equity and equity advisory
TRANSCRIPT
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EQUITIES AND DERIVATIVES
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Topics
STOCK MARKETS
INDIAN STOCK MARKETS
INVESTMENT IN STOCKS BROKING BUSINESS
BUSINESS OF ADVICE
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FIRST STOCK EXCHANGE in the WORLD?
FIRST COMPANY LISTED on the STOCK
EXCHANGE?
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WHAT IS AN EQUITY
/ SHARE ?HOW SHARES ARE
TRADED
WHAT IS BROKING
BUSINESS
WHAT IS EQUITY
ADVISORY
Is this how you feel???
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WHAT IS an EQUITY, SHARE or STOCK ?
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STOCKS Stocks or Shares represent the ownership of
a company in proportion to stocks or shares
held
Stock represents a claim on the company's
Assets , Earnings and have Voting Rights
Holding a company's stock means that you
are one of the many owners
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FEATURES
Entitled to a portion of the companysprofits and have a claim on assets Claim on profit Dividend, if paid out Claim on Asset Residual claim if business is liquidated
Limited liability Liability limited to amount paid to buy stocks
Tradability Stock are tradable at recognised stock exchanges through its
members (Stock Brokers)
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WHY we NEED STOCK MARKETS?
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Requirements
of CapitalProviders:???
SHORT TERM /
MEDIUM TERM /
LONG TERM
Capital
Requirement of
a Company:
LONG TERM
STOCK
EXCHANGE
Sources of
New Capital
forcompanies
Investors
can convert
their stockinto cash
A common place for buyer
and sellers
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WHY DOES a COMPANY ISSUE STOCKS ?
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Why would the Promoters share the profits withthousands of people when they could keepprofits to themselves?
The reason is that company needs to raisemoney.
Companies can either borrow it, DEBTFINANCING or raise it by selling part of thecompany, EQUITY FINANCING
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WHAT is the DIFFERENCE BETWEEN
BANKING SYSTEM
and CAPITAL MARKETS?
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Equity Issuance
In practice a company offers its shares toseveral interested participants; institutionsand individuals
When a company issues its equity for thefirst time (through Initial Public Offer) itdecides on offer price
Post listing, at stock exchanges marketparticipants decide the price.
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WHAT is an IPO?
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AN EXAMPLE
Recently, The Aditya Birla-owned IdeaCellular, entered the capital market on Feb 12with an initial public offering (IPO)aggregating Rs. 2,125 crore of equity sharesof Rs. 10 each for cash at a premium to bedecided through the 100 per cent book-building process
The price band for the issue was fixedbetween Rs 65 and Rs 75 per equity share
Shares were issued at Rs.75 and listed atNSE and BSE now trading at Rs.90 per share
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WHY COMPANIES go FOR LISTING?
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Listing of Securities
A security is said to be listed when, at
a stock exchange, it is added to the list
of securities in which trading ispermitted
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WHAT are the ADVANTAGES of LISTING?
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FOR CAPITAL PROVIDERS :
Ready marketability and liquidity
Ensure proper supervision and control in
dealing
Protect the interest of shareholders
FOR COMPANIES :
Cost-effective access to capital The highest visibility and the fairest pricing
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WHAT are PRIMARY MARKETS and
SECONDARY MARKETS?
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Primary and Secondary Market
The primary market is where securities arecreated (by means of an IPO)
In the secondary market, investors tradepreviously-issued securities without theinvolvement of the issuing-companies
When we talk about markets we refer tosecondary market
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WHAT is the REGULATORY STRUCTURE ?
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Ministry of Finance
S E B I
Stock Exchange
Broker
Advisor
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WHAT are MARKET ACTIVITIES?
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Market Place
The purpose of a stock market is to facilitate theexchange of securities between buyers and sellers
Interactive ,Information driven and Volume driven
Stocks are held and traded in Demat form
Tech savvy & Screen based trading Expanding product range
Advanced settlement and regulatory mechanism in
place
Major Stock Exchanges are
BSE
NSE
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Market Activities
Normal working hours 9.55 am to 3.30 pm,
Monday to Friday
Buying and Selling of stocks during this
period moves price up or down
When we talk about markets are up or
down we refer to market indices
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WHAT was the
SENSEX / NIFTYYESTERDAY?
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DO we need MARKET INDICE?
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HOW SENSEX and NIFTY INDICES are
CALCULATED?
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Some Indices -BSE
Sensex Seen as barometer of Indian Capital Market
Comprises of 30 high market cap / liquid
stocks Free Float based calculation
BSE-100
Broad based index of 100 stocks Stocks inclusion based on market activity and
industry representation.
