QUESTION: Who is stock broker? Explain the functions of a broker?
Answer: BROKER: Stock brokers are the trading experts who buy and sell stocks, shares and securities on behalf of clients over the counter or through a stock exchange.
Such stock brokers are mostly connected with a stock brokerage firm and they charge a commission or fee from the client for stock broking and managing their stocks.
Such stock brokers have a good knowledge of the Indian stock market and keeps tabs on the changeable patterns and trends of the different stocks and shares.
TYPES OF BROKERS:
ON THE BASIS OF NATURE:
- FULL-SERVICE BROKER: A full-service broker offers a broad range of stock and share trading services to the clients together with researching on different stocks and shares and presenting recommendation on potential profit-making stocks.
- DISCOUNT BROKER: A discount broker focuses only in executing buying and selling orders for their clients. They perform the trade by charging a brokerage fee much less than what is paid for their full -service counter-parts. Discount brokers do not offer any recommendations on the investment nor do they offer any recommendations to their clients.
ON THE BASIS OF CLIENTS SERVED:
- INSTITUTIONAL STOCK BROKERS: Institutional stock brokers have large institutions and companies as their clients and trade in securities on behalf of them. They offer services
such as investment banking, securities services such as investment banking, securities services, advisory services and brokerage services to institutional investors.
- PERSONAL STOCK BROKERS: These offer investment banking, advisory services and brokerage services to small businesses and individual investors.
FUNCTIONS OF BROKER:
- BUYING OF SECURITIES: One of the most basic functions of a stock broker is to buy stocks on behalf of his client, he may do this in different ways, depending upon the type of account he has. In a discretionary account, the stock broker buys stock for a client based on some prearranged guidelines. In an advisory account, however, the stock broker only advises a client on what stock to buy, while in an execution account, the stock broker only buys stock that the client has specifically indicated.
- SELLING OF SECURITIES: Another function of stock broker is selling stock on behalf of a client. Just as in the case of buying stock, the stock broker can only sell stocks of a client based on the account that a client signed up for. If a client has an execution only account, the stock broker can only sell a client’s stock when asked to do so. If a client has an advisory account, a stockbroker can only advise the clients to sell his stocks and while if a client has a discretionary account, a stock broker has some way on selling the stocks based on pre-arranged guidelines.
- RESEARCH OF MARKET: Competent research accounting, economic and technical analysis of different companies and stocks is done by the stock brokers. The findings of the stock brokers form the base of feedback of the clients. If a stockbroker believes a client’s stock will drop drastically, he will advise him to sell when the price is still high.
If, on the other hand, a stock broker believes that the price of a client’s stock will rise significantly, he may advise him to retain the stock.
A stock broker also advises a client about which stocks he should buy to add his financial portfolio and looks for profitable company’s stocks.
- MARKETING FUNCTIONS: A stock broker finds prospective clients and builds a customer base. He may do this by writing articles in newspapers and magazines, hosting radio and television shows or taking time to call prospective clients. A stockbroker can also receive new clients through referrals from other individuals and organizations or by attending social events where he can market his services.
- LIMITED BANKING SERVICES: Stock market brokers are authorized to provide limited banking services such as interest-bearing accounts, electronic deposits and withdrawals. The clients can avail such banking related services from the stock brokers by paying them a nominal brokerage charge.
- ADVISORY SERVICES: stock market brokers possess expertise related to the working of stock market, performance of stocks, market trends and so on. Besides, they have access to the database and research findings of brokerage firms that they are associated with. Hence, they can provide excellent investment advice to their clients.
CONCLUSION: A stock broker has to make an application for registration as a member of stock exchange to SEBI along with the requisite fee. The board after satisfying itself that the applicant has the necessary infrastructure to effectively carry out its activities will grant the certificate of registration.