There is generally a standard path that a new trader or an investor follows before he enters the market. His inquisitiveness takes him to learn the basics of trading, technical analysis, and fundamentals. There are brave hearts who skip this process of learning and are willing to start trading because a friend or a relative has assured him that he will give him ‘tips’ to make money and get rich quick.
Irrespective of the process adopted by the individual the next question he faces is where to open a trading account.
This is a question that few individuals give a lot of thought to. They generally open an account with a bank who is offering broking services or a broker where his friend or relative trades.
However, selection of a broker is more important for the individual than selecting a bank to open a savings account. There is very little to separate one bank from another if an individual is opening a savings account. Apart from a few percentages in interest rates, the biggest difference is in technology.
Also Read: Building a Stock Portfolio
However, when it comes to a broker, selecting one is extremely important both as a trader and an investor.
Before selecting a broker the person should be sure of why he is opening the account. Is it going to be a trader who will be buying and selling shares at regular intervals or is he going to be an investor who occasionally calls up the broker to place his orders?
Here are some of the points that one needs to consider while selecting a broker.
The most important parameter in selecting a broker is to check his credibility. A tainted broker who has many clients’ complaints against him is a sure case to avoid. Brokers who are willing to place their credibility at stake by either advertising or promoting themselves in social media are the ones that can be considered. Further, one should track social media and Sebi sites to check the credibility of the broker.
If a person is a trader, then he should look out for a broker with very high level of service standards. He cannot be kept holding the line while the dealer is speaking to some other client. These days many brokers offer an online platform and mobile apps for trading. A detailed study of the robustness of the platform and more importantly the fallback mechanism in case of a failure of the internet or the software needs to be checked before opening an account.
Nowadays with digital infrastructure gaining importance, the physical presence of the broker is no longer required. But at the same time, one should check the technological robustness of the broker. This can be ascertained by the number of clients the broker has or the daily volume that the broker does on the bourses. High volume is an indication of a robust broking platform.
Most brokers attract clients by showcasing their quality of research both fundamentals and technical. In his bestselling book ‘Where are the customers Yatch’ written after the 1929 crash author Fred Schwed Jr on the value of individual stock picking wrote ‘They told me to buy this stock for my old age. It worked wonderfully. Within a week I was an old man. Kittens and monkeys throwing darts routinely outperform stock pickers.’
One of the best fund managers of all time Peter Lynch proved it when a bunch of school kids running a dummy portfolio beat the best fund managers in US markets.
Many clients get lured by brokers advertising their research capability, it might work occasionally but rarely in the long run. A broker earns his money by making client churn his portfolio. He is more interested in his returns rather than the clients. A client should take such pieces of advice with large doses of salt and should rather focus on acquiring skill sets to learn the tricks of the trade rather than living on borrowed intelligence.
Research should ideally be given the least weightage in selecting a broker.
At a time when clients are using mobile trading platforms or internet trading, paying high brokerages makes little sense. A no frill broker with a good technological infrastructure is better than a full-service broker, most of whose services are not going to be used by the clients anyway.
Banks offering broking services generally get away by charging very high brokerage as they claim to offer seamless service. But now with nearly every bank offering internet banking services, a client’s account can be mapped to his broking account and he can trade from his home without stepping out to make cheque payments.
Traders and investors alike benefit from a low-cost structure. Traders, especially those who are intra-day, scalpers and swing traders need to have their accounts with brokers offering really low brokerage rates.
Trading and investing is just like any other business, keeping your cost low will end up resulting in higher profits in the long run.
Further, there are some taxes which are charged on brokerages which add on to the burden of cost. Low brokerage rates would mean lower taxes.
To calculate the amount of brokerage and other charges, check this Brokerage Calculator.
Though one should avoid trading and investing with borrowed money, many people prefer to trade with brokers who offer funding facility. For a professional trader, it makes sense to trade with leverage as they understand risk and know how to control it. However, a novice should ideally stay away from it.
For the professionals, it is important to check the leverage limit that the broker is willing to give. The important parameter to check here is the number of times funding is available as well as the interest rate the broker is charging. Higher limits and lower interest rate are a favourable mix.
Other product offerings:
These days brokers tend to lure customers by claiming that they are a one-stop-shop for all financial products, be it equity trading, portfolio management services, insurance or in some case even loans. Brokers these days are offering these products under the umbrella of wealth management and charging extra fees for it.
For a client, it does not matter much if these products are offered by the broker as many of these are in any case available either through banks or are offered online.
The focus of opening an account with a broker should be only for equity trading and investing. His focus should be a seamless operation without interruption, after all, the customer is the king.