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Some Indices - NSE
S&P CNX Nifty
Index of well diversified 50 stocks
Benchmark for index funds and index based
derivatives
Market Cap based calculation
CNX IT: Index of IT companies
BANK NIFTY: Index of Banking Companies
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DO you/family INVEST in STOCKS?
YES ? NO ?
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HOW EQUITY SHARES are TRADED?
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BUYER
SELLER
BROKER
BROKER
STOCK
EXCHANGE
Bank A/c DEMAT
Bank A/c DEMAT
Cash
Shares
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The process is not that Easy !
Market liquidity may not be there
Large spread in Bid and Ask
Impact cost Required quantity is not available to buy /
sell
Buyer has bought the shares but deliveryis not available or vice-versa
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BID and ASK for TAJGVK
Order Book
Buy Qty Buy Price Sell Price Sell Qty
100 183.3 184.4 22
100 183.25 184.45 50
50 183.2 184.5 26
100 183.15 184.75 1
300 183 184.9 5
7522 Total Buy Qty Total Sell Qty 5839
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Depository
Shares held in Demutualization form.
Transferred in electronics forms.
Two types of depositories.
NSDL CDSL
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DP With POA and without
POA.
DP with POA means investors gives right
to its trading member to settle their trades
on behalf of him.
DP without POA means Investors have to
give DIC slips at time when he sold his
scrips.
Please refer to Statement -1.
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Share transfer process
Off- Market Transfer- Transaction take
place between same depository.
Inter depository Transfer Transaction
takes place between two different
depository.
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LEDGER & BILLING
Ledger Statement of a/c which reveals
the daily transaction of the clients.
Billing Confirmation of all trades
relating gross purchase and gross sale
from exchange. Timing between 4:30 to
5:30.
Please refer statement -2
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Auction and Short Delivery
Auction- Initiated by exchange on behalf of Trading
Member.
Suppose Mr. A place buy order for 1000 share of TISCO
at 11:22:01 for Rs 450 per share and Mr. B places a sellorder for 2000 share of Tisco at 11:22:05 for 455 per
share. Assume that no other order were available in the
system . Mr. B sold extra 1000 share and he have no
delivery .Auction Takes Place on T+ 3 days
Close Out on T+ 5 Days
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Auction Calculated:
The closing price of TISCO on 21st March= 455
Last traded price of TISCO = 450
The Previous day close price on 23rd March =
465.
The difference between the closing price on 21st
March and Previous close price is Rs 10.
Suppose price band of auction is (-/+ 15%).= 465 * 1.15 = 535
Penalty paid by MR. B
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Short Delivery
Suppose Mr. A place buy order for 1000 share of TISCO
at 11:22:01 for Rs 450 per share and Mr. B places a sell
order for 500 share of Tisco at 11:22:05 for 455 per share.
Assume that no other order were available in the system .
Mr. B sold extra 1000 share and he have no delivery .Auction Takes Place on T+ 3 days
Close Out on T+ 5 Days
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FOR CLIENTS :What are the STOCK MARKETS for
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Achieving financial goals
Speculation
( Perception of easy money)
Excitement !!!
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NUMBER of PEOPLE INVESTING in theSTOCK MARKET?
NUMBER of DP ACCOUNTS in INDIA?
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CLIENTS
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Client Profiling
Profiling is required to assess level of risk
tolerance
To categorise client in three categories
Investor
Investor & trader
Trader
Leads to higher productivity
Long term relationship with the client
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An Example
Rakesh purchased 1000 shares of Satyam@ 475 per share for long term and at thesame time 1000 shares of satyam are
bought by Rajiv @ 475 per share andsold it next week @ Rs 490 and bookedthe profit of Rs.15000
Rakesh is an investor while is Rajiv aTrader
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Investors Vs Traders
Investor For Long Term
FollowsFundamentals
Stays invested as
long as theme iscontinuing
Trader For short term
Follows Technical
Trades with Stop
Loss and PriceTarget
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Type ofClients
Net-worthRs
Potential
By 2010
Channel Brokerage
Rs. p.m.
