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About Brokerage Stock
by Carmelo J. Montalbano
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Overview
About Brokerage Stock
Brokerage firm stocks have changed character greatly in the last 30 years as trading barriers like the Glass Steagel Act have fallen and emphasis on trading profits has risen. Investment banking activity and worldwide 24-hour trading have required investment banks to operate with large sums of capital and employ trading strategies that involve much more corporate risk than ever before. Brokerage firm stock trades in three subsets: the major brokerage firms, regional firms, and money management and private equity firms. These stocks, while from the same sector trade very differently in the public market. Each sector reflects there relative importance in the economy.
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Characteristics of Brokerage Stocks
Brokerage stocks are more volatile than the average stock on a major exchange. This is because they do not pay dividends thus making investors look to capital gains and trading opportunities when buying broker stocks. Brokerage stocks are volatile as they quick reflect the possibility of recession and economic activity. The very business they undertake, in-house trading and fee income, produces revenues that cannot be accurately forecast and are volatile.
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The Regional Brokerages
Regional brokerage companies exist to take advantage of local ties and business relationships. They provide more direct customer contact than major brokerage firms but also have much less capital and deal primarily in brokerage and local advisement to regional industry and municipalities. The stocks of the regional brokers tend to be less volatile than that of the majors since little income is derived from trading and more from sales and fee income. Regional stocks also vary with the local economy. They resemble cyclical stocks in that they are volatile and quickly reflect recession and recovery expectations in the economy.
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The Major Brokerage Stocks
Major brokerage firms have large amounts of capital and perform the same functions as the regional banks but on a much larger scale. Major brokerage firms like Goldman Sachs, Morgan Stanley, and Merrill Lynch resemble large commercial banks in the size and scope of their activities and capital requirements. Stocks of these companies are traded as part of the S&P 500 and other major indexes. In addition, these stocks are also traded on option exchanges and as part of the futures contracts. As a result, their stock and bond issuance have wide acceptance. There are very few companies that represent such a broad array of skills that can find, for a fee, matching suppliers and users of capital.
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On-line Brokers Benefit from Low Cost Brokerage
On-line brokers such as OptionsXpress, E*trade, and Scottrade have replaced the need for a broker. These firms take on all brokerage activities at reduced prices in return for less capital-intense Internet trading in futures, stocks and options. They offer no fee-producing banking relationships. These firms should be viewed as commodity-like in nature and their performance is directly related to their ability to trade shares as low cost providers. On-line brokerage stocks are most often found as NASDAQ listing that trade at low premiums if the market in not in a bull trend.
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Stocks of Private Equity and Investment Managers
Stocks that are managers of pooled money for investment in stocks and bonds as well as private corporate takeovers were once exclusively handled by large brokerage firms. Today, firms like Pimco and Blackrock manage these same investments without the other components of the brokerage business. These stocks tend to grow as the assets under management grow.They are stable earners in good and bad economic times with reasonable dividend yields. Their earnings are predictable and steady. Investors buy these stocks when looking for safety with a reasonable earnings outlook.
