In 2006, Will Smith starred in The Pursuit of Happyness, a raw, tear-jerker, movie that earned him acting nominations for both the Oscars and the Golden Globes. The movie, based on a true story, follows the life of Chris Gardner, a salesman and single father. While Gardner manages to provide for his family on his sales job, at one point he decides to take an unpaid internship as a stockbroker in a large firm. Taking the internship leads him to become homeless, but he persists in the cut-throat world of the stock market before finally making a cut and landing a job at the firm – where he then literally goes from rags to riches.
This is one portrayal of the stockbroker. As a humble, head down, honest worker that believes in the American dream and works hard to come out of their life’s circumstances. The other significant representation of the stockbroker in pop culture was the 2013 movie The Wolf of Wall Street. Far from the emotional roller-coaster that was The Pursuit of Happyness, this movie saw Leonardo DiCaprio star as a cocaine fuelled, high-stakes Wall Street stockbroker that has perfected the art of the hard sale, engages in pump-and-dump schemes regularly with glee, and ends up being put in the slammer by the FBI and the SEC.
Both of these representations are vastly different, but they do tell us one thing – the stockbroker is a bonafide character of the capitalist story. Much like the 9-5 banker heading to work in the morning in a hat and a long-coat, briefcase hanging at his side, or the door-to-door salesman, or the entrepreneur (or startup founder these days), the stockbroker is a symbol. They are a symbol not just of the accumulation of wealth, the fragility of the system, and the capitalist lifestyle – they are also elusive figures that can make big money through their profession both for themselves and for their clients.
What is a stockbroker? They are financial professionals who execute orders in the market on behalf of clients. Most stockbrokers work for a brokerage firm and handle transactions for a number of individual and institutional customers. Stockbrokers are often paid on a commission basis although compensation methods vary by employer. Brokerage firms and broker-dealer companies are also sometimes referred to generically as stockbrokers.
The function of the stockbroker is two-fold. The first thing they do is that they actually do the technical work of executing trades that their clients want them to make. That means they are making entries, coordinating trades, and pushing buttons on a computer. The second function is more abstract and also more dicey. Advice. Brokers can give you advice on what stocks you should invest in and which ones you should avoid. The first function anyone can learn and do, the second is an analytical gift and brokers can be highly sought after because of their skill and ability to make the right calls for their clients. This is often how they end up making a lot of money.
Now, the PSX is not exactly the New York Stock Exchange. There is a vast difference between the worlds of 11 Wall Street New York and Stock Exchange Building, Stock Exchange Road, Karachi. However, one of the telling sights of the PSX is still that brokers are everywhere and you need them to maneuver your way around the floor. Even if you are savvy and don’t need anyone giving you advice, you will still need them to execute trades for you. This is the role and nature of the stockbroker in Pakistan’s stock market.
How it works in Pakistan
If you want to buy or sell shares, as a retail investor you should know that most of it is done through exchanges like the Pakistan Stock Exchange. An exchange is essentially a marketplace for shares where buyers and sellers meet and decide on a trading price. If you’ve seen movies about stock market trading you’ve probably seen scenes where there are traders yelling across a physical trading floor. As charming as the idea of spittle landing in your eyes as your eardrums face a cacophony of large, angry, frustrated men shouting is, in this day and age most trades are carried out virtually through a network of computers.
Once shares are issued in a primary market through an IPO (we’ve explained those already), they can then be listed on the stock market which is a secondary market. A secondary market is essentially one where investors trade second hand or already issued securities. You no longer deal with the issuing company here. Companies only really offer shares in their stock through IPOs. When this happens, the general public can go crazy and make bids for the shares. However, once those shares have been sold they are the property of the person that has bought them. To sell those shares, or trade them, the owner of the share goes to the PSX which is where other buyers find them and deals can be made. It is, essentially, a marketplaces where buyers and sellers come to trade – the modern day equivalent of a grand bazaar.
However there is a problem. Say you have a share that you want to sell or are going to the PSX to look for companies to invest in. Once you get there, you don’t simply walk up to a stall, or a booth and ask the price. The exchange is simply a place where buyers and sellers meet, and since shares are not tangible objects that can be handed around. Because of this, you need a middleman to actually carry out the deal and execute it – pushing buttons essentially.
These middlemen are called stock brokers. A stock broker is an agent or firm that charges a fee or commission for carrying through buy and sell orders for investors. A brokerage firm acts as a middleman connecting buyers and sellers in order to facilitate transactions. There are essentially two types of brokers. Institutional brokers have large companies as their clients and trade on their behalf. They usually have investment banking divisions and help with IPOs as well. These brokers also had advisory and brokerage facilities. Personal stock brokers offer investment banking, advisory and brokerage to small businesses and individual investors. When we say advisory we mean research and assessment of the index, companies and sectors. Essentially you have large firms with sharp, top of their batch brokers that also serve as advisors and execute complicated transactions that might not be easily done or understood by the average broker. These are major trades and buyouts with multiple beneficiaries.
Do I need a broker?
Yes. People like you and me can’t just walk into a stock exchange to trade shares the same way we can’t walk into the SBP to get a loan. In order to carry out a trade you need someone that is a member of the stock exchange, namely a broker. Brokers buy and sell shares for themselves to make money and also on behalf of their clients. Every broker needs to be registered with the SECP and follow the required regulations.
So let’s say you have a share in company X. It isn’t a liquid share with little free float and little demand. When your broker puts up a sell order on your behalf, it is visible by all the brokers on their computer screens. If someone wants to buy the given quantity at your price, then the transaction is carried out. Each time you buy or sell shares a broker will charge a flat rate or % commission. Stock broker costs depend on the extent of services you avail from them. An alternative to this is to get yourself registered as a broker but that requires fulfilling the SECP requirements.
So how do you get a broker exactly? You can’t just walk up to them and hope they’ll tell you what to do. First things first is to round up your documents. You’re going to need a copy of your CNIC, current salary slip, a copy of a utility bill, your bank statement, a CNIC for a close relative, and a cheque with the money you’re going to invest.
Nowadays most brokers are allowing online account opening. The extent however, is limited and the process is not so great. However, before you open up an account, define your objectives. What type of trading do you plan on undertaking and how you want to carry out investments. Shortlist brokers and services. Sometimes brokers provide advisory if you have a bigger account. Choose a broker that fits your needs. Open an account with a brokerage firm and also a CDC sub account and a CDC investor account. Deposit the money and then begin your investment journey.