5. Who are Brokers?
If you want to buy a property, you go to an Estate agent. Similarly, you can’t buy a stock by simply giving money to a cashier in some neighborhood retail store. Instead, you have to contact a stock agent – also called a broker – who is legally authorized to trade securities in the Pakistan Stock Exchange.
Brokers are responsible for bringing buyers and sellers together in a market. Brokers can exist in financial markets, insurance, art, commodities or real estate. In case of a stock market, brokers act as intermediaries between sellers who are willing to sell their shares and buyers who intend to purchase shares.
A “brokerage firm” is a financial institution that employs brokers. There are over 400 firms offering stock brokerage services in Pakistan. Brokers charge a fee – also called commission – in return for providing their services. The exact amount of commission varies with brokerage houses and underlying price of the shares traded. You must be wondering why do you have to pay a broker for trading stocks? Well, consider the following three levels of service that a broker can offer:
- Ali is fond of doing his own research and deciding which shares to buy or sell. Therefore, he usually calls his broker and orders him to trade specific stocks. The broker, in this case, doesn’t trade any stocks without receiving a direct order from Ali.
- Ahmad is new to the stock trading world. He doesn’t know much about stocks but he wants to learn more about the dynamics. He is also very cautious about his funds and therefore, makes careful decisions based on thorough research. He usually calls his broker to ask for his advice regarding which stock(s) to buy, sell or hold. However, he always makes the final call.
- Aisha is also new to the stock trading world. She just wants to grow her money and isn’t interested in learning the nitty-gritties of the trading world. She has given full authority to her broker to trade based on his expertise and situation of the market. The broker keeps her informed regarding the status of her portfolio from time to time.
5.1. Key trading terms
Before you go any further, it’s important to learn about some terms that are frequently used in the trading world. Here is a list of those terms:
- When a buyer tells how much he is willing to pay for any stock, it’s called a bid price.
- When a seller tells how much he is willing to sell any stock for, it’s called an ask price.
- The difference between an Ask price and a Bid price is called a spread.
- You ‘order’ the shopkeeper to give you a prepaid mobile card. Similarly, an order in stock trading world is literally an “instruction” to a broker to buy or sell a security.
- Suppose Ali is interested in buying 100 shares of Company A and Aisha wants to sell 300 shares of Company B. The number 100 is the order size for Ali and the number 300 is the order size for Aisha. In a grocery store, it’s possible that you intend to buy 200 apples but are able to only buy 50 apples because of unavailability of apples in that market. Similarly, it is possible that your entire order isn’t fulfilled on the same day. This is called a “Partially filled order” in the Stock trading world.