Client is goose that lays golden egg

During the public education workshops that have been going on around the country, up to the last week, Capital Market Advisory Council (CMAC) received very many questions from the participants.

During the public education workshops that have been going on around the country, up to the last week, Capital Market Advisory Council (CMAC) received very many questions from the participants.

One of the most frequent questions was, “Why do I need a stockbroker when I can go to the company and buy the shares directly.” That will remain a very relevant question in the capital market. 

The question asked by our workshop participants was relevant and a natural reaction to concern for value. Yes, why a stockbroker when I can avoid them, especially when I know this is capital market in real sense.

The stockbroker will charge a commission for buying and for selling. Yes, that is the way of business. The fundamental concern of course is the protection of the goose that lays the golden egg. The hard earned savings from the investing public.

Well, the capital market appears to be complex mainly because of the numbers of players involved and the variety of instruments on offer.

There are issuers who come to raise capital, the securities issued, the investing public, the intermediating stockbrokers and dealers, the regulating agencies, the stock exchange, and of course the commercial banks.

Each of these market participants have very specific roles to play in the capital market.  The rules and regulations of the market guide all the players in the market.

In formulating the capital market rules, the regulators look at the organization of the whole market and lay down rules to protect the investing public, develop an orderly, fair and transparent market.

We shall now attempt to answer all those who asked the cardinal question “why the stockbrokers?”  Stockbrokers are the in-betweens of the market.

The sell and buy securities (shares and bonds) on behalf of the general public. Stock broking is a profession like any other. The stockbrokers also buy and sell securities on their own behalf.

How? They have to follow strict rules on buying for themselves. For instance, they are required to disclose to the client when they are buying from that client for their own books.

Stock brokers are usually members of a stock exchange which is the market place where these stock brokers meet to trade or buy and sell shares and bonds between themselves on behalf of the public.

To be admitted or allowed to become stockbrokers, there are rules and regulations that guide the process. These are the membership admission rules.

To be admitted as members, the stockbrokers apply for admission. They are required to complete forms that require them to confirm that they are keen, capable and fit to operate as stockbrokers.

Like many regulated professions or trades, they are required to have minimum education, appropriate skills, minimum capital requirement and office infrastructure to conduct the business of stock broking.

Above all, they are required to have a legal incorporation as a company. The individuals acting as traders in brokerage firms are all nominated by a company and they are either employees or directors of the firms that they represent in the market.

Since stockbrokers buy and sell securities on behalf of the public, they are actually marketers. They will look for buyers where there are sellers and will search for sellers where there are buyers.

In the process of searching for buyers and sellers, they undertake market intelligence and research on the securities they are handling.

In addition they know where to find information on companies and the economy. They also know many buyers and many sellers. Finally, they understand the business and therefore go out of their way to look for investors.

They are able to advice and guide investors on everything about the market. They do public education but of course motivated by business because they are in business.

Effectively the stockbrokers form what we call the distribution channel of the capital market. That is how the capital market works and that is how the stockbrokers add value.

In fact, that is why the companies looking for capital will appoint them as advisors and sponsors. They advise on what price is the most appropriate since they have a feel of the market. Without them, investors may not even know of the existence of the investment opportunities available.

They charge a commission on every sell and on every buy. They also charge advisory fees to companies for corporate advisory services.

All the activities of the stockbrokers right from their admission to the way they handle the investing public, how they keep their records, how they deal with each other and even how they conduct their stock broking business is regulated under the rules and regulations of the capital market.

Enforcement of these regulations is bestowed on the Capital Market Council. Enforcement actions against stock brokers by CMAC ranges from financial penalties, expulsion from membership and legal action.

Since stock broking is a financial service and involves a lot of reliance on the integrity of the market intermediaries and confidence of the investors, capital market regulations include a code of conduct and ethics for all the members of the capital markets.

These are the dos and donts that stockbrokers are required to adhere to when conducting their business.

In conclusion, we need stockbrokers and capital market cannot be there without stockbrokers. They are regulated professionals and they work under strict surveillance of the Capital Market Advisory Council. 

There are seven members on the Rwanda OTC (over the counter) market and their contacts can be found in the CMAC website:

Robert Mathu is the Executive Director Capital Market Advisory Council (CMAC)