CHAPTER II

BRIEF INTRODUCTION OF BROKERAGE FIRM

2.1 Meaning of brokerage firm

A brokerage firm, or simply brokerage, is a financial institution that facilitates the

buying and selling of financial securities between a buyer and a seller. Brokerage
firms serve a clientele of investors who trade public stocks and other securities,
usually through the firm's agent stockbrokers. A traditional, or "full service",
brokerage firm usually undertakes more than simply carrying out a stock or bond
trade. The staffs of this type of brokerage firm is entrusted with the responsibility of
researching the markets to provide appropriate recommendations, and in doing so they
direct the actions of pension fund managers and portfolio managers alike.

Although some analysts view securities market in developing countries as gambling

casinos that have little positive impact on economic growth, recent evidence suggests
that securities markets gives a big boost to economic development [ CITATION Lev96 \l
1033 ]. Traditional brokerage firms have also become a source of up-to-date live stock
prices and quotes. When a brokerage firm transacts for its own account, it is known as
a broker-dealer. Brokerage firm is an entity that has polish permission of securities
and exchange, among others to offer securities in public trading acquire and sell
securities, and provide portfolio management and investment advice services to its
client.

2.1.1 History of brokerage firm

The first recorded buying and selling of shares occurred in the 2nd century BCE in the
Rome. After Rome fell, stockbroking did not become a realistic career until after the
Renaissance. New stock exchanges opened their doors in the 16th and 17th centuries,
including the London Stock Exchange, which was opened at a coffee shop in 1698.In
the 1800s, in the United States, the New York Stock Exchange opened its doors under
a buttonwood tree in New York City. They formally founded the London Stock
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Exchange in 1801 and created regulations and memberships. The system was copied
by brokerage firms across the world, most notably on US and Europe.

2.1.2 Types of brokerage firm

The brokerage firm varies on various basis. Depending on the needs of the investor, it
is wise to choose the one that best matches the investor needs and financial goals.
Some of the types of brokerage firms can be listed below:

 Full service brokerage firm

This brokerage firm that provides a range of financial services in addition to allowing
an investor to buy and sell securities. These firms can provide customers with
financial planning services and consulting services. They can also provide trust
services and wealth management services. This is the most expensive type of
brokerage firm and the investor will be able to place buy and sell orders over the
internet or telephone.

 Discount brokerage firms

This firm doesn’t provide any financial consulting or planning services. The
commission charged by discount brokerage firms is cheaper than those of full service
brokerage firms. Like a full service brokerage firm, the investor can make trade over
the phone or online. Some also do offer trades via a smart phones.
 Online brokerage firm

This firm provides its services through the internet. There are two types of online
brokerage firms. There is the type that doesn’t have physical offices at all. And there
are those that operate under a full service or discount brokerage firm. When the online
service is provided as an option of full service or discount firm, it is referred to as a
self-service account.

2.1.3 Meaning of stock broker

A stockbroker executes buy and sell orders submitted by investors. They connect the
buyers and sellers of stocks, thereby creating liquidity in the market. Stockbrokers
trade on behalf of individuals and companies, and for their services, they charge a flat
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fee or a commission, which is a percentage of the sale or purchase price. Stockbrokers

are known by numerous professional designations, depending on the license they
hold, the type of securities they sell, or the services they provide. Stockbrokers go
through extensive training to learn about securities, and must also pass licensing
exams. Stockbrokers advise their clients whether to buy, sell or hold securities.

2.2 Introduction to securities market

A Securities market is an exchange where sale and purchase transactions of securities

are conducted on the base of demand and supply. Securities market encompasses
equity market, bond market, derivative market where price is determined by demand
and supply of the securities. The saving institutions such as banks, investment trusts
or companies, specialized financial corporations and stock exchanges are some of the
important constituents of capital market[ CITATION Bol98 \l 1033 ] . A well-functioning
securities market should be able to provide timely and accurate information on the
past transactions, liquidity, low transaction costs (internal efficiency) and securities
prices that rapidly adjusted to all available information (external efficiency).

 Primary market
Primary Market is the market for new securities issues and is facilitated by
underwriting groups. The companies sell their securities to the public directly to the
investors through the underwriters. The investment banker reduces the risk and cost of
creating a market of its securities to the issuer. When the firm is issuing shares for the
very first time, it is called Initial Public Offering (IPO). New shares issued by firms
whose shares are already trading in the market are called seasoned or secondary
Issuing Company receives cash from the sale and uses it to expand or fund the
operations. After the initial sale, the securities trading will be conducted on the
secondary market through brokerage firm.
 Secondary market

Secondary market, also known as the aftermarket, is the market where the trading of
the previous issued securities is conducted. An investor buys securities from another
investor instead of the issuer. It is important that the secondary market provides
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liquidity and therefore provides continuous information about the market price of the
securities. Secondary markets are mainly organized in two ways. One is to form a
centralized and organized exchange where all buyers and sellers (or their
representative agents) meet and conduct trading. The other way is Over-the-counter
(OTC) market where securities are traded directly between two parties. Trading
occurs via dealers who carry inventories of securities and contact each other by
computer, telephone or other electronic network instead of a physical trading floor.

2.2.1 History of securities market

The history of securities market began with the floatation of shares by Biratnagar Jute
Mills Ltd. and Nepal Bank Ltd. in 1937. Introduction of the Company Act in 1964,
the first issuance of Government Bond in 1964 and the establishment of Securities
Exchange Centre Ltd. in 1976 were other significant development relating to capital
markets. Securities Exchange Centre was established with an objective of facilitating
and promoting the growth of capital markets. Nepal Government, under a program
initiated to reform capital markets converted Securities Exchange Centre into Nepal
Stock Exchange in 1993. The only secondary capital market in Nepal, NEPSE
operates under Securities Act, 2007. NEPSE had brought about a number of changes
in order to upgrade itself and provide efficient and reliable services. In August 2007,
it automated its trading system. Initially a not for profit organization, NEPSE has turn
itself in a profit seeking organization in May 2008.

2.2.1.1 Securities exchange board of Nepal (SEBON)

Securities Board of Nepal (SEBON) was established by the Government of Nepal on

June 7, 1993 as an apex regulator of Securities Markets. It has been regulating the
market under the Securities Act, 2006. The Governing Board of SEBON is composed
of seven members including one full time chairman appointed by the Government for
tenure of four years. Other members of the Board include joint secretary of Ministry
of Finance, joint secretary of Ministry of Law, Justice and Parliamentary Affairs,
representative from Nepal Rastra Bank, representative from Institute of Chartered
Accountants of Nepal, representative from Federation of Nepalese Chambers of
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Commerce and Industries, and one member appointed by the Government from
amongst the experts pertaining to management of securities market.

2.2.1.2 NEPSE

NEPSE is the only secondary capital market of Nepal. The vision of NEPSE is
creation of wealth of nation by adding value through trading of securities. The
objective of NEPSE is to provide liquidity to government bonds and corporate
securities by facilitating transaction through intermediaries. The other objective of
NEPSE is to protect investors’ rights and develop a secondary market, as prescribed
in the Memorandum of Association and Articles of Association. The function of
NEPSE is to provide trading floor to the listed securities.

In 1994, NEPSE started its trading with 62 listed companies. From 2005 government
bonds are being listed and traded at NEPSE floor. At present there are more than 240
companies listed in NEPSE. To date 47 companies which didn’t comply with the legal
requirements have been delisted from NEPSE. NEPSE has replaced the open cut
trading system with fully automated screen based trading system (ATS) since 24 th
August. In Nepal, the company willing to sell its securities to the general public shall
have to get listed with Nepal Stock Exchange. Documents for listing are company
objectives, ownership structure, memorandum of association, articles of association
and audited balance sheets and profit and loss accounts and annual reports for the last
three consecutive years to the Nepal Stock Exchange[ CITATION Koi02 \l 1033 ].

2.2.1.3 CDS

CDS and Clearing Limited, a company established under the Company Act is a
company promoted by NEPSE in 2010 to provide centralized depository, clearing and
settlement services in Nepal. The company was inaugurated on 31st March, 2011. The
main objective of CDSC is to act as a central depository for various instruments
especially to handle securities in dematerialized form. This organization is entrusted
with the safekeeping, deposit and withdrawal of securities certificates and the transfer
of ownership or rights of the said instruments. Most modern stock trading is done in
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electronic exchanges where buying and selling occurs via online matching of order
placed buyers and sellers[ CITATION Man05 \l 1033 ].