Useful tips for stock market investors

It is believed that investing in knowledge is the best investment. Similarly, if an investor is knowledgeable, he will be able to maximize his returns in the stock market. Therefore, today’s article will focus on pivotal factors investors should bear in mind when investing. 

• An employee of a stockbroker firm shall trade only through the stockbroker firm, who has employed him/her.

Your investment advisor is able to invest in the stock market only through the stockbroker firm he works. Further on, the employees of the stockbroker firm should not trade in securities which are in the ‘Restricted Securities List’. A Restricted Securities List would comprise a list of securities the stockbroker firm possesses material nonpublic information. Such steps will avoid conflict of interest and strengthen the professional relationship between the stockbroker firm and investor.  

• A stockbroker firm should take all possible steps to establish the true and full identity of each of its clients and of each client’s financial situation, investment experience and investment objectives.

An investment advisor is expected to assist investors in financial decision-making. It requires a clear picture of the investors’ expectations and financial situation. Thus, when your advisor poses questions pertaining to your finances that at times may sound personal, investors should provide genuine answers. If not, you might create a false image in the mind of your advisor that would be reflected as unsuitable advice. 

• Investors should open a client account with a stockbroker firm.

An investor should open a client account with the preferred stockbroker firm before investing in the stock market. It will obtain particulars on the client including the full name, a copy of the identity card/passport, specimen signature, residential and correspondence addresses, telephone numbers, occupation and the name, address and telephone number of the client’s employer/business.

• Stockbroker firms should explain to the investor the risk involvement in the market.

Stockbroker firms should provide a client agreement to the client (investor) and draw the client’s specific attention to the risk involvement in the market. The client agreement will entail a written ‘risk acknowledgement statement’ to the effect that the client is aware of the risk associated with trading of securities. The statement should be duly read and signed by 
the investor.

• A stockbroker firm may maintain complete and accurate records.

Records of confirmation notes on trades (bought notes/sold notes), books, accounts and other documents which are sufficient to explain readily at any time all transactions in date order relating to a particular client should be maintained. It could be maintained either in hard copy or electronic form. A stockbroker firm is also expected to ensure integrity, security and confidentiality in the transmission and storage of all records.

• The stockbroker firm should send to the client a note confirming the purchase or sale of securities by the end of the trade day (T). 

These client notes are commonly referred to as bought/sold notes. It is a statement sent by the stockbroker firm when securities are bought or sold from your account. The statements are generated on the day the transaction is done and posted/emailed on the same day. The document entails useful information (e.g. the name of security that is bought /sold, price the transaction was made, quantity, relevant fees, brokerage, net amount, settlement day, etc.). These documents keep you updated on the purchases and sales made from your account. The documents are even more important if you have signed a discretionary account.

• A stockbroker firm should maintain complete confidentiality of client information.

A stockbroker firm is expected to maintain complete confidentiality of client information. Disclosure of client information is permitted only with the prior written consent of the client or if the disclosure is required under any applicable law or under the rules of the Colombo Stock Exchange (CSE)/Central Depositary System (CDS).

• A stockbroker firm shall send a statement of account to all clients who are debtors over trade day + 3 (T+3).

A stockbroker firm should send a statement of account to all clients who are debtors over trade day + 3 (T+3), on a monthly basis by the seventh day of the following month. This should apply to all debtors over T+3 who have had transactions during the month and the ‘interest charged on delayed payment should also be considered a transaction for this purpose. Such statements of accounts shall specify the transactions in the account including receipts and payments during the month under reference.

• The client becomes a debtor if he/she fails to make payment by the settlement date.

The client becomes a debtor if he/she fails to make the payment by 09:00 hours on the settlement date, which is T+3. If the investor becomes a debtor, the investor will be liable for all losses and damages sustained or incurred by the stockbroker firm that purchased the stock (buying stockbroker firm). The buying stockbroker firm may, at its absolute discretion, recover interest commencing from the day after the settlement date up to the date of 
final settlement.

• A stockbroker firm may charge a brokerage fee for services provided.

There are transaction costs investors incur when investing in the market; i.e. Brokerage fees, CSE fees, CDS fees, SEC cess and the share transaction levy. The brokerage fee is levied by the stockbroking firm for the services rendered. However, a stockbroker firm shall not share or rebate brokerage with a client.
-Transactions up to Rs.50 million – (Brokerage) - 0.640 percent
-Transactions over Rs.50 million – (Brokerage) - 0.200 percent (minimum brokerage (floor))

• In the event of experiencing irregularities when dealing with the stockbroker firm, investors should follow the stipulated procedure to lodge a complaint. 

