Question

4. What are the key areas of activity for securities firms? Describe the difference between brokerage services and underwriting services.

Answer 1

KEY AREAS OF ACTIVITIES FOR SECURITIES FIRMS

Securities firms specialize primarily in the purchase ,sale, and brokerage of securities.These firms act as a financial intermediaries in that they bring together economic units who need money with those units who wish to invest money.

Major activity areas of security firms are:

1. INVESTING:

Securities firms act as a agent for person who want to invest by establishing and managing mutual funds and by managing pension funds. Thus securities firms help people to invest their extra fund and earn money.

1. INVESTMENT BANKING:

Investment banks specialize in underwriting and distributing both debt and equity issues in the corporate market. In public offerings, the firms act as a agent and receives a fee based on the success of the offerings. The firm act as a underwriter and receive commission

1. MARKET MAKING:

Security firms assist in the market-making function by acting as brokers to assist customers in the purchase or sale of an asset. In this capacity the firms are providing agency transaction for a fee.

1. TRADING:

Trading activities are conducted on behalf of customer. The activities usually involve position trading, pure arbitrage, risk arbitrage, and program trading. Trading is purchase and sale of stock, securities in order to earn money by difference in price.

1. CASH MANAGEMENT:

Cash management accounts are checking accounts that earn interest. The accounts have been beneficial in providing full-service financial products to customers, especially at the retail level.

1. MERGER AND ACQUISTION :

Most firm advice to corporate clients about merger and acquisition .Earn fee for advice given. Corporate clients also get the advantage of synergy and other benefit due to merger.

1. BACK-OFFICE SERVICE FUNCTIONS:

Security firms offer clearing and settlement services, research and information services, and other brokerage services on a fee basis.

DIFFERENCE BETWEEN BROKERAGE SERVICE AND UNDERWRITING SERVICES

Underwriting services:

Most important aspect of the securities business is the selling of new securities issues to large institutional and retail investors

In its function as underwriter, a firm owns the new security issue as part of its inventory, thereby taking risk.

The underwriting firms receives a profit from the difference between the buying and selling prices

The underwriting firm uses all its expertise for trading in secondary market

The underwriters do principal trading.

Brokerage service:

In its function as broker, firm never own new security issue as part of its inventory, the broker act as a agent on behalf of buyer and seller

In exchange for facilitating or executing a trade, brokers charge their clients a commission

Brokers do agency trading by acting as agent.