PCG PCG > 5 crs
> 4 crs
0.50 LACS PCG, EB 1,00,000 +
MN+
U-HNI 3-5/4 crs 1.50 LACS BR, EB 50,000+
HNI 1-3 crs 10 LACS BR, EB 20,000+
MNI 10 / 25lacs- 1 crs
25 LACS BR, FR, EB 6000+
Retail Retail < 25 lacs
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KNOW YOUR CLIENT
Primary
Interest
Day-Trader
PositionalTrader
Investor
Occupation Business Self Emp Salaried
Risk
App-cap
High Medium Low
Net-worth HNI MNI Retail
Participate-ion
SelfDirected
Validator Delegator
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CLIENT / PRODUCT / CHANNEL
CHANNEL
TYPE
INVESTOR
TYPE
HNI MNI SmallInvestor
PREMIUM Delegator PMS-MF PMS-MF MF
Validator Broking:EQ & CX
Broking: EQ& CX
Broking:EQ & CX
DISCOUNT Self-directed
Internet
EQ & CX
Internet
EQ & CX
Internet
EQ & CX
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Allocations
ASSET ALLOCATION
STYLE ALLOCATION
SECTOR ALLOCATION
SCRIP ALLOCATION
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DIFFERENT ANALYSIS USED in STOCKS
BEFORE TAKING a POSITION
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A. Fundamental Analysis
B. Technical Analysis
&
Information
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HOW FUNDAMENTAL ANALYSIS isDIFFERENT from
TECHNICAL ANALYSIS
P d t G id
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Product GridInvestors are advised by dedicated relationship managers through various
advisory products
Market Analysis Technical Analysis Fundamental
Research
Thematic Research
Regular Inquire Company &
Sector reports
Yearly Wealth Creation
report
Budget CoverageQuarterly
Results Preview
IndiaStrategy
Monthly MOSt MomentumMOSt
Value
MOSt
Mutual
Weekly Futures Weekly
Guide
Daily MOSt CommodityMorning Calls
Derivative Strategy
Market Dairy
Pivot Points
MOSt Market
Action
MOSt Morning
Research
Market
Hours Market Information &
Intraday Calls
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DO you know COMMONLY USED
TERMS in the STOCK MARKETS
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Bull market
Bear market
Large Cap Shares
Mid Cap Shares
Blue Chip Shares
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Market Capitalization or Market cap
Floating share x Market price per share
Earnings per share
Equity earnings / Number of Outstanding shares
Price to Earnings ratio (P/E)
Market price per share / Earnings per share
Return on Equity
Equity earnings / Networth
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WHAT is the ROLE of a BROKER ?
WHAT is BROKING BUSINESS?
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Why Broker ?
A stock broker sells or buys stock onbehalf of its clients
A transaction on a stock exchange must
be made between two members of theexchange
A typical person may not simply walk intothe Bombay Stock Exchange, and ask totrade stock. Such a transaction must bedone through a broker
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Transaction Network
Equity share trading is regulated through a exchange.The exchange takes care of smooth trading andtimely settlement of outstanding dues.
All these done through proper network. The exchangehave a network of Brokers ,Sub-brokers and a
clearing corporation. The brokers and sub brokers under takes the timely
delivery and settlement of funds and share. The clearing corporation undertakes the transaction
of brokers on behalf of the exchange.
Stock exchange ------ Brokers----------- buyer/seller(clear and settle) - (Execute orders)- (Purchase& sale of securities)
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WHAT is the REVENUE MODEL for a
TRADITIONAL STOCK BROKER ?
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Brokerage Firms And Brokerage
Revenue for a broker is charges andcommission, known as brokerage forexecuting buy/sell order submitted by theclients
Eg: If 1000 shares of Reliance @ 1200are bought by a client and thebrokerage charges are 0.50 %, thenthe brokerage income from thistransaction is (1000 x 1200 x0.50%)Rs 6000/-
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WHAT are the COST COMPONENT of
a CLIENT in a SHARE TRANSACTION
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Charges Income Source for
Brokerage Broker
Stamp Duty State Govt.
Transaction Charges Exchange
Contribution to InvestorProtection Fund
Exchange ( For Investors)
Service Tax Central Govt. ( On Brokerage)
Securities Transaction Tax (STT) Central Govt.
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TRADING DELIVERY F&O
Non-
Brokerage
0.006% 0.014% 0.0041%
STT 0.025% 0.125% 0.017%(only SELL)
Service Tax 12.24% 12.24% 12.24%
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Different Types of Brokerages Cash Market
Intraday (0.01%-0.10%)
Delivery (0.10%-0.50%) Derivatives Market
Intraday (0.01%-0.10%)Carry Forward ( )
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Cash Market-Intraday
The client wants to earn the pricedifferential in the same day. i.e. Theposition is entered and squared off in thesame trading session
The Brokerage rates are typically lower insuch kind of transaction, since there is noshare settlement
There is also a concept of single side anddouble side brokerage varies fromregion to region
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Benefit For Brokers
Intra day example
1000 share of Reliance bought @ 1100 and sold @ 1150on the same day, brokerage rate is 0.05% both sides
Revenue is (1000 x 1100 x 0.05%) Rs 550 one sided and(1000 x 1150 x 0.05%) Rs 575 = Rs 1125
1000 share of Reliance bought @ 1100 and sold @ 1150on the same day, brokerage rate is 0.07% one side
Revenue is (1000 x 1100 x 0.07%) Rs. 770
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Cost Pay by the client
Revenue is (1000 x 1100 x 0.05%) Rs 550 one sided and(1000 x 1150 x 0.05%) Rs 575 = Rs 1125.Charged on
Total turnover.
