Why Some Brokerage Promoters Don't Trade in Equities and Derivatives? | CORPORATE ETHOS

Why Some Brokerage Promoters Don’t Trade in Equities and Derivatives?

By: | October 26, 2017
Stock Broker

It may come as a surprise to most of you that promoters of stock brokerages do not trade in equities or commodities.  Some of them have openly revealed it including Mr C J George, Managing Director of Geojit Financial Services.  The Hindu wrote about Mr George four years ago, “He is neither a bull nor a bear in the stock market. In fact, he does not invest in stocks.” For such businessmen their only equity investment is in their own company.

It may sound ironic that entrepreneurs who provide a platform for investors to trade in equities, commodities and derivatives do not trade at all. Is it akin to the promoter of KFC not eating any food from their outlets? Or is it like IndiGo promoters not flying at all in any of their flights?

Alex K Babu, Managing Director of Hedge Equities Ltd, finds nothing wrong in promoters shying away from trading in equities. He feels it is an individual choice and decision. Actually, there is no harm in investing but they shouldn’t be doing trade on a daily basis. That requires a different mindset and attitude, according to Alex Babu.

There are a couple of issues involved when promoters don’t trade in equities or other asset classes. It may give a feeling that the promoters are only interested in the business and not to prove that trading is beneficial for investors. When they go for social gatherings, quite naturally many people may ask an opinion about a particular stock or industry. If they don’t actually trade, they can’t give an opinion about it and they could cut a sorry figure! A few broker promoters have told me about it.

The second major disadvantage is with respect to understanding the systems and processes. Unless, a brokerage promoter opens a trading and demat account and trade, how can they understand the problems or issues faced by their customers.?

Promoters should be able to understand the complexities of trade and some discrepancy much before the customers realise it.

Thirdly, if a promoter trades and makes profit that itself is sufficient for the investors to gain confidence in the markets and there is no reason to believe that promoters of brokerages have any access to insider information that may be attributed to their profits from trading.

However, there may be one or two important reason for brokers not to trade- to observe in a detached manner the functioning of the market and make necessary changes or interventions. And secondly, they want to devote more time their business and can’t possibly learn the nitty- gritty of trading.

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