Well, we have now learned how to hand over money to people, in exchange for stocks, but what is to stop them from cheating you, or from running off to Mexico with your hard earned 250 dollars that was supposed to go to McDonalds? Well to keep brokers honest, the government has put into place many commissions, and organizations. Of these organizations the major player is the Securities Exchange Commission (SEC).
The SEC is a government agency whose purpose is to regulate the securities industry (the stock markets). It was created after the Great Depression when Congress passed the Securities Exchange Act of 1934. This agency decides what is legal, and prosecutes those who break the rules, along with setting many standards for brokers and investors alike. All companies traded on the many stock exchanges across America have to be registered with the SEC. Each must follow rules about what they can do with their stock, how they can advertise, and much more.
Most of the rules placed on companies are to prevent the owners and employees from using insider information. Insider information is information that a person obtains about a company that is not available to the rest of the public, that can be used to their advantage while buying stocks. For example, lets say you are the CEO of company XYZ, and company ABC is now in negotiations with you to merge, and create a much larger company called GHI Inc. Now, usually mergers cause stock prices to go up, so if you, knowing that a merger is going to take place, go out and buy a lot of stock from both company ABC, and XYZ, you are using insider information, and are breaking the law.
SEC rules and regulations not only pertain to companies on the Exchange, but to the brokers that trade, and to you, the investor. As an investor, you too, cannot buy stocks knowing information about a company that know one else knows. Brokers get the heaviest burden of rules and regulations from the SEC. Most of these rules are to protect you, the investor. An example of one of these rules is that when a floor broker goes to buy a stock on your behalf , he must buy from the lowest priced bidder, and when he is selling, he must sell it to the highest price bidder. Sounds like common sense, but in fact it is not. Floor brokers, could easily sell your stock really low to another broker, in exchange for them selling you a different stock really cheap, to give a better customer a better price. This would not be fair to you, being sacrificed to give another person a better price.