The functions of jobbers and brokers before the BB
The membership of the LSE (London Stock Exchange) before BB (adopted 27 in 1986) was split into two groups, brokers and jobbers, each with sharply distinct functions. Broker is a person who buys and sells shares or currency. Main tasks of brokers were to execute orders for clients, manage portfolios of securities, sell investment advice etc. Brokers were not permitted to deal with each other but were permitted to deal with jobbers. Brokers charged a commission on all deals they executed, set by the LSE. Jobber is a person, who buys and sells shares from other traders on SE. Main task of jobbers was to buy and sell securities on their own account. Jobbers were not permitted to deal with securities directly with the general public.
The advantages of single capacity system (conflicts of interest)
The main advantages of single capacity system were: ensuring competitive market in securities and ensuring that investors would not be subject to the conflicts of interest. Under single capacity system, the broker had no reason for wanting to do anything but obtain the best deal for the client. And dual capacity system leads to the conflicts of interest since it is difficult to ensure that the client received the best prices and advice about which securities to buy and sell because brokering firm also holds securities on its own account.
“Big Bang” refers to the major changes in the operations of the London Stock exchange that came into effect on 27 October 1986. These reforms consist of three elements.
The system of minimum commissions on London Stock Exchange transactions was ended. After BB brokers were free to charge whatever commission they wish.
The “single capacity” system was ended. The distinction between brokers and jobbers was abolished: brokers could now buy and sell securities on their own account and jobbers could deal directly with clients.
The gilt-edged securities market which had been very uncompetitive part of the capital market was freed up to allow greater competition. After BB 27 institutions were granted licences by the Bank of England to operate as primary dealers in gilt-edged securities.
People who own stocks and bonds are referred to as investors or respectively stockholders and bondholders. If you own a stock - you are part owner of the corporation and as a proof of it you may ask for a certificate with your name and the number of shares you hold. A bond represents a promise by a company or government to pay back a loan plus a certain amount of interest over a defined period of time.
Broadly speaking there are two classes of investors, those who buy shares because they are seeking income in the form of dividends and those who buy shares because they hope to make a capital gain from the resale of the shares. The latter group is known as speculators and they usually described as bulls and bears. Speculators who buy in the expectation that share prices are about to rise are known as bulls. The bear sells shares that he does not possess because he expects prices to fall before the account is settled.
Government stocks in Britain are known as gilt-edged securities (gilts) because they are such a safe form of investments. The interest received on gilts is called the coupon. Gilts fall into three groups depending on the date of maturity:
- Shorts (gilts to be redeemed in 7 years or less)
- Mediums (gilts to be redeemed in f period of 7 to 15 years)
- Longs (gilts to be redeemed in more than 15 years)
Types of gilts:
Index-linked gilts, where coupon and the amount at which the gilts are redeemed is linked to inflation.
Floating rate gilts. The coupon paid on these gilts varies depending on market conditions.
Convertible gilts. On the maturity date, the holder can decide whether he wants to have the gilt redeemed or to exchange it for a new gilt.
Local authority bonds or municipal bonds are similar to gilt-edged except that they are issued by Local Authorities, Public Boards, and Overseas Governments. Municipal bonds may be general obligations of the issuer or secured by specified revenues.
Another way of earning money on the stock exchange is by making loans to larger companies or to the government in the form of fixed-interest securities. Loans made to joint-stock companies in this way are called debentures. Debenture holders do not share the member’s risk. They receive a regular income from their investment and take precedence over the shareholders if the company is liquidated –debentures holders are paid before shareholders.
Most debentures are: secured, registered and redeemable.
Secured debentures (or mortgage debentures). If a company cannot repay the loans or pay interest the holders of secured debentures are automatically entitled to payment from the company’s assets.
Unsecured debentures (or naked debentures). Holders of unsecured debentures are not automatically repaid from the company’s assets if the company is unable to pay in the usual way. Unsecured debentures is basically no more than a promise to a repay a loan/
Registered debentures. The holders of registered debentures are listed in a company register. These debentures can only be transferred in accordance with certain terms and conditions and every transfer must likewise be entered into the register. The company can refuse the transfer, in which case the person to whom the debenture was to be transferred can appeal against the decision.
Bearer debenture. It is an unregistered debenture which can be negotiated by just handing it over to the new holder.
Redeemable debentures. They are repaid on a fixed date, often at a higher price than the issue price, that means some extra money for holder.
Irredeemable debentures. The loan is repaid when the company liquidated.
Convertible debentures. They can be exchanged for ordinary shares.