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Securities markets are the markets in which securities, or financial assets, are traded. There are two different types of securities markets. The first type is known as the primary market; the primary market is used for trading newly issued securities. The second type of securities market is known as the secondary market; the secondary market is used for trading securities that have already been issued. Primary markets and secondary markets are generally used for trading equity securities.

A stockbroker is a person who is employed by a commission house or merchant; stockbrokers solicit business for these institutions. An investment advisor is a person or organization that makes the necessary daily decisions regarding an investor’s portfolio. Both stockbrokers and investment advisors want to be responsible for making investment and trade decisions because they earn commissions and fees as they help investors buy and sell securities. Stockbrokers and investment advisors are generally paid in three different ways: commissions, assets under management, or a combination of commission and assets under management.

There are a number of different types of brokerage firms. There are three main types of accounts: cash accounts, discretionary accounts, and margin accounts.

A broker is an intermediary between buyers and sellers of stock. An investor places orders with brokers, either indirectly by phone or fax or directly through the Internet. The broker takes the orders to the securities exchange. If the broker is successful, the trade is executed on the exchange. The broker then notifies the investor that the trade has been made, and funds and securities are exchanged on the specified trade date (See Chart 20.1).

Orders to buy and sell securities can be placed with a broker in many different ways. Buy-and-sell orders are directions that tell brokers when to purchase or sell a specific quantity of a security at either a pre-determined price or the market price. There are a number of different types of orders, and each type has specific advantages and disadvantages. Types of orders include market orders, limit orders, day orders, good-till-canceled (GTC) orders, fill-or-kill orders, and stop or stop-loss orders.

It is important to work with good people and institutions. Working with brokers and financial advisors can be challenging. You must understand what you want to accomplish, what you expect from the broker or advisor, and how the broker or advisor will be paid. You should be paying brokers and advisors to add value to your portfolio—you should not be paying them to do what you could do for yourself.

Finally, if you decide you need help, it is important to work with qualified, licensed, and appropriate institutions and individuals. Work with a trusted financial advisor, not just a salesperson.

A benchmark (also called an index) is a measuring device that shows the average performance of a specific set of securities: benchmarks are used for comparison purposes. Benchmarks may be modeled after published indexes or customized to fit a specific investment strategy. Benchmarks are the standard by which you should judge the performance of individual assets in your portfolio; they also allow you to evaluate your portfolio as a whole. You cannot know how well your portfolio is performing unless you have a benchmark with which to compare that portfolio. Comparing asset performance to benchmarks is a principle of successful investing. This section discussed benchmark basics, types, construction, weighting, and where to find benchmark data.


Now that you have completed this section, ask yourself the following questions:

  1. Can you recognize the different types of securities markets?
  2. Are you aware of the basic characteristics of brokers and investment advisors?
  3. Do you understand how to buy and sell securities?
  4. Can you answer questions about choosing a broker or an investment advisor?
  5. Do you know how to select and use benchmarks?


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