Definition of Broker and how do I choose a broker?

What is a broker and how do I choose a broker?

In a vibrant market like India where there are hundreds of brokers to choose from, it is extremely  important for a trader to choose a broker wisely. 

What is the role of a stockbroker?

A stockbroker is an entity that services as the intermediary between the trader (client) and the stock exchange. The broker is registered and governed by SEBI and must obtain memberships of any exchange that it wants to offer trading services on to its clients. In exchange for a charging fee or brokerage, the broker provides its clients (traders) the ability to place trades on different exchanges. In India, most brokers have memberships with the National Stock Exchange of India (NSE) for share trading (Equity) and Futures and Options Trading (F&O).

Brokers buy and sell shares and other financial products on behalf of their clients. When you trade through a broker you are essentially allowing the stockbroker to place a trade on your behalf. In return for placing trades on behalf of its clients, brokers usually charge a fee (brokerage) based on the percentage of trade value (turnover).

Factors to keep in mind when choosing a broker:

1. 1. Reputation and Security:

      • Look into the broker’s reputation in the market. How long has it been offering reliable services?
      • Ensure that the broker is SEBI registered.
      • Verify that the broker has valid memberships with the exchanges that it offers.
      • Research into the broker’s history and watch out for red flags such as prior complaints.

1. 1. Online Trading Software:

      • Ensure that the broker’s online trading software is reliable and user-friendly.
      • Is the broker going to help you in learning how to use the software? Sometimes an in-person or an online demo can make the software seem easily accessible.
      • Check out user reviews of the software provided by the broker. How was the experience of fellow traders?
      • Fast, reliable and easy-to-use are the primary characteristics that you should look for in an online trading software.
      • Available on multiple platforms—computers, mobile phones, tablets and web-based.

1. 1. Backoffice and Safety of Funds:

      • Ask the stockbroker about backoffice tools available for clients.
      • How long does it take to process withdrawals?
      • Can you process withdrawals online?
      • What kind of backoffice software does the stockbroker provide?  
      • How tedious is the process to transfer funds? Does the stockbroker accept online transfers from your bank?
      • How long does it take for your transferred funds to be reflected in your account?
      • How do you know that your funds are safe with your stockbroker?
      • Your broker should be able to answer all your questions with no hesitation or confusion.

1. 1. Brokerage Fees:

Many traders make the mistake of choosing their broker purely based on the brokerage fees charged by the broker. Do not make this mistake!

For starters, if you are not looking to trade frequently then going with a broker that offers offline trading can be a good decision even if the brokerage fees are slightly higher. As a beginner you will definitely run into challenges with the online trading software so being able to call the stockbroker and having the broker place trades on your behalf is an important service.

Once you are comfortable with trading regularly then you can choose a broker that is both affordable and meets your needs.

If you are looking to trade daily or frequently then brokerage fees can quickly add up. Different brokers offer different types of plans. Brokerage fees can vary from broker to broker on the basis of the segments that you are wanting to trade in.

Brokerage is usually described in terms of paise. For example: A broker might charge 1 paise brokerage. In layman’s terms, this means that you are paying Rs. 1 for every Rs. 1000 in trade value i.e. 0.01% of the trade value.

Examples are the best

Here’s an example that will help illustrate how this structure works in practice: If you execute a trade for Rs. 2 lakh, you will be paying Rs. 20 in brokerage (200,000 X 0.01%=20). Draw up a list of upto 25 brokers and start comparing their various brokerage/pricing schemes. Based on the turnover you are looking to do and the segments that you are looking to trade in, you will find yourself with a short list of a handful potential brokers.

Aside from brokerage fees, many brokers also cleverly charge “turnover fees” apart from the required government charges (Securities and Transaction Tax, SEBI fees, etc.). Be very careful and ensure that the stockbroker is completely transparent with its fees: do not simply make your decision based on the “brokerage charged” because brokerage will not be the only fee charged!

1. 1. Customer Service:

Last, but perhaps the most important criteria — how is the broker’s customer service? Will they be able and willing to support you when you are experiencing a technical glitch with your trading software or when you are in desperate need of help? Feel free to ask a lot of questions to your stockbroker! After all, this is the broker whom you plan to depend on in order to earn trading profits. You need to have the confidence in knowing that you can trust your broker.

How long do you wait on hold before somebody picks up your call? How friendly and knowledgeable is their customer service? Answer all these questions truthfully before you make the choice.

Choosing a broker is not easy but cannot be overlooked. Take out ample amount of time to research and find the right stockbroker to meet all your needs.