buying and selling financial instruments on behalf of someone else is a broker, and most people in the industry perform both functions.

FINRA and Becoming a Licensed Broker

The Securities and Exchange Commission doesn’t have a broker licensure program, but most firms require their brokers to pass the Series 7 exam administered by the Financial Industry Regulatory Authority (FINRA). FINRA is not a government agency despite its austere title. FINRA, formerly the National Association of Securities Dealers (NASD), is the largest of the financial industry’s self-regulating organizations, and although it is independent of the government, it is subject to SEC oversight. The organization emphasizes investor protection through testing, compliance, continuing education and enforcement of its membership. Securities professionals at all member firms must pass one of their series tests at either the representative/sales level or principal/officer level. The most common of these entry-level tests is the General Securities Registered Representative exam or Series 7.

The Series 7

The goal of the Series 7 exam isn’t to train better day traders. FINRA designed the test to cover seven functions its board deemed critical for registered representatives (RR’s) to serve clients. The current test has 250 multiple choice questions, plus 10 questions not counted into the candidate’s score. It is administered in two three-hour sections. The seven areas RR’s must demonstrate competence are:

  1. Identify and attract potential customers. Much of this is standards and techniques for marketing services to the public. (9 questions)
  2. Evaluative: Help customers understand their financial position, net worth, needs and goals as well as considerations for risk tolerance, age and family status. (4 questions)
  3. Informative: Offer information to customers on various financial instruments, e.g. stocks, government and corporate bonds, annuities, retirement plans and many others; describe potential risks and benefits of potential investments, including tax considerations and alternative investments. (123 questions)
  4. Management and maintenance of accounts: Requirements to open and close various types of accounts (e.g. margin, individual, joint, retirement plans), account record-keeping including proper authorization before conducting transactions. Margin terminology. (27 questions)
  5. Understand and Describe Markets: Primary and secondary markets, their purposes, forces that effect markets, and participants. New issues and investment banking, regulations, especially the Securities Exchange Act of 1934. Regulations for equities, penny stocks, Over the Counter (OTC) market, U.S. Treasuries, municipal securities. (53 questions)
  6. Transactions: How to execute, verify and follow-up on customers’ buy and sell orders. What constitutes settlement of securities, record-keeping of transactions. (13 questions)
  7. Portfolio Review: Routine review and recommendations to customers regarding adjustment to accounts based on changes in economic conditions and customer needs. Portfolio analysis and securities analysis. (21 questions)

Clearly, sections three and five are weighted more heavily than the others. A perfect score on these two sections would provide the necessary 70% required to pass. FINRA offers a more detailed outline as well as some model questions on their website.

Other Preparations

Third party study guides or classes may do a good job of helping pass the test, but even a good score on the Series 7 will not guarantee a successful career as a stockbroker. The Series 7 may be the final step in becoming a stockbroker, but it shouldn’t be the first step. A college degree in Finance or other business related field is the best preparation. Understanding economic theory, pricing of bonds, options strategies and basic accounting are best learned over time from knowledgeable instructors rather than test coaches. A broker needs to keep up with current events and understand the implications of political issues to anticipate opportunities and avoid losses.

Recommended Readings

Bookstores and libraries are packed with titles aimed at investors, both amateur and professional. Unfortunately, many of these either counsel readers that all they need is a firm handshake and aggressive personality or offer get-rich-quick gimmicks. Below is a broad selection of classic or semi-classic volumes. Even if slightly dated, their principles and theories continue to make them worthwhile reading:

· A Random Walk Down Wall Street by Burton Malkiel. First published in 1973, revised again this year, this is an excellent introduction to investment theories and the efficient market hypothesis.

· The Intelligent Investor by Ben Graham. “By far the best book on investing ever written.” – Warren Buffett. A guide to value investing with the best recommendation an investment book could hope for.

· The Essays of Warren Buffett edited by Lawrence Cunningham. Samples from the Berkshire Hathaway newsletter organized and prefaced by a business professor at George Washington University. These essays offer the core Buffett business philosophy.

· Beating the Street by Peter Lynch. Peter Lynch’s 13-year winning streak averaging 29% returns challenged the efficient market hypothesis. His “invest what you know” advice provides a refreshing alternative to technical analysis’ obscurantism.

· Why Smart People Make Big Money Mistakes by Gary Belsky and Thomas Gilovich. Instead of focusing on investment strategies, Belsky and Gilovich focus on the investor. They elucidate why people do the stupid things they do with money.

· Manias, Panics and Crashes: A History of Financial Crises by Charles P. Kindleberger and Robert Z. Aliber. A timely book, originally published in 1978, the fifth edition came out in 2007; instead of running through the litany of manias and crashes, Kindleberger describes and dissects the common features of both.

· Technical Analysis of Stock Trends by Robert Edwards and John Magee. Technical Analysis has a loyal following and equally steadfast detractors. This well-known guide offers one of the most comprehensive explanations of the theory and practice.

Peter Lynch and Warren Buffett, two of the most successful investors of all time, see themselves as students of the craft, not mega day traders. Neither a degree in business nor a Series 7 passing score guarantees success as a stockbroker. A successful stockbroker needs a thorough knowledge of markets, economics, and a sharp analytic mind. Those skills will benefit you whether you join the ranks of the frantic traders and specialist who scurry around the floor of the New York Stock Exchange, become a financial planner for families or a financial analyst for a bank.

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