CHAPTER 2

SECURITIES COMPANY

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 LEARNING OBJECTIVES

• Understand the concept, characteristics and role of securities

companies on stock market
• Understand the organizational model of securities companies
• Understand the basics of securities companies’ operations such as
brokerage, self-trading, underwriting and other support operations
• Understand the operation status of securities companies

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 CONTENTS

1. Overview of securities company

2. Basic operations of securities company

3. Evaluation of securities company operations

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 1. Overview of securities company
1.1. Definition and classification of securities company
1.2. Characteristics of securities company
1.3. Role of securities company

1.4. Operating principles of securities company

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 1.1. Definition and classification
of securities company
 Definition: Securities company is an intermediary financial
institution established under law, performing one and/or a
number of operations on the stock market.
 Classification:
By business
By possession
operations

General
Partnerships securities
company

Limited Specialized
Liability securities
Company company

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Joint Stock

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Company
 1.2. Characteristics of securities company
 An intermediary on the stock market in:
+ Trading
+ Payment
+ Providing information
+ Capital between buyer and seller
 A conditioned business organization with:
+ Capital
+ Human resources
+ Physical facilities
+ Subject to strict control from management agency
 Conflict of interest between securities company and customers
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 1.3. Role of securities company
- For issuers:
+ Create a mechanism to raise capital for issuers (through underwriting operation)
- For investors:
+ Reduce costs, risks and transaction time (through brokerage operation)
+ Improve investment efficiency (through securities investment consultancy)
- For the stock market:
+ Contribute to price creation, market regulation
+ Contribute to increasing the liquidity of financial assets
- For market management agencies:
+ Help market management agencies manage and supervise activities in the
market effectively
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1.4. Operating principles of securities company

 Financial principles
 Principles of professional ethics

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 2. Basic operations of securities company
2.1. Securities brokerage

2.2. Securities Self-trading

2.3. Underwriting securities

2.4. Securities investment consultancy

2.5. Other operations

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 2.1. Securities brokerage
 Definition: create a connection between those who need to buy
and those who need to sell securities.

 A stockbroker’s skills:
- Communication skills

- Customer searching skills

- Information mining skills

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 2.2. Securities self-trading
• Definition: Securities companies engage in securities trading
using their own capital to reap benefits, while simultaneously
accepting the risks associated with such operations.
• In Stock Exchange: buy/sell orders of securities companies are
entered into system and executed similarly to buy/sell orders of
other investors.
• On OTC market: Securities companies will conduct direct
securities trading with counterparts through negotiation and via a
networked computer system.
• The objective of securities self-trading operation is to generate
profit for the company through buying and selling securities with
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customers.
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 2.2. Securities self-trading
 Requirements for self-trading operation:
1. Must be managed seperately
2. Priority execution of customers’ orders before securities company
orders
3. Stabilizing market prices
4. Creating a market for newly issued securities

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 2.3. Underwriting securities
• Definition: Securities companies will assist issuers in completing
procedures before offering securities for sale, organize the distribution
of securities, and help stabilize prices in the initial period after
issuance.

• Types of underwrting:
- Firm commitment underwrting
- Best efforts underwrting
- All or none underwrting
- Mini– Maxi underwrting
- Standby underwrting 13

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 2.4. Securities investment consultancy
 Securities companies through analytical activities, give advices to
help investors buy and sell securities successfully.
 Form of consultancy:
+ Direct

+ Indirect

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 2.4. Securities investment consultancy
 Basic principles of consulting operations:
1. Never guarantee securities value.
2. Always remind customers that your advices are based on analysis.
3. Do not exaggerate about the market, seduce, solicit.
4. Do not induce customers to buy/sell securities that your company
wants to sell/buy.
5. Advices must be based on objective grounds.
6. Customer information must be kept confidential.
7. Consulting operations must be completely separate from self-trading
operations of securities company.

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 2.5. Other operations

* Financial consultancy:
+ Consulting on business restructuring, merging, acquisition
+ Consulting on business management, strategy
+ Consulting on securities offerings and listings
+ Consulting on business equitization, business valuation
+ Consulting on financial analysis of business
* Securities depository
* Exercising ownership rights on behalf of customers
* Credit operations:
+ Advance payment for selling securities
+ Margin
+ Securities collateralization
+ Repo
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 2.5. Other operations

• Financial consultancy:
+ Consulting on business restructuring, merging, acquisition
+ Consulting on business management, strategy
+ Consulting on securities offerings anf listings
+ Consulting on business equitization, busines valuation
+ Consulting on financial analysis of business
* Securities depository
* Exercising ownership rights on behalf of customers
* Credit operations:
+ Advance payment for selling securities
+ Margin
+ Securities collateralization
+ Repo
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 3. Evaluation of securities company operations
3.1. Evaluation of financial security

3.2. Evaluation of profitability

3.3. Evaluation of liquidity

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 3.1. Evaluation of financial security
• Adequacy of capital:
- Equity to Total assets ratio
- Equity to Legal capital
- Liquid capital ratio = Liquis capital * 100 / Total risk value
• Chất lượng tài sản:
- Risk-adjusted assets to Total assets (excluding fixed assets) ratio
- Ratio of Provision/(Short-term investment + Long-term investment
+ Receivables)
- Receivables to Total assets ratio

Note: Assets after risk adjustment are Total assets (excluding fixed
assets) – the total value of potential risks in asset categories

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 3.2. Evaluation of profitability

- Profit after taxes to Total revenue ratio

- Profit after taxes to Equity ratio

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 3.3. Evaluation of liquidity
- Current assets to Current liabilities ratio
- Cash and cash equivalents to Current liabilities ratio

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 SUMMARY

• Definition and classification of securities company

• Characteristics of securities company
• Role of securities company
• Basic operations of securities company

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