Analyzing What I Have Read So Far.

These posts will be a day short but what I have learned from reading the Series 65 examination book so far is that broker-dealers like to make money off transactions between investors. They are the middle men, whereas where my field of study is (investment adviser) we only receive a fee for our advice, for a flat fee or an hourly rate, or for a small percentage (1%) of the client's assets being invested. Investors provide capital to companies looking to make money. The investor or underwriters buy a share of the company (let's say 20%) and this helps the company gain money. These positions of ownership are called equity securities. A good way to understand this would be that a home owner has equity and ownership, and an investor has equity and ownership as well.

So when investors buy shares from a company looking to enlarge or expand, they are providing capital to a corporation (TDA as an example?) in exchange for equity securities. Then, if the business grows, the original investment firm will then sell shares to other investors, making a large profit for themselves and for the company, because as each share is bought, the price likely to skyrocketing as business should be taking off. This would go down the line in a perfect world. The investors buying up shares from the originating investor would then also make money if the price of the shares continues to climb. However, this can go either way. A company could take a nose dive if people are not interested in their product, or if the company is unionized and workers go on strike, the cost of oil goes up, etc. You get the idea.

Now for the "FUN" part! The stock that is being sold must be registered with the Securities and Exchange Commission. (SEC) This is called a prospectus. They also must print annual (10K) and quarterly (10Q) statements so that the secondary investors buying shares know whether or not the company will continue to grow. This tells investors whether to invest in the company or stay invested because the company is about to grow tremendously. Also, the company now must hire a lawyer and an accountant to work on the 10K and 10Q statements, because this is very important to investors that are buying up shares, and because it is literally the law for them to do so.

Now, an investment firm is in the primary market and they make money back directly then give that money to a company and the securities the company buys are promised to be paid back. The secondary market is where trades are made back and forth - no money is made up front, however, you can sell your trade if you feel that it is getting too hot / cold for you.

Brokers work in the secondary market. They sell investors shares and make a profit for themselves, so they make money regardless of whether the investor makes a dime.