Role of Securities Market

How Securities are Traded

Role of Securities Market

n    Provide liquidity to the investors

n    Indicate the true price of securities

n    Channel fund from surplus to deficit unit with the help of financial intermediaries (brokers)

Type of Brokers

n    Full-Service Brokers

n    Discount Brokers

n    On-Line  Discount Brokers

Full-Service Brokers

n     Provides full-range services including information, publications and investment advices

n     Also known as financial consultant /investment executives/ registered representatives

n     Source of income –

– Charging commissions on customer

– Selling load (mutual) funds and other financial products

– Trading for their own accounts (principal transactions)

– Issuing IPOs

– Underwriting

– Imposing admin fees on customer accounts

Discount Brokers

n    They offer order execution services to the customer at a discounted price which is less than the price charged by full-service brokers

n     Less (no) information, publications and investment advices

n    Main source of income –

– Commissions from customers

On-Line  Discount Brokers

n    These are discount brokers providing services through internet

n    One survey (conducted by AAII in 2001) results shows that 76% of discount brokers offer on-line trading and 41% of these firms are on-line firm

n    They offer real-time quotes

Types of Brokerage Accounts

n     Cash Account: Customer makes only cash transactions

n     Margin Account: Margin transactions are allowed (initial margin deposit $2000). Page : 128-129

n     Asset Management Account: full service account provided by full-service brokerage firms, services include investment of cash balances, check writing privileges and instant loans fro any purpose

n     Wrap Account: Using broker as a consultant (middle man), customer chooses an external money manager from a list provided by the broker. All the costs- consultant and money manager fees, transaction cost etc – are wrapped in one fees. It is a sort of package deal.

Investing without a Broker

n    Dividend Reinvestment Plan (DRIP)

Plan offered by a company whereby stockholders can reinvest dividends in additional shares at no cost.

Types of Order

n    Market Order

Buy or sell at best possible price

n    Limit Order

Buy or sell at a specified price

n    Stop Order

This is used to buy/sell after stock reaches a certain level. Buy (sell) stop order is placed above (below) the current market price

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