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How Do Stockbrokers Use Math?

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Pricing Stocks With Fees

Every investor must use a stockbroker to purchase securities from the stock exchange, since only registered representatives and members of the stock exchange can enter transactions. When a client asks for a quote from a stockbroker to make a purchase, the stockbroker must calculate the purchase price, which involves a little computing. The stockbroker must take the price per share of the stock at that minute and multiply it by the quantity that the client wants to purchase. Then the broker will add a commission fee to that total. Some stockbrokers charge annual fees, plus flat commission fees for each trade, a percentage of each stock purchase price or a combination of these. The stockbroker will need to calculate this total rather quickly to give a client a quick estimate. Your stockbroker should also advise you on the income tax consequences before making a sale of your current stock.

Calculating Leverage

More experienced investors may seek to increase their buying power and their earnings using leverage. Investors can do this buying options, futures and on margin. If you invest this way, your broker is loaning you money based on the value of your account and calculating your increased risks. When the value of the securities in your account drops below the amount you borrowed because prices decreased, your stockbroker would give you a margin call. You would need to deposit money into your account quickly or sell some of your assets to cover the loss. Of course, your stockbroker would have the math already done to inform you of the amount. A stockbroker should pay attention to historical price trends and use statistical risk factors to make informed recommendations for investors to buy or sell.

Comparing Investment Strategies

Clients look to their stockbrokers to help them invest their money to maximize their earnings. A stockbroker must calculate whether the amount an individual client has to invest would yield better if the customer paid a transaction fee upfront or an ongoing management fee, OER. The OER is stated as a percentage and must be multiplied by the investment amount to arrive at an annual fee. Then the term of the investment must be multiplied by the annual OER to decide which fee structure would better benefit the customer financially. Stockbrokers must also consider the clients' age and financial goals when pointing them towards long-term investments with risk or relatively safe lower yielding investments. The client is usually on the phone or sitting in front of the stockbroker waiting for the reply, so these calculations need to made quickly and with accuracy.

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About the Author

Julia Fuller began her professional writing career eight years ago covering special-needs adoption. She holds a bachelor's degree in accounting from Marywood College, is co-owner of GJF Rental Properties as well as a livestock and grain crop farm. She worked for the United States Postal Service and a national income tax service.

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