Sunday, 20 March 2016

How to choose a Broker ?

We have been getting requests for recommending a broker with which subscribers can open account .

There are so many brokers and brokerage plans offered and overall there is a cut throat competition to acquire new customers.

What you should be looking for while selecting a broker.

Let us try to clarify some of the important aspects.

Broadly there are two kinds of brokers in the market.

- Normal Brokers

- Discount Brokers

Normal brokers will charge much higher brokerage as they claim to give better services , something like picking your form, picking your cheque to be deposited in your account, providing you a relationship manager etc.  So they will charge higher brokerage compared to normal. We have seen a broker charging even Rs 100 per lot of option on each leg. Now, with this kind of brokerage , it really becomes difficult for an option trader to make positive returns from the market because first you will earn something like 2 to 3 % for your broker and then you will earn anything for you.

Another set of brokers which have entered in the market since last few years are Discount Brokers. They will offer you discounted brokerage like Rs 20 per order (any number of lots), Rs 750 /- per month for unlimited number of trades  , etc etc.  Theses Discount brokers are mainly available online for all the services, such as printing of your form , trading on their online platform , sending them forms through courier and most of them operate with one or very few branches. Also, they will charge you for orders place over phone which will be over and above the brokerage charged.

Even the so called normal brokers may charge you for the orders placed by you over phone.

Now, with this kind of scenario, what should we do ?

It depends on the type of trader you are. Honestly, broker is hardly adding any value to your trade and almost all are equally safe ( as all are guided by same regulations).

If you are somebody, doing lot of trading, better to go for discount broker as it will save you lot of cash outflow on brokerage. But, if you are somebody, who doesn't trade frequently, you can stick to same broker although it may not make any prudent financial reason.

How come discount broker gives you per ORDER kind of trade ?

Here is the catch. All brokers, in addition to brokerage are charging transaction charges in the trades done by you. These charges are over and above the brokerage and taxes like STT etc. AND they vary from broker to broker.

So , broker can claim that he is giving you BROKERAGE FREE trade, but the fact of matter is , he will be charging you higher transaction charges. So, ultimately , a FREE brokerage plan can cost you more than a normal plan also.

So, a final checklist before deciding on the broker :-

A. What is the brokerage charged ? - If you are a trader with good volumes, ask for per order brokerage rather than per lot. If not per order, anything more than Rs 10 per lot is on higher side and you should try to get it reduced. EVERYTHING IS NEGOTIABLE.

B. What are the transaction charges ? Ask upfront. Ask to provide these details in writing and check with the charges charged in your contract note.

C. What is the margin blocked on positional trades , specially when you are selling options ? In Nifty, this can range from 25 K to even 60 K for one lot. Many times they will block much higher margin and hence your overall profitability ges drastically reduced. Why we broker do that ? - OK, we will discuss it next time.

D. What will be the charges if I place my order over phone ?

E. What is the process for withdrawal of my money ? Is it online or do i need to place telephonic request ? My money shoul be credited in my account within 24 hours.

OK, once you talk on these lines, rest assured , most of the things will be taken care.

Additionally, some more precautions will be shared in next post.

Feel free to comment, suggest and ask.