Rules of the Game: Brokers Always Win

 | Jul 31, 2014 | 3:00 PM EDT  | Comments
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This morning, I was just killing a few minutes during a not-so-scintillating conference call by scrolling through my Facebook (FB) feed. I stopped short when I noticed that a brokerage -- a company I follow -- was asking if a degree in business was needed to become a trader. What the flip?

Well, to answer the question, absolutely not. That's like asking if one has to attend culinary school to become a truck driver. Apples and oranges.

Most people responding to the thread agreed that a business degree isn't necessary for daytrading. But what struck me was how no one, not a soul, challenged the notion that a brokerage was promoting the idea of trading. Stop and think about that for a moment.

When you make a trade, it's not free. And even with those large accounts with minimal charges, there is still somebody making money. Banks and brokerages don't park money for free. (I just added those last two sentences for the crowd who always seems to think they have some special free deal from a brokerage. Trust me: It doesn't exist. They are charging you somehow.)

So, back to trading commissions. When you buy a stock, the broker takes a cut. When you sell a stock, the broker takes a cut. Even if you make a trade and it loses money, you still pay the brokerage a commission. Nice for them, isn't it?

When I worked at a daily trading newspaper, we did Webcasts with brokerages. They were advertisers, so it was an opportunity for them to sponsor some market education and timely content about current stock ideas.

The brokers loved those Webcasts. When we featured a stock, they saw increased trading in that stock. Did they care how the stock performed? What do you think?

Look, I'm a capitalist. I'm not against companies making money. But I want people to think very carefully about the motivations when somebody encourages you to actively trade.

There's a lot of money to be made by your trading. The brokerages really don't care if you make a profit on a trade or lose your shirt. Either way, something goes into their till. So, if you see a Facebook post by a brokerage firm, tacitly encouraging you to actively trade by asking inane questions, just remind yourself of what that firm has at stake.

Of course, brokers aren't the only ones profiting by active trading. Newsletters and trading software purveyors also make a tidy profit. Walk around a MoneyShow event some time. It's a fascinating experience, and worth doing if you haven't yet. I bet you'll find vendors that will make you scratch your head and ask, "Hmmm. Does he actually make any money trading, or just by selling this system?

Hey, I'm as mesmerized as the next person by flashy charts and screens with red and green prices flashing every second. There is nothing wrong with educating yourself about the market -- that's why we're all on this website! I enjoy reading the other columnists, even those who have a completely different point of view from my own. I can usually learn something.

But when a company -- such as a brokerage -- is selling you on reasons to trade, take a minute and think about what's in for them, vs. what's in it for you. The two sides are not always equal.

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