Factors to consider before selecting a Stockbroker

19 Jan 2021  Read 996 Views

It's 2021. As part of something new to do this year, you are thinking of making some stock market investments. You've looked up everything you need to know about investing. And you have found that the first thing you need is a Demat account! 

Now, all that's left to do is to look for a stockbroker service that can help you set up your Demat account and provide investing services hassle-free, with reasonable costs, and who's operations best match your investment objectives. But wait, how do you select the right broker for yourself? 

Every trader faces this question at least once in their lives; actually, not just once, quite often, this question has a constant recurrence in almost every investor's life. 

So, here we discuss important considerations that help in selecting a stockbroker congruent to the investment needs.

Let's get started.

Where to start?

When made correctly, stock market investments reap the highest returns for the investors than most other money market options. And a good stockbroker helps the investor get there; however, choosing one is not as easy as it sounds! Any misstep in Finding a Stockbroker could mean wastage of brokerage money, time, and money-making opportunities.

Mistakes to avoid

It is of utmost importance to not commit the following three mistakes while choosing a stockbroker:

  • Do not choose a stockbroker because your friends and family use them.
  • Do not choose a stockbroker based on their advertisements alone.
  • Do not choose a stockbroker based on the call you get from one of their executives. Verify all facts and numbers before making any decisions.
  • Do not choose a stockbroker based on the investment plan they said would work for you because every investor has different investment objectives and needs different strategies for their portfolios.

Decide! Are you an investor or a trader, or both?

Choosing a stockbroker is preceded by a crucial decision on the investor's part – whether he is a trader or an investor, or both? This decision is significant because traders are usually charged with lower brokerage charges as they trade frequently. Certain platforms provide fixed monthly brokerage charges for unlimited trading, which is beneficial for the traders.

Investors are more interested in research, analysis, and tips/suggestions and are not wary of the brokerage charges because they're looking for long-term investments. In the case of individuals who're both traders and investors, their expectations are not merely driven by market momentum but by other higher expectations.

Factor to consider while choosing a stockbroker:

Alright, let's get to the main event! 

Following are the different aspects that (in particular order) drive the process of choosing the right stockbroker:

Type of Broker 

Until Zerodha came with the concept of discount-broking in 2010, stockbroking in India was uni-dimensional. Stockbrokers earned a commission as a percentage of the trades made. Higher the trades, higher was the commission. Such stockbrokers were known as full-service brokers.

On the other hand, discount brokers broke this norm by providing a no-frill trading experience to their clients, mostly through online means.

The consideration here: Whether to go for a full-service broker (that charges a percentage of your trade value) or a discount broker (that charges a fixed brokerage rate irrespective of the trade value)

Price Considerations 

Pricing is one of the essential considerations in picking a broker. The price consideration includes the following parameters:

  • Account opening charges: Opening a Demat account with a depository participant requires payment of an account opening fee. These account opening charges vary for different stock brokers. Some do not charge a penny, while some have higher charges.
  • Brokerage charges: Full-service brokers charge a percentage of the trade value, while discount brokers allow unlimited for a fixed brokerage charge. Investors need to be careful about how much they're paying in the name of brokerage charges. A fun fact here! The brokerage charges though they appear fixed on these websites are actually negotiable.
  • Annual maintenance charges (AMC): Like the account opening charges, the AMC is also a yearly charge linked to your Demat account with a stockbroker. They vary from one stockbroker to another. It is always preferable to choose a stockbroker with low to zero AMC if you're an investor looking to make a long-term investment than regular trading. You don't want to pay a regular AMC for services you're not utilizing regularly!
  • Initial money/margin money: Margin money essentially acts as your balance in the account, which you pay before you begin trading activities. The brokerage paid to full-service brokers is heavily dependent on the margin money paid upfront. Lesser brokerage is needed to be paid when more margin money is charged.
  • Hidden costs: Investors need to be extra careful in their discussions with stockbrokers before the account opening process. Some stockbrokers have certain charges that become known after the account has been opened.

The variety in the product basket

Different stockbrokers provide a plethora of investment options – equities, commodities, currencies, mutual funds, IPOs, NCDs, FDs, and many more. Investors need to know what they're looking for and accordingly choose a stockbroker that meets the particular investment need.

The Fund Transfer Process

Bank stockbrokers like ICICIDirect to HDFC Securities provide a three-in-one Demat account, which does not require the transfer of funds at every transaction. On the other hand, non-bank stockbrokers like Zerodha need the investors to transfer money when it dries up in the account periodically. With changing times and technological advancements, many stockbrokers have become affiliated with fund transfers.

Physical Presence

Discount brokers mainly have an online presence, while full-service brokers operate a number of physical branches spread over the geography through sub-broker partnerships and franchises. Many investors seek that personal touch of discussing the investment portfolios and seek services from full-service brokers. 

Trading Performance

As India moves towards digitization, online platforms are becoming critical parameters in deciding on the right stockbrokers. There are still stockbrokers that use NSE and BSE based trading platforms in serving their clients. However, numerous brokers have moved on to making technology the top driver of their brand. 

The customers also prefer platforms with a faster performance speed of the software, real-time feeds, secure trading environment, prompt chat support, and other features to ease their investment experience.

Research and Analysis

The need for an expert research team is ever-existing for investors and traders. Traders especially require expert advice every now and then so they can plan and trade accordingly. 

Discount brokers do not provide any market research, analysis, or reports to their clients while the full-service brokers do! The full-service brokers keep an in-house research team comprising qualified individuals who carry out in-depth research and analysis.

Investors can also peruse articles in newspapers like the Economic Times that publish expert-written articles regularly.

Customer Service

When it comes to stockbrokers, customer service is not just administrative concerns resolutions but also the following:

  • Availability through various channels like chat, messages, calls, and mail
  • Availability throughout the day
  • Efficient resolution with lowest turnaround times
  • Structured escalation process in case of non-resolution of issues

The quality of customer service is a matter of subjectivity. However, some stockbrokers are known for their bad services, and some have a reputation for their excellent customer service. Investors have to be careful about all the positive reviews they read online. Not always, but sometimes, they're bought reviews by the stockbrokers themselves.

Stockerbroker Reputation 

A stockbroker's reputation becomes a relevant factor in choosing it. Although discount brokers have been recently established and do not have a long-standing history, one can assess them based on their evolution in their scale, the number of employees, the daily turnover value, products offered, number of active clients, etc.

As for full-service brokers, most of them have a history to show. Some full-service brokers have a legacy that dates back to the 1980s. The reputation of full-service can be assessed based on the daily turnover value, their franchises and sub-brokers spread across the country, brand name recall, etc.

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Closing Remarks

Choosing an investment strategy is challenging but choosing the right broker is even more difficult. A stockbroker's choice can mean the difference between an exciting new income stream and a frustrating loss-making disappointment of an investment. 

It all comes down to how you assess a stockbroker's viability. We have presented you with important considerations. Weigh in all of them and make a choice accordingly. 

Stay Positive, Test Negative!

Happy Investing!!

About the Author: Shrey Salwan | 43 Post(s)

Shrey Salwan is an MBA student at FLAME University, Pune, majoring in Marketing. He is also pursuing CA and CS. He is a creative thinker, a grammar nazi, and social media enthusiast seeking to work in the dynamic world of social media and content marketing to transform technical and digital information and processes into influential stories. He has a knack for telling stories and does so through his quirky way of writing.

 

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