Who does what in the Market

When you buy or sell shares in a company your only contact will usually be with your stockbroker.

But if you read the financial pages of newspapers or the information sent to you by stockbrokers or companies, you will see a whole host of other business mentioned, such as market makers, registrars and regulators. Each of these organizations has a different but crucial role in the efficient working of the stock market. So, while you may not actually deal with them day to day, it is worth understanding the role they play.

The Karachi Stock Exchange
Regulators
Registrars
Stockbrokers
Market makers
Company advisors
Shareholders

The Karachi Stock Exchange

The Karachi Stock Exchange is the principle Pakistani exchange for investors who want to buy and sell shares or bonds. It is known in regulatory circles as a Recognized Investment Exchange, which means it provides a marketplace for investors.

Companies who list on one of the Exchange’s markets, have to abide by strict rules governing their listing and may have their shares suspended if they do not comply.

But the Exchange does not get involved in regulating the advisers and brokers individuals deal with. That is the responsibility of the Security Exchange Commission of Pakistan.

Regulators

Regulators are there to protect you and your money. The main regulator in Pakistan is the Security Exchange Commission of Pakistan (SECP). Any financial companies whose main business is investment must be authorized by the SECP. That includes stockbrokers and independent financial advisers. These firms are required to ensure all the people who work for them meet the standards laid down by the SECP.

Registrars

If a company lists its shares on the stock market it needs to appoint a company registrar. The company registrar is responsible for the upkeep of a legal record of the company’s shareholders.

This means that every time you buy or sell shares, the registrar will make a record of the transaction. This is useful if you lose the certificate and need to trace your holding. But registrars will not always know you are the owner of shares if you buy through a nominee account.

Nominee accounts, operated by stockbrokers, enable you to buy and sell shares more quickly than if you hold the paper certificate but as the shares are held under a nominee account, the registrar will only know how many shares are held in that account, not who the individual owners are. That then becomes the responsibility of your stockbroker.

Stockbrokers

Stockbrokers are the people who will buy and sell your shares on your behalf for a fee. There are different types of stockbroker.

If you want help with your investments you might be best suited to a full advisory service, where the broker will look at your individual circumstances and devise a strategy to suit your needs, monitor your investments and make suggestions on buying and selling shares. Some may even buy and sell shares for you without asking for your approval first. This service is highly tailored and, unsurprisingly, can prove expensive.

These days most people are prepared to do their own research. That is, after all, half the fun of investing. If you are in this camp you need to look for an execution only stockbroker. These brokers cannot legally offer you any advice on your decisions and to keep costs down usually operate over the phone or the Internet.

This does not, however, mean they will not provide you with any tools to help you make the best investment decisions. Many execution-only brokers, particularly the larger firms, offer all kinds of research and online tools for everyone from the novice to the real expert.

To a large degree, finding the right broker for you will depend on your individual requirements but there are four factors you should look for: quality of information, speed of execution, markets available and cost. Generally speaking, the better the information on offer, the more you will pay.

Market makers

When you give an order to buy or sell shares to a stockbroker, they pass the deal onto a market maker who will execute the deal. Market makers have to offer stockbrokers separate prices for buying and selling shares (known as bid and offer prices).

When you see a share price quoted in the newspaper it is usually the mid price (the average of buy and sell prices) and this determines the value, or market capitalization, of a company.

Market makers are ultimately responsible for how much share prices move up or down. If, for example, demand for a company’s shares is high, market makers will put up the price to attract shareholders to sell. If demand is low, the market maker will reduce the price to attract buyers.

Company advisors

If you read about one company taking over another, or that a company has diversified into a new area, you will usually see the reporter name a different firm as the company’s advisor.

While listed companies have boards of directors who are there to advise the business on any future developments, they usually employ outside firms to help independently analyze the prospects for the business. These firms, often investment banks, may, for example, do some research into which of the business’s rivals may be ripe for takeover.

Shareholders

If you have bought shares in a company you are a shareholder. Owning shares gives you the right to vote at company meetings and to get any dividends the company pays out. You may also qualify for shareholder perks, such as discounts off the company’s products, although you may have to hold the share certificate directly rather than through a nominee account.

Shareholders are usually split into two types: institutional and private. Institutional holders are companies who may, for example, invest the pension schemes of their staff in shares. They can also be fund managers who run investment schemes such as unit trusts or investment trusts. So, if you have a pension or another investment scheme, these institutions will be investing on your behalf.

Institutions have the biggest influence on the market’s performance simply because they have millions or billions to invest. If they, for example, own a reasonable percentage of a company’s shares, selling them will have a significant influence on the price.