Jamaican stockbrokerage versus money-market company - What's the difference in services?

- Iyengar

PFA: A money-market broking company deals primarily in short-term interest-earning securities. A stockbroking company deals primarily in ordinary stocks and a wide range of interest-bearing securities.

Both types of companies, being dealers in securities, must be licensed by the Financial Services Commission.

Stockbrokerages, as dealers in stock listed on the Jamaica Stock Exchange, are also broker-members of the JSE. They also trade in unquoted stocks - that is, those not listed on the JSE - but that is generally a very small part of their business.

JMMB Securities Limited, a subsidiary of money-market company JMMB, is a broker-member of the JSE.

Most of the 11 stockbroking companies in Jamaica offer a wide range of financial products and services through the units established within them to offer these specialised products and services. These are outside of their regular stockbroking activities but they create other streams of income for the brokerages and allow them to be more responsive to the needs of their clients.

It is not unusual, therefore, for stockbrokerages to offer foreign exchange trading, portfolio management, pension-fund management services, and retirement products. They also sell unit trust and mutual fund products.

But there are other stockbrokerages that are companies within wider financial groups whose products and services complement those offered by the rest of the group. By and large, they do not appear to be different from the other type mentioned above in what they do and how they operate.

acting as middlemen

Stockbroking companies sometimes trade on their own account, or as principals, in which case they sell securities they own to their clients or buy securities from their clients. They do more business as agents, though, by acting as middlemen between buyers and sellers and are paid a commission by the client for facilitating the transaction if the security traded is ordinary stock.

If, however, the security is a bond, they sell to the client at a price higher than the price they bought it for. In the case of very short-term securities, the buying price and selling price are the same but the companies offer a lower rate of interest to the client than the rate of interest that they earn on the instrument.

There is no guarantee that the order of a client will be executed. This depends on whether there is buying or selling interest at the client's price and in the desired quantities. But an order may be executed almost immediately or with some delay, depending on the market. The overall objective of the stockbroker is to ensure that the client gets the best deal in every transaction.

The only money-market brokerage company operating in Jamaica offers a savings instrument that offers clients easy access to a portfolio of interest-earning securities that it buys for its own account but from which it sells securities to its clients.

No rate is negotiated by the client and the savings facility has no maturity date and money may be withdrawn with little or no notice. At that time, the broker buys back the securities from the client. This arrangement gives a level of liquidity that is uncommon.

more returns than savings

The returns are generally superior to what is earned on other savings instruments due to the funds being invested in a variety of high-yielding and relatively safe instruments.

The return to the saver is shown on the statement that is issued periodically and is less than the return that is earned by the money-market brokerage company on the underlying securities.

The company also offers other money-market products but has, over the years, become a highly diversified financial services provider. Its offerings now include foreign-exchange trading, pension and retirement planning, insurance and stockbroking through one of its subsidiaries.

There are other financial services companies that offer many of the services and products offered by these companies. I am not aware that any has duplicated the savings facility of the money-market brokerage company and, although some may include equities in the portfolios created and managed for their clients, they cannot trade on the Jamaica Stock Exchange but must use broker members to buy and sell ordinary stock for them.

A stockbroking company and a money-market brokerage company are not the same but they have so expanded their services and products that the lines between them are becoming quite blurred.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning.Email: finviser.jm@gmail.com