Do we really need stockbrokers in NEPSE?

Author’s note: This is an opinion piece. The article gives no investment advice. 

Article by Samin Gurung

Stockbroker companies in NEPSE and their trading fees. (*long exhale*)

They make money when the market is rising. 

And they make money when the market is falling. 

This certainly reminds me of the Gold Rush period in 19th-century California. Gold miners, people who panned for gold, rarely found life-altering wealth under the dirt. It was basically a gamble, only a few profited heavily. But companies that sold shovels to these miners certainly became rich beyond measure.

As investors flock to grab a piece of NEPSE's ever-promising profit pie, some make money and some lose it. 

But stockbroker companies always scrap that tiny margin of commission and fees off of these investors. These commission and trading fees allow broker companies to pay for their staff, electricity bills, and scorching system fees and still turn up a hefty sum of profit. 

This article is an impression of the envy-coated question that we investors have - Do we really need stockbroker companies in NEPSE?

So, stockbrokers in NEPSE . . .

A stockbroker is a professional or entity who helps people buy and sell stocks of companies traded on the stock market. 

They act as a middleman between investors and the stock market.

In other countries, stockbrokers can also provide advice and guidance to their clients on how to invest their money in stocks, for a fee. These are called full-service brokers.

However, in Nepal, stockbroker companies only perform two functions: brokerage and depository services. 

In simple English, that means they open your Demat account and let you trade in NEPSE.

Now, stockbrokers were a necessity in the early days. Nirmal Pradhan, the hailed king of NEPSE, reminisces in one of his interviews about how he used to request his stockbroker to buy shares for him.

“I had to stand and yell my order through the window of my broker company’s restroom, covering my nose with my fingers against the pungent smell,” he once reflected.  

But things have changed now. Transactions happen in a flash from the online trading portal.

So why do stockbrokers still take a piece of your pie from fees and commissions? And why is the regulatory board SEBON coordinating to also let banks perform brokerage services?

Benefits of having stockbroker companies

Believe it or not, stockbroker companies are actually necessary for a stock exchange. 

To understand this, we have to sit back and carefully think about the advantages of having multiple stockbroker companies, and the consequences of otherwise letting the exchange do all this work. 

Now, I'm not being paid to write this article and bolster the existence of stockbroker companies, although I certainly wouldn’t mind being sent a fat cheque (sarcastically, of course.)

I'm an ordinary guy and my humility forces me to state I haven't known enough about the world of investing. Nonetheless, as a former media officer at Sharesansar, there are certain things that make me think, and I can’t help but research deeper. 

Talks aside, why do we really need stockbroker companies?

1) It’s international practice

As much of a no-brainer as this sounds, it’s true. 

A securities exchange of any sort should have its basic structure in place. This includes having a regulatory agency, stockbrokers, market-makers, and a standard rule of law, among other things. 

United States of America, the country that modernized securities trading, also still has floor traders on the stock exchange. 

Technology has only developed so much. We still need humans to oversee and complete unfinished edges that technology hasn’t been able to solve. 

2) Specialization benefits everybody

In the early days of the industrial revolution, workers at a factory did everything. 

If it was a garment factory, each worker was assigned to manufacture a shirt from scratch. Each of them had to measure the cloth, cut it, sew it, and button it to perfection. 

Then one day, some genius decided to divide the work among groups. A worker was responsible only to measure and cut the cloth, the next worker worked on sewing all day, and another fixed the buttons and collars. 

The result? Insane improvement in productivity. 

This is the reason why you don’t deposit and borrow money directly from Nepal Rastra Bank, the central bank. There are banks and intermediaries who take up that job. 

Similarly, the stock exchange can only do so many things well. 

It can’t be filling your trading applications and forwarding your payments while ensuring the market runs smoothly. 

As a result, an entity is needed to be a middleman in the process. This frees up the stock exchange for other work. 

This is where stockbroker companies enter. 

3) Stockbrokers are incentivized to perform well, and incentive is the lifeblood of capitalism

In other words, stockbrokers are obliged to perform well because they profit by performing well. 

What will you do after your stockbroker company does not pick up calls for the 100th time?

You change your broker. 

As a result, the broker company that provides timely services to its clients will profit and grow with time. 

This incentivizes all other broker companies to deliver top-notch service to its clients. 

Imagine if the stock exchange was responsible to answer your phone calls for every minor task. How chaotic would that be? As someone whose job was to regularly call NEPSE and take important data, trust me, I know. 

Furthermore, stockbrokers are responsible for taking the investment horizon far beyond the nation’s capital city. We have broker officers in major cities across the nation, enabling people from everywhere to contribute capital. 

If stockbrokers did not benefit from more clients, NEPSE would remain limited only in Kathmandu.

Scenario of stockbrokers across the world

After I tried to paint the importance of stockbroker companies, it is also my duty to unveil the contrast that we have in Nepal from the rest of the world. 

Numerous brokerage firms in the US, India, and other countries operate on a “Zero Commission” model. 

In other words, they do not take any trading fees from clients. 

How then, do these zero-commission brokers make money? 

1) Interest on margin loans

Stockbroker companies in these countries are allowed to dispatch margin credit for clients. This practically means investors can buy shares worth more than the money they put up. 

The stockbroker company provides this margin, and it earns from the interest levied on this loan later, even without taking any commission or fees. 

2) Referral Incentives

In Nepal, we have only one stock exchange, zero liquidity providers, and no market-maker. 

However, stockbroker companies abroad take referral fees from multiple stock exchanges and liquidity providers for referring their client base to these entities. 

3) Premium Services

As I hinted earlier, stockbroker companies abroad provide more than just brokerage. They are allowed to offer stock picks and recommendations for clients willing to pay for it. Some also sell various services like curated newsletters, portfolio management, and research tools. 

Wrapping Up

Stockbroker companies in NEPSE certainly aren’t going anywhere, not for the foreseeable future. 

Broker companies in Nepal perform only their primary function: depository services and brokerage. 

These are a necessity for the stock market, as NEPSE alone can never handle it. 

Furthermore, as the stock exchange matures and grows, we may rather have to increase the capacity and scope of responsibilities carried by these stockbroker companies, and for some new ones that will emerge in the days to come. 

Stockbroker companies do make money at good times and bad, but that is for fulfilling a service gap and ensuring the smooth operation of NEPSE. 

Additionally, broker companies do not make as much in a bear market, since the trading volume is significantly slashed down. 

As such, everybody, even broker companies, hopes for a bull market. 

If this makes you feel better than the brokers are also actually on your side for this one, let it be that way.

A former media officer at sharesansar, Samin now handles his business ventures, spoils his puppy, and wears toe-chewed socks as a result. When he is not strumming his guitar, singing at the top of his lungs, you'll find him writing about financial freedom on nepalearn.com.