X

Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.


Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Identifying a Broker: Do's and Don'ts - Views on News from Equitymaster
 
 
  • PRINT
  • E-MAIL
  • FEEDBACK
  • A  A  A
  • Sep 16, 2004

    Identifying a Broker: Do's and Don'ts

    For most Indian retail investors, equity markets have remained an enigma (read: confusion) for a long time now. Successive scams and misdeeds over the last decade have left investors in the lurch. Not surprisingly, the percentage of household savings invested in equity and related instruments have declined sharply in the last decade.

    Among various market participants, brokers play a very vital role as a financial intermediary. More often than not, brokers are the first contact point for retail investors when it comes to investing in the stock market. While it can be safely said that brokers have been, to an extent, responsible for the poor image of the stock markets in the eyes of the investors, it would be unwise to put all the blame on them.

    As much as stock selection is a systematic and an extremely essential aspect to equity investing, so is choosing the right broker. Investors have to realise that brokers are just intermediaries and the final decision to buy or sell a stock is in the hands of an investor himself.

    Problems arise when the investor depends significantly on the broker, not just to execute the transaction, i.e. buying or selling shares, but also to provide investment advice. Blind faith in the broker can be harmful for the investor simply because, whether the investor gains from the buying or selling decision or not, the broker is sure of the brokerage. Therefore, investors have to ensure that they know their brokers well and understand their advantages and shortcomings.

    In this article we try to bring out a checklist, which will help the retail investor to wisely choose a broker who can cater to all his needs.

    1. One of the foremost criteria for selecting a broker has to be the broker's financial health. In the past, many investors have been left in the lurch as brokers have wound up due to financial difficulties (margin lending beyond limits combined with other stock market related issues). Investors need to find out the financial health of the broker in order to ascertain how safe their dealings are. The investor can ask your broker for his latest audited networth as submitted to the stock exchange. The higher it is the better. It means that the broker has committed higher amounts of capital to his business and thus stands much more to lose if he violates the law.

    2. Investors need to keep themselves away from brokers that have a tainted past as far as their dealings on the stock markets are concerned. Many a broker have been involved in scams and investors need to realise that more often than not, it is their money and shares that gets misused in these wrong doings. The track record of a broker is of prime importance. The investor can ask to see their register of investor complaints that the broker is required to maintain statutorily. If the broker does not have such a register then it is better to avoid such a broker. The investor should also ask the broker upfront if he or the broking entity has any outstanding cases of arbitration or legal proceedings pending against them by Securities and Exchange Board of India (SEBI) or the stock exchange.

    3. Fast and accurate order execution is another key criteria to choose a broker. Every broker competes to render such service, as customer satisfaction will bring more business and trading volumes. Investors should select a broker with a sufficient number of marketing officers and telephone lines to handle the orders. One also needs to find out whether the broker has an online presence or interface that lets clients trade through the Internet. If yes, then it does not mater where his office is. Or else, you would want to select a broker closer to your place of work or residence Ease of accessibility is important.

    4. Documentation and after-sales services: Documentation is vital since it represents the formal contract between you and your broker. It is advisable to have a copy of any document the investor signs. As for as after-sales services are concerned, a number of brokers are now using automatic account clearing and transfer. This requires flawless, easy-to-understand documentation that can be checked at all times. Investors also need to find out whether the broker has his own Depository Participant (DP) services, this will greatly simplify the procedure for transfer of shares in case of a sale transaction for delivery.

    5. For the retail investor, information, primarily in the form of research (on companies as well as sectors) is of prime importance. At the same time it is even more important that the research is unbaised. While we are not implying that broker research is not unbiased, it is better that investors rely on research provided by an independent entity (that is available with the broker) in order to avoid any occurances of conflict of interest. Remember that no matter what the research information says you must exercise your own judgement or research the stock some more on your own. Try and read at least more than one point of view on any stock or sector. Another critical factor is to understand where the broker is sourcing its research from, if it does not have its won research desk. Remember, the more you trade, the more the broker benefits.

    6. Retail investors and we reiterate, the term 'investors' do not need to be too bothered about brokerage fees or other fees. For instance, there are essentially five types of charges and fees, that you pay to

      • The broker (brokerage fees for executing the trade)

      • The DP and the Depository (transaction charges)

      • The stock exchange (annual demat maintainence charges, transaction charges and demat custodial charges )

      • The state govt and the central govt (service tax on brokerage, stamp duty and education cess).

