Diversification of Stock Brokers and Commission: A much needed move to upgrade Nepal’s Stock Market

Nepal’s Stock market has a long history that starts from Rana Regime when Nepal Bank Limited and Biratnagar Jute Mills floated the Shares. However, Stock Market in Nepal got the proper shape only after the establishment of Nepal Stock Exchange (NEPSE) in the year 1993. After the establishment of Stock Exchange, Nepse along with its trading partners i.e. Stock Brokers combined to form a complete Secondary Market in Nepal.  Currently, there are 50 functional Brokers existing in Nepal.

During its initial stage, the role of Stock Broker was limited to execute the stock order from Buyer and Sellers. With time passes, they started to play additional roles to facilitate the stock exchange related activities. 

Brokers are categorized as the orthodox and modern brokers according to the nature of the business. Modern-day Brokers don't only execute the order for clients but they offer bulk number of services to their clients. Besides order evacuation modern day brokers do provide Portfolio Management Service, Research and Development, Training and Development, Underwriting, Mutual Fund Management, Loan against Shares, Margin Funding, IPO funding, Investment Advisory, Demat Account, Article Publication, Stock Picking, Seminar, Webinars etc

Unfortunately, except order execution of Stocks, Demat Services and limited Margin trade, 50 brokers operating in Nepal are not involved in any other services mentioned above and confined to the role what orthodox broker does.

If we look at the neighboring Indian Stock market, Stockbrokers have been classified according to the service they provide to their clients i.e. Full Services Brokers and Discount Brokers.

Discount Broker are brokers who are focused only in the execution of trade i.e. buying and selling of different Securities. Besides buying and selling they don't provide any major services. Given the services offered by Nepalese brokers operating, they seem to be discount brokers.  There service is limited to providing the order execution and Demat opening service.

Most of Investors around the world prefer Discount brokers just because of the cheap brokerage commission. Discount brokers provide relatively low brokerage commission compared to a full-service broker. Some of the discount brokers charge minimum brokerage commission and some of them provide a monthly or yearly package.   After paying some amount to brokers,  client can have access to unlimited trade.

Clients who can study the market well and are independent in investing or trading can opt for Discount Brokers. Discount brokers are very good options for Independent investors.

Full-Service Brokers are those who provide other investment services besides buying and selling of stocks. Choosing the full-service brokers, client won't feel that he/she is moving alone. Full-Service Brokers provide personalized investment service for clients like Portfolio Management, Portfolio Checkup, Advisory service etc. It's like Liverpool Football Club slogan "you will never walk alone". They ask your needs, guide to invest in particular stocks, manage your portfolio, and make them  available when you are confused and feel any  difficulties.  But while providing additional services to their clients, Charge imposed by Full-Service brokers are higher than that of the discount brokers

Given the present provision, our regulators haven't classified the brokers yet. All the 50 Brokers operating in Nepal are of similar nature. Demat Service and Margin Service are only two things that differentiate brokerage Service in Nepal.

In keeping view with the contemporary practice in other part of the world and category of the investors, Nepalese Secondary Market needs diversification of brokers as soon as possible.

Due priority should be given to experienced investors as well as the new comers.  Clients who can invest independently and  have  sufficient knowledge of secondary market can opt  for Discount Brokers because they offer  only trading facility in low brokerage commission. Similarly, discount brokers are the best choice to big traders  as it  save huge amount of commission. Currently they are not highly motivated in Nepalese stock market as broker commission for them is higher than their expectation.

Differentiation of brokers would have been difficult before the online trading platform launched in Nepal. Once Nepal will have a fully automatic online trading platform, brokers should be classified according to the service they provide.

Similarly, a beginners who don't have enough time to analyse the trend of the stock market and lack of knowledge to understand it properly but very keen to be a part of Stock Market,  can be part of Full-Service broker. Though their service charges are comparatively higher than the discount brokers, this additional burden can be compensated by personalized service they provide. Full-service Brokers can be your investment advisor or they can manage your Portfolio. They can advise you the stock to buy and sell,  provide you with different research-based study materials and so on. It means client will be fully supported and guided by such brokers. Investing without proper knowledge is far better than paying some additional charge and investing your hard-earned money prudently with an advice of the professional of Stock market. In India, both types of brokers are parallelly popular. Zerodha, 5 paise are some popular Discount brokers whereas ICICI Direct, Share Khan, Angel brokers are some popular Full services Brokers.

Besides the classification of Brokers, change in Module of Broker Commission is a must for Modern Day Broker Service.  Nepal has a fixed brokerage commission system. The question arises why can't broker compete with a low brokerage in the market.

Fixed Commission rate is certainly against the concept of Free market economy. If we look at the broker commission system in India, we can see how they are charging different rate of broker commission ranging from Zero brokerage to the flat rate.

Why can’t a broker say give their client to spend Rs 1000 per month and trade unlimited or why can’t a broker say their clients to give Rs 100 per order executed no matter how much is you’re the size of transaction? Why can’t a broker decide to provide Zero brokerage to attract clients if the broker has less clients?

Institutional Investors and big investors might bargain with different stock brokers to provide a certain fraction of commission after the trade.  As the Institutional Investors and big investors trade bulk, brokers might not be greedy to provide some hidden commission back to the clients. So Hidden and Illegal competition in brokerage commission might be seen due to the current commission module. Open Competition in Broker Commission will reduce such incidents.

So this is appropriate time to take initiation for Open Competition in Brokerage commission.  If we will have the provision of the Upper Slab of broker commission, competition in brokerage commission will boost market.

There are numerous concerns which should be addressed with due priority to enhance the Nepal’s Capital market. The initiation should be taken to classify the brokers according to the nature of their service and provisioning with a provision for open Competition of Brokerage commission System. These two provisions will  certainly enhance the capacity of  the investors and eventually help create  virtual cycle in secondary market in Nepal. This will create win-win situation to all players in secondary markets i.e. investors, brokers and regulator as well.

 -Santosh Raj Bajgain  (The Writer can be reached at bajgains@gmail.com)