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The Meaning of Profitability Model for a Securities Company

Until now, a precise and uniform definition of the profitability model of a securities company has not existed. However, the profitability model can be described in two dimensions, as follows:

1. The profit structure of the securities company

2. The profit methods of the securities company's business

Profit Structure of the Securities Company

The profit structure of a business refers to the components of total profit, each with its unique derivation and nature. It also refers to the percentage in the total profit, as manifested in the types of business (products/projects) that contribute to the profit of the business and their respective effects on the profit. Qualitatively speaking, it is reflected by the profit-making projects that account for the profit and the effect of each profit-making project on the enterprise's ability to make a profit. The profit structure of a business is the manifestation of its business structure. The projects are the cause and the results are the effect. The business structure of an enterprise has been a long-standing topic in corporate strategy theories. From related diversification to unrelated diversification, from vertical integration to horizontal integration, from diversified expansion to returning to the core business, extensive and in-depth studies have been carried out by scholars. Practical business structure models, such as the GE Matrix and the BCG Matrix, have played a major guiding role in the operation practice of a business.

Currently in Chinese securities companies, the business structure mainly consists of the brokerage business, underwriting business, proprietary business, and asset management business. Of these, the brokerage business is dominated by the sale of securities, which accounts for 50 percent of total revenue. The investment banking business focuses on stock financing, which accounts for 10 percent of total revenue. The proprietary business is closely related to the secondary market, marked by relatively large fluctuations. The asset management business is slow-developing and accounts for a relatively small percentage. The basic rationale for such a combination of these business types is the stock generation services, trading services, and investment services.

Profit Methods of the Securities Company

The second dimension relates to analyzing the profit method of each business type of a securities company. The profit method of each type of business is essentially synonymous with its business model. The profit model is the core of the business model. In recent years, business models have become a hot topic in corporate strategy theories, and various definitions have been proposed.[1] In layman's terms, the business model answers such questions as "What kind of value does the enterprise provide for its clients?" and "By what means does it gain profit (make money)?" The profit model or business model of the various business types of a securities company is simple and clear-cut: Gain revenues by providing financial services for different types of clients.

  • [1] Peterovic, Kittl, and Teksten (2001); Linder and Cantrell (2000); Weiwei (2003, 77-84).
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