Chapter -11 STOCK BROKERS Stock Broker A stock broker is a person or entity, which is a member of a stock exchange. A stock broker acts as a facilitator to carry out transactions of investors on a stock exchange. Thus if you want to buy say 100 shares of a company XYZ (which is listed on say National Stock Exchange) in the secondary securities market, he would have to go through a stock broker registered in NSE to carry out his transactions on National Stock exchange. Stock brokers are governed by SEBI Act, 1992, Securities Contracts (Regulation) Act, 1956, Securities and Exchange Board of India [SEBI (Stock brokers and Sub brokers) Rules and Regulations, 1992], Rules, Regulations and Bye laws of stock exchange of which he is a member as well as various directives of SEBI and stock exchange issued from time to time. The documents to be signed with stock broker Before start of trading with a stock broker, you are required to furnish your details such as name, address, proof of address, etc. and execute a broker client agreement. You are also entitled to a document called Risk Disclosure Document, which would give you a fair idea about the risks associated with securities market. Please go through all these documents carefully. Every stock broker is required to be a member of a stock exchange as well as registered with SEBI. Examine the SEBI registration number and other relevant details can be found out from the registration certificate issued by SEBI The services offered by stock brokers Stock brokers offer services such as buying and selling on behalf of investors. They also provide advisory services. If stock brokers are also registered as a portfolio manager, they can offer PMS services. Some of the bigger brokers also publish their own research reports which are available at a cost for investors. A stock broker is obligated to give you prompt and efficient service, make timely payment and give delivery of shares. He is required to execute your orders on the stock exchange with utmost sincerity and exercise due diligence. He is also obligated to issue you contract notes indicating your transactions for the day. Insist on this. Always be aware of your rights. Stock Brokers and Investment Analysis Stock exchanges to some extent play an important role as indicators, reflecting the performance of the country's economic state of health. Stock market is a place where securities are bought and sold. It is exposed to a high degree of volatility, prices fluctuate within minutes and are determined by the demand and supply of stocks at a given time. Stock brokers are the ones who buys and sells securities on behalf of individuals and institutions for some commission. The Securities and Exchange Board of India (SEBI) is the authorized body which regulates the operations of stock exchanges, banks and other financial institutions. The past performances in the capital markets specially the securities scam by Harsh ad Mehta has led to tightening of the operations by SEBI. In addition the international trading and investment exposure has made it imperative to better operational efficiency. With the view to improve, discipline and bring greater transparency in this sector, constant efforts are being made and to a certain extent improvements have been made. As the condition of capital markets are constantly improving, it has started drawing attention of lot more people than before. On the career related aspects, professionals have opportunities to choose from for a wide range of jobs available in a number of organizations in this sector and one can expect to have good times ahead of him. Nature of Work In India capital markets are experiencing radical reformation. The stricter regulatory framework along with introduction of information and technology has added more professionalism to the industry. The most common areas of work in the capital markets, one can look forward to include the following. Stock Brokers Given the present complex situation of our capital markets, stock brokers have to face challenging tasks. The specialized knowledge and professional acumen required has made the job of brokers highly skillful. The work of stock brokers depends upon the kind operations they engage themselves into. Some of the brokers like to practice with individual clients while others work for institutions. Brokers who work for institutional investors are often called securities traders. Many prefer to work as dealers, advisors and securities analysts. Security analysts are those who advise companies on floatation’s of shares as they are expected to have sound knowledge of capital markets. Brokers also work in the financial sector with banks, mutual funds, consultancies, insurance companies, pension funds and financial institutions etc. Duties of Stockbrokers to Their Customers Fair Dealing A stockbroker has a fundamental responsibility for fair dealing. The rules and regulations of the securities industry require a stockbroker to treat his customer in a fair manner characterized by high standards of honesty and integrity. Besides being governed by securities laws and commercial regulations, stockbrokers are subject to the rules of self-regulatory organizations such as the National Association of Securities Dealers (NASD). The NASD Rules of Fair Practice impose the following standard upon members of the securities industry: "A member, in the conduct of his business, shall observe high standards of commercial honor and just and equitable principles of trade." This standard (along with other NASD rules) is enforceable as the standard to which public customers are entitled to depend. Duty of Loyalty Since stockbrokers are compensated through commissions on the transactions which they execute, there is some inherent tension between the broker's interests and the interests of the customer. It is the broker's responsibility to always place the interests of the customer first. The broker's obligations and duty to the customer must be paramount, and for a broker conducting himself properly this will not present a conflict. A prime example of the broker's obligation to keep the customers interests first is the question of trading frequency in the account. The broker is obligated to recommend trades which meet the needs of the customer, not merely to generate commissions for himself. Excessive trading by a broker involving purchasing and selling securities for the purpose of increasing commissions, is known as "churning", and it is prohibited. Obligation of Disclosure A broker also has a duty to disclose all material information in connection with an investment recommendation. In general, the broker has an obligation to disclose all information which may be reasonably relevant to an investor to take into consideration in making an informed investment decision. In particular, a broker has an obligation to disclose the various risks and level of risk of an investment recommendation. Brokers have a duty to be truthful in all communications with customers. Brokers are held to a standard that their communications should provide a sound basis for evaluating any securities being recommended. In particular, exaggerated, false or misleading statements are prohibited in a stockbroker's communications with the public. Authorization for Trading A broker may not execute trades in a customer's account unless the customer has approved and authorized the trade in advance, or has given the broker discretionary trading authority (the power for the broker to make trading decisions in the account). A broker may not engage in unauthorized trading. On the other hand, a broker has an obligation to carry out the instructions of the customer. Requirement of Suitable Recommendations Perhaps one of the most important and least known obligations of a stockbroker is the requirement for all investment recommendations to be consistent with the customer's financial status, investment objectives, level of understanding and risk tolerance. According to this suitability rule and the requirement of the "know your customer" rule, a broker must have reasonable grounds for believing that the recommendation is suitable and appropriate for that particular customer based upon his individual financial situation, understanding and needs. It is the responsibility of the stockbroker to make reasonable efforts to obtain the relevant information regarding the customer and recommended investments. The "know your customer" rule requires that the broker obtain a customer profile so that the broker will be able to properly match the needs of the customer with appropriate investments. The broker is also required to use care in connection with knowing the investments which are recommended. Special Situations Certain forms of investments pose particular problems, and therefore, brokers have additional duties in connection with such activity. For example, trading with money borrowed from the brokerage firm, known as trading on margin, is a carefully regulated activity. Brokers also have special responsibilities in connection with options trading and private placement limited partnerships among other forms of investments. Supervisory Responsibility and Duty of Good Faith A brokerage firm has a responsibility to supervise the activities of its brokers. The firm must maintain a system to enforce compliance with rules and to prevent violations of securities laws and regulations. The responsibility of the brokerage firm to supervise its agents is especially important since many customers maintain their account with a particular firm and follow the advice of their broker based upon the name of the firm standing behind the broker. A stockbroker and brokerage firm has the responsibility to conduct themselves with good faith in their interaction with customers. Customers place their trust and reliance in the broker and brokerage firm to treat them in accordance with the high standards imposed upon the securities profession. The fact that many customers place their total faith and reliance in the broker viewing him as a trusted advisor and putting their financial affairs in his hands, certainly should heighten the broker's responsibilities and duty of good faith.
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