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Stock Brokers (PDF) by mnmgroup


									                                 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

         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

       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

 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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