Dear Dr. Don,
Is it possible to find out if a stock broker was paid by a company to promote their stock at a particular time in the market? My broker seldom (if ever) has recommended a particular stock investment to me and yet, about 2½ years ago, he did with Bank of America stock. Is it possible for me to know if my broker was paid more than usual?
— Gary Grouse

Dear Gary,
A corporation only gets equity capital from the financial markets when it issues shares of stock in either a primary or secondary offering of new shares of stock. At these times, the corporation compensates the underwriting team for selling the new shares.

The daily trading of existing shares takes place between shareholders who no longer want to own the stock and investors looking to buy shares in the company. While the company wants its shares to increase in value, it’s not going to provide brokers with an incentive to get customers to bid up the price of the shares.

It’s a conflict of interest, but a securities firm looking to win underwriting business from a company could try to influence its securities analysts to issue a favorable outlook for a company’s stock. The “FINRA Guide to Understanding Securities Analyst Recommendations” provides a nice discussion of the potential conflicts, but also details how analyst reports can still provide valuable insight into a firm’s prospects.

The guide points out, “An analyst’s report can help firms make money indirectly by generating more buying and selling of covered securities — which, in turn, result in additional commissions for the firm.”

Investments don’t always pan out. Stop looking for someone to blame for the poor performance of this investment. Change brokers if that will make you feel better, but stop blaming the stock broker for your decision to invest in the stock.

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