Editor's note: This is a special excerpt from TheStreet.com Ratings' Ultimate Guided Tour of Stock Investing. Other Beginner's Guides cover stock basics , market indices , diversification , financial goals , risk tolerance and growth and income stocks .
A stock exchange is like a supermarket, but instead of buying groceries, you buy stock. To continue the analogy: The supermarket you go to depends on the stock you're buying. And, just like a supermarket, you get to pick what you want from any of the shelves, but you've got to check out at the register. The attendant at the checkout counter (called a broker in the world of stock investing) rings up your purchase, which also includes some money to pay his or her commission . It would be very impractical if every investor who wanted to buy or sell stock had to travel to the exchanges to trade stock. Besides, you can't. You have to be licensed to buy or sell stock on the exchange. That's where brokers come in. By definition, brokers are people who bring buyers and sellers together. There are all kinds of brokers: insurance brokers, mortgage brokers, real estate brokers, concert ticket brokers, and many more. We're just talking about stock brokers. Brokers must register with the NASD (National Association of Securities Dealers, renamed the Financial Industry Regulatory Authority, or FINRA) in order to do business. A broker acts on your behalf, as the buyer, to find another broker who's working on someone else's behalf, as the seller. It's this broker's job to bring the two together. So if you're looking to buy stock, you would place your order through a broker at either a full-service, discount, or online brokerage firm. How does the broker on the floor of an exchange know what you want to buy or sell? Good question! He or she gets an order on the computer screen from your broker in the office. This order tells the broker on the floor which stock you'd like him to buy or sell on your behalf. You can also park yourself at your computer and place your order online with a broker. Selecting the right broker is as important as selecting the right stock investment. There are two key questions you have to answer for yourself before you choose a broker: How much customer service do I want?How much am I willing to pay in fees? Keep these questions in mind as you read about the three types of brokers available: