In under to transact business in the securities market, an investor has to route her order is through a brokerage firms as only member broker are allocated to enter the trading floor trading among the member of a recognized stock exchange is carried on within the framework of rules, bye laws and regulation of the exchange.
Function of brokerage firm
1) The business of broker consists of searching out buyer when their customer wish to sell and locating sellers when their customers wish to buy so as to executes transaction as per customer instruction.
2) The broker do not function as principals in the transaction, they are agents only.
3)The exercise of care and skill require that the broker follows instructions and places the order in the market. When the security is traded in the fastest possible time.¹
4) The brokerage firm may be hold liable for any losses resulting its mistake.
5)The brokerage firm can not act as both broker and dealer in the same transaction because these could be conflict of interest or double commission might result.
6) The broker makes his fee from the difference between the price at which he buys the shares for his own account and the price at which he sells their to customer.
Functional specialization of members
Functional specialization of member at the stock exchange helps a lot in making it is free active and continuous market. In India the stock exchange rules, by-laws and regulation do not prescribe any functional distinction between member.
1)Commission broker-Almost all members act as commission brokers. The commission broker executes buying and selling orders on the floor of the exchange. For that, he charges a commission not exceeding the official scale of brokerage.
2) Floor broker- The floor brokers are not officially attached to other members. The floor broker executes orders for any members and receives as his compensation a share of the brokerage charged by commission broker to his constituent.
3) Taravniwalla or jobber- The taraniwalla may be a jobber or specialist who specializes in stocks located at the same trading post. He trades in and out of the market for small difference in price and as such is an important factor in.
4) Dealers in non-cleared securities- The dealer in non-cleared securities specializes in buying and selling on his own account shares which are not in the active list.
5) Odd-lot-dealer- The odd-lot dealer specializes in buying and selling in amount less than the prescribed trading units or lots. He buys odd lots and makes them up into marketable trading units.
6) Budliwala- The Budliwala or financier lends money to the market by taking up delivery on the due date at the end of the clearing for those who wish to carry over their purchase or loans securities to the market when it is short by giving delivery on the due date at the end of the clearing for those who wish to carry over their sales.
7) Arbitrageur-The arbitrageur specializes in making purchase and sales in different markets at the same time and profits by the differences in prices between the two centres.
8) Security dealer-The security dealer specialises in buying and selling gilt-edged securities that is securities issued by the central and state Governments and by statutory public bodies such as Municipal Corporation.
Types of transactions in a stock exchange
The member of recognized stock Exchanges are permitted to enter into transactions in securities as under.
a) For “spot delivery” i.e for delivery and payment on the same day as the date of the contract or on the next day.
b) For “hand delivery”, i.e, for delivery a d payment within the time or on the date stipulated when entering into bargain, which time or date shall not be more than 14 days following the date of the contract.
C) For “special delivery”,i.e. for delivery and payment within any time exceeding 14 days following the date of contract as may be stipulated when entering into the bargain and permitted by the Govering Board or the President
Basic types of transaction
Long purchase– The long purchase is a transaction in which investor buy securities in the hope that they will increase in value and can be sold at a later date or profit. The object, then, is to buy low and sell high. A long purchase is the most common type of transaction.
Each of the basic types of orders described above can be used with long transaction. Because investor generally expect the price of the security to rise over the period of time they plant to hold it, their returns comes from any dividend or interest received during the ownership period, plus the difference between the price of the security to rise over the period of time they plant to hold it.
Their returns comes from any dividend or interest received during the ownership period l,plus the difference between the price at which they sell the security and the price paid to purchase it. This return, of course, is reduced by the brokerage fees paid to purchase and sell the securities.
Margin trading– Most security purchase do not have to be made on a cash basis borrowed funds can be used instead. This activity is referred to as margin trading and it is used for one basic reason to magnify returns. This is possible because the use of borrowed funds reduce the amount of capital that must be put by the investor. As peculiar as it may sound, the term margin itself refers to the amount of equity in an investment, or the amount that is not borrowed.
Essential of margin trading-Margin trading can be used with most kinds of securities. It normally leads to increased returns, but there are also some substantial risks. One of the biggest is that the issue may not perform as expected. If this in fact occurs, no amount of margin trading can corrects matters. Margin trading can only magnify, not produce them. Because the security being margins is always the ultimate source of returns, the security selection process is critical to this trading strategy.