If a client has a complaint against a stockbroker firm relating to a particular transaction/s, the complaint should be first referred by the client to the compliance officer of the stockbroker firm, in writing, within a period of three months from the date of the transaction/s. The compliance officer of the stockbroker firm is expected to promptly respond to such client complaints.
If the client is not satisfied with the decision taken by the stockbroker firm or the manner in which the complaint was dealt with by the stockbroker firm, the client may refer the complaint to the CSE .This decision will be conveyed to the client and/or stockbroker firm in dispute.  If a party is not satisfied with the decision, such party may appeal, within a period of 21 days from the date of the decision, to the Dispute Resolution Committee of the CSE for an adjudication of the decision. The decision of the Dispute Resolution Committee shall be referred to the board of directors of the CSE for ratification. The decision of the board of directors shall be conveyed to the relevant parties in dispute.

• The stockbroker firm should make the necessary arrangements to record the orders given by the client.

Stockbroker firms are expected to record the orders given by clients in order to minimize discrepancies on the execution of orders. They may use a telephone recording system with notice to the client or ensure that the order instructions are received from clients in writing. If a telephone recording system is used, order instructions including date and time of the order should be clearly recorded. 
The records should be maintained for at least six months. In the event of a complaint, it will be the responsibility of the stockbroker firm to provide sufficient proof that the stockbroker firm received order instructions from the client pertaining to the disputed transaction if it is revealed that the order instructions have not been recorded and maintained. If the stockbroker firm fails to do so, the stockbroker firm will be 
held liable.

• When providing advice to a client, a stockbroker firm and the employees of such a firm, who deal with clients, should act diligently and carefully.

Stockbroker firms and employees of such firms who deal with clients should disclose, to the best of its ability, all circumstances and risks that could reasonably be expected to affect a client’s decision. A stockbroker firm and the employees of such a firm, who deal with clients, shall not enter into a transaction which may conflict with a client’s interests, unless the client is informed of such conflicts of interest and consents to the transaction.

• A stockbroker firm and the employees of such a firm, who deal with clients, should not disclose a client’s order to a third party.

Stockbroker firms are expected to maintain utmost integrity. Thus, the stockbroker firm is expected to maintain confidentiality by refraining from sharing a client’s order to a third party.  However, an exception to the rule is seen when prior written consent of the client is obtained for the disclosure of the information or if the disclosure is required under any 
applicable law. 

• The stockbroker firm/investment advisor should execute transactions according to the instructions given by the client.

The role of an investment advisor is limited to providing advice. As mentioned above, it is up to the client (investor) to make the decision. However, a client may authorize the investment advisor to trade on his/her behalf. In such situations, the client should give prior written authorization by signing a discretionary account. 

• Stockbroker firms and employees should refrain from prohibited trading activities. 

Equity generates lucrative returns in the long run. Nevertheless, certain stockbroker firms/investment advisors together with investors tend to engage in prohibited trading practices with the objective of earning unusual returns within a short time period. Unauthorized forms of trading involve a higher degree of risk. Moreover, prohibited trading practices could distort markets and adversely affect an investor’s portfolio. Thus, it is important for investors to be aware of these forms of trading.
Unauthorized forms of trading: Executing a buy/sell transaction in a client account without the authority of the client, executing trades contrary to the instructions received from the client, execute its/their personal trades in the account of the client, using the client’s account for third party trading.
Market manipulation and creating a ‘false market’: Market manipulation is a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of a security.
Excessive trading (churning): A practice undertaken by stockbroker firms and employees of such firms to buy and sell transactions in a client account with the intention of generating commission for the stockbroker firm or themselves.
Insider dealing: The illegal practice of trading on the stock exchange to one’s own advantage through having access to confidential information.
Front running and use of non-public price sensitive information for trading: Front running is the unethical practice of a broker trading in his personal account based on advanced knowledge of pending orders from the brokerage firm or from clients, allowing him to profit from the knowledge.

• A stockbroker firm may appoint ‘agents’  

It is important to draw a clear difference between an investment advisor and an agent. The former is expected to inform you about the suitable investment opportunities and provide the necessary advice. On the other hand, the primary role of an agent is to introduce new clients to the stockbroker firm. Investors should be well versed on these differences when investing in the market. 

• Stockbroker firms can extend credit to its clients. 

Stockbroker firms provide an array of services to the clients. Accordingly, they may provide credit to purchase securities from the CSE, provided the total value of the credit does not exceed three times of the ‘adjusted net capital’ of the stockbroker firm. If extending credit, the stockbroker firm should enter into a written agreement with each client to whom credit is extended, which clearly sets out the terms and conditions entered into between the parties.
The credit extended to a client of the stockbroker firm should be secured by collateral obtained from such client, which will comprise of securities held in the client’s CDS account. The credit extended to a client should not exceed 50 percent of the market value of securities, which are pledged by the client to secure
 the credit.

• A stockbroker firm can force sell securities pledged on credit.

In the event the market value of the securities pledged by the client falls by 25 percent, the stockbroker firm can inform the client to meet the shortfall by the next market day. In the event the client fails to meet the shortfall on the next market day, the stockbroker firm can immediately sell the securities, which are pledged by the client.