      If one isn't trading in and out of stocks very often, and if you're not too concerned about whether your trade is executed within 15 seconds or 2 minutes, there really isn't a significant difference among brokers as far as fees and other charges are concerned.

    7. Investors also need to be informed about the affiliation of the broker with the various exchanges. While most brokers have membership with the two largest exchanges in the country, namely NSE and BSE, some of them do not have both these memberships. This is an important aspect, as certain stocks are listed on only one exchange (like Castrol and Nestle).

    8. Some brokers, apart from equities, also provide services like mutual funds advisory, insurance and fixed income schemes. However, a word of caution investors need to be aware of the background of the broker as far as selling and distribution of specialised products like mutual funds and insurance is concerned. Advice regarding asset allocation is an extremely specialised field and your broker may or may not have the necessary skill set to provide such services. If the broker is giving you such a service then try and see if the staff is qualified by IRDA for insurance or by AMFI for Mutual Fund products or by AFP for financial planning. Again, irrespective of whether you make money, the broker is sure of his commission.

    9. Ask your broker if he does proprietary trading. What percentage of his total business is made up of proprietary trading? The higher it is the more it is of concern. Simply because the brokers efforts are also being invested in managing his own portfolio (either investments or trading or both) and he probably has less time or interest in servicing you. The larger his proprietary trading is then it is more likely his own interest may come first and not yours. You can ask for systems and procedures that they have in place for clearly segregating the two. A good professional broker may do some proprietary trading but would definitely have good systems to clearly segregate the two. (e.g. physically separate dealing rooms, different trader work stations and a separate dealing team)

    10. Corporate brokers are preferable over partnership or sole proprietary concerns. You have recourse to them under company law other than other capital market regulations. They also have to meet higher minimum net worth criteria to become a member of an exchange.

    11. Last but not the least, investors have to treat broking service like any other service and accordingly, they may go in for referral views. That is, like any other service it is wise to ask friends or relatives for their view on various brokerages if they are already using such a service. An opinion of clients of various brokerages gives one a better perspective of the service provided by various brokers. For instance, one always goes in for opinions or references when going for home loans, for buying a house, selecting a school for one's children or even buying a car.

    Investors, i.e. people with an investment horizon of atleast one year and above, need to understand that a broker is just an intermediary and the decision to invest or otherwise is in their hands. It is important to understand that it is not always prudent to blame the broker for your losses though that is often the easiest thing to do!

     

     

    Equitymaster requests your view! Post a comment on "Identifying a Broker: Do's and Don'ts". Click here!

      
     

    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    The Only Two Ways to Get Rich (Vivek Kaul's Diary)

    Jul 25, 2017

    One of the nice things about being rich is that you get to observe rich people. Who are they? How did they make their money, you wonder?

    Two Sectors Offering Value Right Now (The 5 Minute Wrapup)

    Jul 24, 2017

    Where does one find value in the stock markets now.

    What a Slowdown in Retail Loans Tell Us About a Slowing Economy (Vivek Kaul's Diary)

    Jul 24, 2017

    This despite the fact that interest rates have come down over the last one year.

    Don't Panic If You Miss The Income Tax Return Deadline This Year. Here's why... (Outside View)

    Jul 24, 2017

    Penalties liable under Section 234F of the Income Tax Act, will be applicable from AY2018-19.

    More Views on News

    Most Popular

    Ride the Bull Wave with These Perfect Proxies to India's Growth Story(The 5 Minute Wrapup)

    Jul 15, 2017

    The secret of spotting multibaggers before they become a hit.

    The Real Returns from Real Estate Have Been Very Low(Vivek Kaul's Diary)

    Jul 17, 2017

    Real estate prices across India have barely gone anywhere over the last four years. Prices have fallen in many cities over the last one-year, new data from the National Housing Bank suggests.

    The New Pharma Rally Starts NOW(Daily Profit Hunter)

    Jul 12, 2017

    The most hated sector is offering the best trading opportunity. Are you ready?

    All You Need To Know To e-File Your Income Tax Returns(Outside View)

    Jul 12, 2017

    The Income Tax return filing deadline is drawing near; if you have not already filed your taxes, here's how to do it.

    Sold Your Immoveable Property? Here Are The Tax Implications...(Outside View)

    Jul 19, 2017

    When you're selling an immoveable property, it becomes imperative to recognise the intricate tax implications.

    More
    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407
     

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms

    S&P BSE SENSEX


    Jul 25, 2017 03:36 PM

    MARKET STATS