Services tax is 12.24% charged on total brokerage
=67.32Transaction charge 0.004 %Charged on total turnover=
44.
STT is 0.025% charged on total turnover = 275
Stamp duty is 0.0024% charged on total turnover = 26.4
Total Cost of Purchase = 1100962.72
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Cash Market-Delivery
The client purchases or sells in a single
trading session which results in actual
delivery of stocks
The Brokerage rates are higher in suchkind of transaction, since there is share
settlement
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Delivery Example
If 1000 shares of Reliance @ 1200 are bought by aclient and the brokerage charges are 0.50 %, then thebrokerage income from this transaction is (1000 x1200 x0.50%) Rs 6000/-
If 1000 shares of Reliance @ 1200 are bought by aclient and the brokerage charges are 0.20 %, then thebrokerage income from this transaction is (1000 x1200 x0.20%) Rs 2400/-
Brokerage income has come down significantly
because of pricing Therefore negotiating correct pricing is one of the
most important part of converting broking accounts
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Derivatives Intraday
The client wants to earn the price differential inthe same day. i.e. The position is entered andsquared off in the same trading session
The Brokerage rates are typically lower in such
kind of transaction, since there is minimum valueof Rs 200 000 per transaction Brokerage rates vary between 0.01% to 0.10%
on the value of transactions
There is also a concept of single side anddouble side brokerage varies from region toregion
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Intraday Example
A client enters into a contract to buy one lot ofReliance March Futures(150 shares lot) @ 1250
brokerage 0.03% and sells @ 1280 brokerage
0.03%
Revenue is (150 x 1250 x 0.03%) Rs 57 and
( 150 x 1280 x 0.03%) Rs 58 so, total is Rs 115
Similarly if the selling is done on the next day
with the same brokerage rate then also therevenue will remain the same
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Derivatives-Carry Forward
The position is entered and squared off in
different trading session
The Brokerage rates are typically very
much similar to intraday brokerage rates,since in F&O exchanges have not yet
started settlement by stock deliveries
Brokerage rates vary between 0.01% to0.10% on the value of transactions
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WHY BROKING is a GREAT BUSINESS?
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In the developed markets at least one brokingfirm is among the top 10 in terms of marketcapitalization
If the market are bullish the broking firms tend to
make super normal profits You are aware that bonuses at times exceed the
whole years CTC in broking firms
This is where a great opportunity lies to make arewarding and profitable career, if you are ableto properly get a hang of direct equities business
B i Ri k
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Business Risk
Fortunes of a broking firm are cyclical in
nature
If the market are bearish for a vary long
time profits are substantially squeezed
Direct Vs Indirect
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Direct Vs Indirect
Investing
Broking Mutual Fund
Revenue ScopeRs 10 00 000 x 2 timesdelivery per month x 12
months x 0.30 % deliverybrokerage = Rs 72000
Revenue ScopeRs 10 00 000 x 2 timeschurning in a year x 2 % = Rs
40000
Risks are higher, since costs arehigher and holding period isvery less
Risks are lower
A BROKARGE FIRM
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A BROKARGE FIRM
Two facets Front office and backoffice
Front office: Functions of the front office
include acquisition, Relation shipmanagement, Advise and entry of orders.
Back office: Clearance processing,
ensures payment and shares delivery
http://en.wikipedia.org/wiki/Front_officehttp://en.wikipedia.org/wiki/Back_officehttp://en.wikipedia.org/wiki/Back_officehttp://en.wikipedia.org/wiki/Front_office -
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WHAT is the DIFFERENCE BETWEEN
BROKERAGE FIRM and MOSt?
Th d t i
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The product is:
ADVICE
EQUITY Ad i
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EQUITY Advisory
Recommend Investment and Trading ideas to
their clients.
The Clients receive the research and the
business receives the revenue
Research Team
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Research Ideas
Strategy Desk
Idea Filtering
Advisors
Ideas according to Profile
Clients
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THANK YOU