How to choose a stock broker

Yoganand D | Updated on January 20, 2018 Published on June 12, 2016


MUGUNDAN SUBRAMANIAM, Self-employed, based in Chennai

N G BHOL, Retired Chartered Accountant, Bengaluru

UR KAMATH, Ex-Manager, Canara Bank

Full-service brokers, discount brokers or banks that offer 3-in-1 accounts — which one is best? Yoganand D spoke to some market veterans

In the ‘old world’, brokers controlled exchanges and earned a fixed commission. But, over the last decade or so, electronic trading has dramatically increased trading volumes and slashed the cost of intermediation. Technology and changes in the market structure have seen the commission-based stockbroker model evolve to a fee-based service. The choice of stock brokers has multiplied with the mushrooming of various models — right from traditional to discount brokers that offer no-frills account.

So are you with the right broker? Is he offering the right price? Here’s what some veterans in the market say, to help one understand the pros and cons of various brokerage models and choose the right broker.

The traditional way

From the traditional method of going to the stock broker’s office to place an order or making calls, one can now trade or place orders from a computer or on-the-go on the handset. Investors have an array of models to choose from. A full-service broker, aside from helping you buy and sell shares, also offers add-ons such as research reports, stock recommendation, intraday trading tips, derivative strategies and other advisory services such as retirement planning, tax assistance, etc.

S Vasudevan, a professional who retired recently, says, “Full-service brokers are very helpful to take investment decision. I have switched three full-service brokers to find the right one that suits my needs, keeping in mind the ease of commuting to the broker’s office.” Doesn’t the higher cost of full-service brokers bother him? “Full-service brokers are providing competitive rates in the industry and I am satisfied with their call-n-trade service,” he explains, adding he does not have any plans to shift to a discount broker.

Full-service brokers have a pan-India presence through their own branches or franchisee. You need a bank account, though, that would be mapped to your trading account to facilitate fund transfers.

Then there are banks that offer 3-in-1 accounts that provide savings bank account bundled with a demat account and a trading account. Since everything is under one particular entity, transaction and managing the account becomes easy. Such brokers also offer additional services such as research reports, stock recommendations, etc.

For the seasoned investor

If you are a frequent trader, the hefty brokerage charged by the traditional broker can be very unsettling. Since 2010, discount brokers, which have shaved off a chunk of the brokerage costs that traditional brokers charge, have disrupted old thought and brought in a welcome change to many seasoned investors.

Low and flat brokerage structure that offers high cost savings is reason enough for many to open an account with a discount broker. These brokers charge a fixed brokerage irrespective of the size of trades.

UR Kamath, a former bank manager, started trading way back in 1990 with a full-service broker. He says “I changed my broker a few years ago. My old broker was not only expensive but lacked basic customer support services. But ever since I moved to Zerodha, a discount broker, I have saved a lot of money as they don’t charge brokerage for delivery trades. So it is basically free. Also, whenever I have any query, I call their support line and get the necessary information within minutes.” Was adapting to the latest technology an issue? “My broker gives me access to internet-based trading. I am not too familiar with computers, however with my limited knowledge I find my broker’s platform quite easy to use.”

There are others who have found operating an account under a discount broker equally convenient. Mugundan Subramaniam, a self-employed professional based in Chennai, says that after mulling over various stock brokers offering 3-in-1 accounts, he opened a trading account with a discount brokerage which is comfortable and easy to access. For a few others, relying too much on trading tips from the traditional broker has cost them dear. Moving to a discount broker has not only cut down their costs but also caused them less heartburn from wrong investment advice.

N G Bhol, a Chartered Accountant who retired as an additional general manager, has 20 years of experience in the stock market. He was with a full service broker until 2011, hoping to get better personalised service. But he ended up disappointed. "A beginner should read up and know what he is doing. Always be open to learning new things and keep updating yourself on the market. While opening a trading account, look out for hidden charges and avoid them. Give more weightage to lower brokerage charges and better trading platforms rather than looking for only a good advisory service.”

He believes that one should trade on his own and, instead of building castles in the air, be content with making small and consistent profits.

“Cut your losses and learn from them” advises Bhol.

Right one for you

So which type of broker fits your bill? Whether you should opt for a discount broker or not would depend on your level of expertise and knowledge of the stock market. If you are a newbie, you may have to rely on brokerage research reports for your investment decisions that a discount broker does not offer.

Traditional brokers also provide higher margin funding and a wider range of products such as MFs, NCDs, tax-free bonds, etc. While a full service broker charges higher fees, increase in competition has forced them to offer better deals to customers.

Many traditional brokers offer volume-based plans where the brokerage is linked to the size of transactions; higher the number of trades lower the brokerage that can come down to 0.02 per cent to 0.3 per cent (intraday). Trading in options can be in the band between ₹16 per lot to ₹80 per lot.

Discount brokers, on the other hand, can work out better for a seasoned investor, who can do without the additional advisory services and save a lot on high trading volumes under the flat structure.

For instance, if you execute multiple trades in a day totalling ₹1 crore, a traditional broker may charge you a brokerage of between ₹300 and ₹500. A discount broker can charge you just ₹40 (includes buy and sell) for the same trade.

Some offer zero brokerage too in the delivery segment, derivatives or unlimited trading at ₹20 per trade, such as Zerodha and RKSV.

Given the fast pace at which the market is evolving, it is likely that a full-service broker transforms into a discount broker in the near future.

Increasing competition can also force discount brokers to widen their services, offering mutual funds, IPOs, etc., as some have already begun to do. Keep a watch on the changing trends and go for the one that offers you the best deal at all times.

Published on June 12, 2016
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