Who is a stock broker? Explain the role played by him in the financial market.
Ans. A Stock Broker is a professional who executes buy and sell orders for stocks and other securities on behalf of clients. A stockbroker may also be known as a registered representative, investment adviser or simply, Broker. Stock Brokers are usually associated with a brokerage firm and handle transactions for retail and institutional customers alike. Stock Brokers often receive commissions for their services, but individual compensation can vary greatly depending on where they are employed. Brokerage Firms and Broker-Dealers are also sometimes referred to as Stock Brokers themselves.
Role of Stock Brokers:
The role of Stock Brokers has evolved in a big way over the last few years. Now Brokers are not just here to buy or sell stocks on behalf of their clients. They play a bigger role in helping an investor stride through whole investment process, providing research based advice on stocks to helping client to invest in alternative assets, and subscribing to Initial Public Offers (IPOs) and mutual funds schemes. Apart from this, Brokers also offer financing facility for investors who are looking to take leverage position. So, the traditional Brokers have transformed themselves into a one-stop in- vestment solution provider. Let us now look at some of the important roles the new age Stock Broker plays in a client's investment journey. They are presented as follows:
Rolex of stock brokers :-
1) Buying.
2) Selling.
3) Research and Advice.
4) Personalised Service.
5) Margin Financing.
6) Invest in other Assets.
7) Marketing.
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1) Buying: One of the most basic responsibilities of a Stock Broker is to buy stocks on behalf of his client, he may do this in different ways, depending on the type of account the client has. In a discretionary account, the Stock Broker buys stock for a client based on some prearranged guidelines. In an advisory account, however, the stockbroker only advises a client on what stock to buy, while in an execution ac count, the Stock Broker only buys stock that the client has specifically indicated.
2) Selling: The other responsibility a Stock Broker has 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 Stock Broker can only advise the client to sell his stocks, while if a client has a discretionary account, a Stock Broker has some leeway on selling the stocks based on a prearranged guideline.
3) Research and Advice: Most of the broking houses have set up in-house research team that scans companies and stocks as well as analyze the macro-economic sce- nario that impacts the stock market. With the inputs from the research team, brokerage house puts buy or sell recommendation on stocks. Brokers also have techni- cal analysts who would provide market trends and intra-day trading tips. They send out news and other alerts on a continuous basis. Brokers also conduct investor edu- cation programmes to help inprove their clients' knowledge about investing in the markets.
4) Personalized Service: Most Broking Houses assign a relationship manager to interact with the client who would act as an advisor. Relationship managers advise their clients above when to make transactions and guide them about what to look for in the market dealings. They would advise clients on putting stop-loss especially when they are making intra-day trades. They monitor client's portfolio and provide timely advices to them.
5) Margin Financing: Stock Brokers are well capitalized these days. It means they have a strong Balance Sheet with high equity and debt in books. Stock exchanges monitor the extent to which brokers are lending in line with their net worth. As a result, many large Broking Houses provide financing facilities to clients who are looking to take leverage positions. This means borrow for trading. Funding is mostly done by the NBFC arm of the Brokerage House. Clients are allowed to take a posi- tion in the market after paying the margin amount. In most cases, investors are allowed to trade with a 50% margin.
6) Invest in other Asset Class: A part from investing in stocks, Brokers also help the investors to invest in other assets classes like commodities, gold exchange traded funds (ETFs) and mutual fund products. They also help their clients to investment in initial public offering (IPO) of companies.
7 )Marketing: 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 or taking time to call prospective clients. A Stock Broker can also receive new clients through referrals from individuals and organizations or by attending social events where he can market his services.