Key roles played by Finance professionals in capital markets

KEY FINANCE PROFESSIONALS ROLES IN CAPITAL MARKET

Over the last few years, my interest in the capital markets has grown because of all the media coverage in the electronic and print media. Capital markets, which were once considered to be accessible only to the wealthy, have now turned into the vehicle of choice for the aspiring wealthy. Hence, there is going to be a growing need for finance professionals to guide those who are interested in investing in capital markets.  When I spoke with some of my classmates and friends pursuing professional courses like CA & CMA, none of them even considered the possibility of seeking out career opportunities outside of accounting and auditing.  I was quite surprised and felt bad as they were confining themselves to the careers of accounting and auditing when they have very interesting and fast growing career opportunities in risk management, capital markets and management consultancy. 

To start with, finance professionals are professionally qualified people with qualifications like ACCA, CPA, CIMA, CA, CMA, CFA, CAIA, and CFP. These courses make a person proficient in corporate and personal finance, risk management, financial markets, accounting and auditing. Finance is an essential component of any business or organization, and hence finance professionals are continuously in high demand.

It would be nice to begin the topic by reviewing our understanding on capital markets. Capital markets are a part of financial system that serves as an engine of growth for modern economies. It is a market where buyers and sellers are engaged in trading of shares, bonds, and other long term investments. It is broadly classified into primary market and secondary market. Primary market deals with issue of new stocks or bonds to investors, often via mechanism known as underwriting. In the Secondary market, existing securities are sold and bought among investors and traders, usually on exchange over the counter, or elsewhere. Primary markets sell the securities initially, and secondary markets allow investors to buy, sell and trade securities among themselves. Most capital market transactions take place on the secondary market.

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The table above shows how size of the secondary market compares to size of primary market for government bonds. As per the statistics provided by the RBI, primary market transactions are only 15% when compared to secondary market transaction.                                                                                                                                       

Capital markets can also be classified into Stock markets (for equity, where investors acquire ownership of companies) and the Bond markets (where investors become creditors).

KEY ROLES PLAYED BY FINANCE PROFESSIONALS IN CAPITAL MARKETS

Various participants in capital markets include large stock exchanges, brokers, sub-brokers, investors, governments and depositories.  But since this article is about roles played by finance professionals I want to suggest major roles within the capital markets for which most finance professionals have the necessary knowledge to pursue and become successful.  For those of my friends who are not interested to read any further let me remind you that since every professional has the chance to be be an active investor in the stock markets, it might not be a complete waste of your time to read on to understand the most popular roles in the capital markets, since the following professionals will help your future savings and investment plans.

1. Capital market trader
2. Capital market broker
3. Personal Investment advisor
4. Portfolio manager
5. Hedge fund manager
6. Arbitrageur
7. Investment Banker.                                                                                        

CAPITAL MARKET TRADER

A  Capital market trader  is a person involved in trading in equity securities or bonds. He purchases stocks or bonds using his own investment or borrowed funds and tries to make gains by way of dividends or capital appreciation or both. Some traders purely focus on equity securities, while others speculate in derivatives (securities with price that is dependent on underlying assets) like future contracts, forward contracts, options, swaps etc. Trader also acts as a financial analyst and invests people’s money in securities by working for brokerage houses or investment companies. Common duties of capital market traders include communicating with  brokers, placing buy and sell orders, completing required paperwork etc. Top stock & bond trading companies are Barclays PLC, JP Morgan, Citigroup and Goldman Sachs.  

CAPITAL MARKET BROKER

Capital market broker is an individual who facilitates the completion of a transaction (buy or sell) for an agreed percentage of brokerage or commission. The broker acts like a catalyst in a chemical reaction. A broker may spend his day calling prospective clients and cultivating a relationship with other industry professionals. Brokers execute trades either by phone, physical trading floor or even electronically. These financial agents work in stressful, fast paced environment and have to stay up to date with latest tax laws, market research about securities in order to provide clients with best possible return.

PERSONAL INVESTMENT ADVISOR

A personal investment advisor is one who helps individuals and corporations meet their long term financial objective by advising them a right security to invest for a commission or fee. The main job of an investment advisor centers around analyzing information and preparing plans best suited to individual client’s requirements. He/she has to educate and assist his clients on various ways of accomplishing client’s financial objective. Investment advisors advise the people, who are willing to invest in capital markets but are unaware about the way to invest smartly.

