Fee vs safety: Here's what you should consider when picking a stock broker

While a low fee is alluring, ensure you can trust the broker with your money and securities

Around one million new demat accounts have been added each month over the past quarter. A record (almost) six million new demat accounts have been opened in the current calendar year. New entrants into the stock markets need to choose their brokers with care. An attractive brokerage fee is important. But it is just as crucial to partner with a broker with whom your money and securities will be safe.

Investors need to first decide whether they would like to go with a discount or a full-service broker. If you are going to engage in futures and options (F&O) or intraday equity trading, and your trading volume is likely to be high, you may be better off with a discount broker. To a buy-and-hold investor, who transacts less often, the fee is a less important consideration, and he may choose a full-service broker.

The type of broker you choose should also depend on whether you are a do-it-yourself (DIY) investor or someone in need of guidance. “Some customers are self-sufficient. They do their own research and select stocks themselves. They should choose a discount broker,” says R. Kalyanaraman chief customer officer, Espresso, Sharekhan’s discount broking arm.  

Many investors, especially those above 35, feel the need for a branch network and a relationship manager to handhold them. They will be better off opting for a full-service broker. These brokers offer research reports for both fundamental investors and technical traders that customers can turn to for guidance. “Your choice of broker should be dictated by whether it is strong on research and advisory—on stocks, including initial public offers, and mutual funds,” says B. Gopkumar, managing director and chief executive officer, Axis Securities.

Broker frauds are a frequent occurrence in India, hence safety should be a primary consideration while choosing a broker. The quality of the promoter becomes important. Brokerages backed by large private-sector banks score on this count. If you decide to go with an independent broker, go with one that has been around for a long time. “Longevity indicates that the broker has been able to survive the highs and lows of the markets,” says Kalyanaraman. He adds that as regulatory norms get tighter for brokers, many may not be able to survive in the new regime. This makes it all the more important that customers go with established brands.    

The National Stock Exchange’s web site has a page (Insert hyperlink: https://bit.ly/30gQxKE) that provides the list of complaints made against brokers. That will give you some idea of how reliable is the broker you plan to go with.  

In the past, most frauds have occurred when a broker’s relationship manager took on the role of a money manager, traded on the customer’s behalf, and lost money. “The relationship manager has an incentive to trade more frequently. When he does that, he takes on a higher degree of risk, which results in losses. Stay away from brokers who make such offers,” says Nithin Kamath, founder and CEO, Zerodha, the country's largest stockbroker.      

Look for a stable and easy-to-navigate platform

• The interface for both the web and the mobile platform should be user-friendly
• While every platform will have some downtime, this should not be a regular occurrence
• To find out if a broker’s platform is reliable, take feedback from existing users or look for reviews online
• Since account opening has become easy, open accounts with three brokers, try them for some time, and then select one  
• Educational videos, advanced charting tools, and single-view reporting (including a report on capital gains and losses for tax filing) are desirable features