Broker dealer definition (NASAA Series 63, 65, 66)

Tyler York

Learn the definition of a broker-dealer, who they are, how they operate in the real world, and then work through a practice question from Achievable’s NASAA prep programs.

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Full Broker dealer definition (NASAA Series 63, 65, 66) video transcript:

Broker-dealers are one of the four primary Financial professionals that you need to be aware of for the exam. Essentially, a broker-dealer is a financial firm that helps investors. Buy and sell Securities a number of different companies, have a broker-dealer businesses that they operate which include Fidelity Investments, Charles Schwab Wells, Fargo, TD Ameritrade and Edward Jones while all these companies are unique and what they do, each of them offer two primary services to their customers first custodial Services, which basically is holding safekeeping and record-keeping a customer's portfolio. If you have an account in a company like Fidelity or Charles Schwab that account likely has a number of different investments in it. And you probably don't worry about the company losing your stock, or not record, keeping it properly or not reporting your gains and losses on those Investments that relates back to the custodial Services. These businesses provide

And the second big service are trading execution services and that simply is. If you want to buy or sell an investment, we will do that on your behalf that we might charge you something, or we might have some type of fee to you for that service, but will do it for you. Now, let's take a look at the legal definition of a broker-dealer, which is actually a very important test point. In fact, I almost recommend, you know, this off the top of your head because it's likely to show up on your test. A broker-dealer is a person in the business of soliciting, or effecting Securities transactions for the accounts of others, or for their own account. To the untrained eye, This legal definition probably doesn't mean much, but if we break down the different parts of this definition, I think you'll understand better. What exactly. It's trying to say. No. First the term person a person is a pretty broad term. You're a person, I'm a person but also the US

Is it person in elementary school is a person, a local business is a person in particular, a person includes a natural person or a human being, but it also includes any legally formed, entity for exam purposes. I would always assume a broker-dealer is a legally formed, entity not necessarily a human being, and that correlates with the real world virtually all broker-dealers out there are legally formed businesses. However, it's possible. A broker-dealer is considered a natural person. If a broker-dealer business is set up as a sole proprietorship, a sole proprietorship is a type of business where there's one business owner, and essentially be a human being in the business or kind of viewed as one in the same. That is the one instance where a broker-dealer could be viewed as a natural person, AKA a human being. But again, I recommend you consider all broken dealers on the exam as businesses as firms. Let's go to the next part of the definition in the business of solicit.

Or effecting Securities transactions, which is just a fancy way of saying. Hey this type of business is going to attempt to get their customers to buy and sell Securities or they're actually going to do those types of transactions. Remember what we said, upfront broker-dealers, help investors buy and sell Securities. Now, the last part of the definition is arguably the most important part in and actually relates directly back to the name broker-dealer. When they say, for the accounts of others, or for their own account there, referring to the terms, broker and dealer. Let's focus on the term, broker first, broke the part where it says, for the account of others, know what exactly does that mean? We'll think about what a broker does. Let's take a step outside of Finance real quick and go to Real Estate. If you're planning on selling your house, you're likely going to hire a real estate. Broker pay. Real estate brokers job is to connect you to the cellar with a buyer out there. And if they do they earn a commission in that in general is what Brokers do they

Buyers and sellers typically in return for some form of a commission. If you were to go to a broker-dealer, asking them to help you buy some stock and they connected you with some seller out there in the market and subsequently charged with the commission. They just acted in a broker or what we also called an agency capacity. Let's go to the other term dealer in again, will step outside of Finance for a second. If you think about a car dealership car dealers, buy cars from the public, put it into their, a lot in attempt, to resell that car to another customer in return for what we called the spread and I might sound confusing, but a spread is simply the difference between what a car dealership would buy a car for versus what they would sell that same car back to another customer for. So, for example, if a car dealership buys a car, from you, for $5,000 and they sell that same card to another customer, there is for $8,000. They just made a $3,000 spread.

Dealers buy products into their inventory, a marked down price. And if you've ever sold a car to a car, dealership, you know, that you're selling it at a low price and then that same dealer will take that product and plan to sell it to another customer. If there's any marked up price when he broke it, either acts in this type of capacity, which we also sometimes referred to as a principal capacity, they do the same thing as a car dealership. But instead, they do it with things like stocks bonds and other types of Investments and the length is back to the original legal definition. This is what we mean by a broker-dealer trading for their own account. If you wanted to sell an investment and went to a broker-dealer and they were to buy that investment from you and place it directly into their own inventory. They are basically trading directly with you, utilize in their own account. Now to bring it all together, the term broker in dealer. These are two different terms that mean, two completely different things, which might seem a little confusing but

Ford dealers can act either capacity on any given transaction. If you go to a broker-dealer playing to sell stock, they could act as a broker and connect. You the cellar with a buyer and maybe charge a commission, or they might buy the security directly from you and place it into the inventory. Essentially acting as a dealer, broker-dealers cannot act in both capacities. Simultaneously, that would literally be impossible. But that could be an important test point in the main thing you want to be aware of their, is it Brody? This could not charge a commission while simultaneously charging a marked down or a markup depending on the type of transaction. The bottom line broker-dealers or Securities firms. That helped their investors buy and sell Securities and also typically maintain custody of their clients Assets. Now that we've gone through the definition of a broker-dealer, let's take a look at a practice question, to see how we might be asked about the material. We just learnt. I'll write a broker-dealer. Can be best described by which of the following definitions if you want to.

Take a second, pause the video. See if you can answer the question and then we'll break it down together. Go ahead and do that now. Okay, let's see if you got the answer right let's go ahead and just cut right to the chase. The answer is any person engaged in the business of effecting transactions in Securities for the accounts of others or for his own account. We thoroughly discuss the legal definition of a broker-dealer and that's as close as it gets right there. Not something you might be wondering it, mentioned for his own account. At the end sometimes test questions will refer to a broker-dealer in a way that might seem like we're talkin about a natural person and remember. Again, it's possible a broker-dealer is a human being if it set up as a sole proprietorship but still of all the four choices, it's the closest one to the legal definition of a broker-dealer. The tip off is that language of the end for the accounts of others, or for their own account, anytime you see that language you're most likely encounter

Sing the legal definition of a broker-dealer. Now let's go through the other answers just understand what they're saying and actually talk about what it's referring to because they all refer to something. Any individual who represents a financial firm in effecting or tempting to affect purchases or sales of Securities roof. Now that kind of sounds like a broker-dealer, right? But there's a key term here in the term. Is individual, like we set up front. Broker-dealers are almost always going to be considered firms there to individual professionals, that will discuss in this test. And those will be agents and investment advisor representative what you'll learn about later in the achievable materials. In this, in fact is an agent agents are the primary employee of a broker-dealer. Broker-dealers are the businesses that help customers buy and sell Securities in the employees that represent that business are known as agents. Let's go to this one next. Any person who

Compensation engages in the business of advising others on Securities. This is what we call an investment advisor investment advisers or firms. That don't necessarily help investors, buying Social Security's, but give them advice on what securities that buy and sell when the buy and sell them and essentially help them be better investors in the market. And last any individual who represents a financial firm in offering Securities advice. You see that term individual again, whenever they mention the term individual for identifying professionals, on this exam, you're likely going to be encountering an agent or an investment advisor representative. Those are the two human being rolls that we talked about on this exam and. In fact is an investment advisor representative, just like how broker-dealers are the firm's and agents are the individuals that represent the firm when it comes to Securities. Transactions investment advisors are the firms that provide investment advice, their client and investment visor.

Are the individuals that represent that firm while giving advice to the same clients.
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