PORTFOLIO MANAGER

A portfolio manager is either a person who manages a group of assets, the portfolio, for individuals or institutions, which may include stocks, bonds and other assets or who makes investment decisions using others’ money placed under his control.  Portfolio manager may also be a fund manager where such fund is considered as group of assets .  Portfolio manager has to make decisions about investment mix and policy, matching investments to objectives, balancing and minimizing risk etc.  A portfolio manager after gaining a good experience in alternative investments may become hedge fund manager.  Hedge funds are like any other funds except that the assets being traded are not confined to traditional asset classes like stocks and bonds.  A Portfolio manager’s performance can be easily measured on the basis of the alpha(return) he/she makes. Top Portfolio management companies are Blackrock (US) , JP Morgan , Deutsche Asset Management etc.The average income received by a Portfolio manager  is about US$100-250k(60-150 lakhs INR).

HEDGE FUND MANAGER

Hedge fund manager is an individual who oversees and makes decisions about the investments in a hedge fund.  Hedge literally means to make an investment to reduce the risk of adverse price movements and hedge funds are various alternative investments made using pooled funds in order to earn active return or alpha (actual return-CAPM return).  It refers to investing in two markets with equal and opposite positions so that correlation between two securities will be minimum i.e. even if one security didn’t give return up to the expectation, the other one will compensate such deficit. It also involves investing in high yield financial instruments (real estate, bonds or precious metals).  Hedge fund managers are compensated heavily since the decisions they make can usually determine the outcome of the fund they are managing. Their decision making and judgement is heavily scrutinized with respect to benchmark performance and most top level hedge fund managers have performed very well with respect to the market.  Top hedge fund firms are Bridgewater associates, JP Morgan, Black Rock etc.  The average income earned by a hedge fund manager is around 1million US$(6 crores INR) including their salary and commission as a percentage of return made by them.                                    

ARBITRAGEUR

An individual who does arbitrage is known as an arbitrageur. Arbitrage is a process of buying those securities which are underpriced in  market and selling those securities in another  market where these are overpriced. Thus an arbitrageur encashes the market fluctuations and makes risk free gains. Anything in the world is easier said than done.  In the same way, it is not so easy for an arbitrageur to identify which shares are underpriced or overpriced.  Arbitrageur may be stock trader or an investor or anybody with knowledge about any kind of market imperfection. Arbitrage activities also include  placing simultaneous buy and sell deals of the same security at different prices and gaining straight away from the difference. Hedge fund managers, portfolio managers, stock market brokers also do arbitrage during their course of activity.                                                                                

INVESTMENT BANKER

An Investment banker is the one who facilitates the banks or financial institutions or companies in raising funds through equity or debt.  Investment bankers raise capital and underwrite securities and bonds, including IPOs. Generally portfolio manager and investment bankers are referred to interchangeably.  But the basic difference between them is an investment banker facilitates a company to sell its stocks and bonds and other securities, where as a portfolio manager manages a group of assets, the portfolio. Underwriting of stocks or bonds is one of the key function done by investment bankers.  Top investment banking companies are Goldman Sachs, JPMorgan, Bank of America Merrill Lynch, Barclays capital, BNP Paribas.  The average earnings made by an investment banker is about  US$80k(48 lakhs INR).     

Capital market professionals work in a very challenging and fast-paced environment.  Since the markets are constantly changing and evolving due to technological innovation there is a great onus to continue to learn the latest and greatest.  Hence, it is common to acquire professional certifications like the prestigious CFA, CFP, CAIA  to improve their career advancement opportunities.  Apart from the above said career opportunities, finance professionals have many other roles to play like Strategist,Consultant,Research analyst and Risk manager. According to statistics issued by CFA Institute, CFA professionals,who a good representation of capital market roles, are most likely to pursue the following careers (manager,entrepreneur and Chief executive roles have been excluded from the original data).

Source: CFA Website

Hence there is a need for the other professionals to enter the fields of capital markets rather than being typical auditors or management accountants so as explore the career avenues in capital markets.  Finally, I would conclude that capital markets are growing rapidly and are serving as employment base for a greater proportion of Finance professionals and each and every one of us have to grab this fruitful opportunity in one way or another.    

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