Sunday, 24 January 2016

Choose the Perfect Stock Broker for Wealth Creation

Hello investors and friends,

Hope you are having a relaxed weekend. This week, let us try to understand a key element in the process of trading or investing in the Stock Market. This is extremely important since you need to know how you are actually able to buy or sell shares which are listed in the exchanges.

We have heard of different kinds of brokers - Marriage broker, Real estate broker, Online broker, Insurance broker etc. Typically if we want to buy or sell a house or property, what do we do? Instead of trying to find potential buyers or sellers, we ask a broker to help us out. What are the primary advantages of this?

1) A Real estate broker is experienced in the Real Estate field and understands its dynamics
2) Broker would have a sound understanding of the Real Estate scenario and hence would have an upper hand
3) Broker would have a good database of Buyers and Sellers since that is his daily job
4) Broker would also be able to help in smartly estimating the value of the deal so that we can save some money
5) Broker would take a commission for helping us out, but it saves us the effort of actually trying to market our property or go house to house on our own to buy one.

So in simple terms, a Broker is basically a middleman, who is an expert in a particular field of service and links the customer and service provider for a commission.

Now, who is a Stock Broker? Wikipedia defines as follows. A stockbroker is a regulated professional individual, usually associated with a brokerage firm or broker-dealer, who buys and sells stocks and other securities for both retail and institutional clients, through a stock exchange or over the counter, in return for a fee or commission

Please note that in India, the Stock Broker or Brokerage Firm needs to be registered with the Securities and Exchange Board of India (SEBI) which is the regulatory body for the fair activity of the Stock Market.

So, if we want to be a trade or invest in the Stock Market, what is the first step? We need to identify a good Stock Broker. The first thing a Stock Broker would do, is to get a Demat account created for us. 

Decades ago, the shares were all in Materialized form. Imagine holding a big file full of Stock Certificates for every stock you own. Those were the days when it was a long process to even check the market prices of a business. It was an arduous task to buy or sell a stock since information was very slowly reaching the retail investors. Also, transparency was not very high in those times.

Those days are over now, thanks to the revolution of the internet. Today, we can all hold shares of companies in a Dematerialized account, where everything is electronic. Once the Demat account is created, the account holder can now invest in the Stock Market by buying quality shares.

There are many advantages of the Demat account:

1) Firstly, there is no physical certificate for the securities/shares. Everything can be seen online with a Username and Password
2) Extremely secure way of holding securities - No risk of natural hazards, theft etc
3) Bonus or Right shares allotted to the investor are credited automatically to the account
4) Dividends are also credited instantaneously
5) Change in address updated in a Demat Account are automatically updated to the businesses we own. Hence any communication (AGMs, Presentations etc) from the company will come to our updated Address
6) Most important advantage is that an investor can check the balance and make trades from anywhere in the world if he/she is connected to the internet.

Now, there are thousands of Stock Brokers in the market today with a huge number of customers transacting through them. Now, I personally have seen and transacted through a good number of brokers and here are a few points which mark a good Broker:

1) I like brokers who are open about their costs. Many of them come up with lots of offers etc. and they swindle you with some hidden costs later on. It is good to get to know what is the Account Opening Fee and Maintenance Fee moving forward. 
Remember to Read the Offer Document Carefully Before Opening an Account with the Broker.
2) A Transaction Fee or Brokerage is the commission the Broker takes for every transaction you make through them in the market. So its good to compare the Fees with various brokers before making a decision.
3) The Brokerage is generally different for Intra Day trades, Commodity Trades, Futures/Options and for Delivery. So you need to choose a broker based on your needs. For this you need to know yourself very well. Which category do you fall in :-)
4) Its always good to choose a broker who gives you a very good User Interface. By this, what I mean is, there are many brokers who make it very difficult to see your portfolio, make a buy or sell, check the current price, charts, make account transfers etc. Its very important that we choose a broker who makes our transacting life easy and simple. Some brokers whom I know have an extremely easy to use User Interface and it gives all kinds of information to the user in REAL TIME
5) Profit and loss statements (Long term and short term capital gains/losses) are very very important for paying tax every year. I have seen only a few brokers who focus on calculating this accurately for the investors. Especially, when we have bought a share during one Financial Year and sell it within one year in the next Financial Year, it becomes extremely tricky to calculate on our own. Here, good brokers stand out since they do the calculations for you and help out.
6) Its good to choose a Broker who has a good customer care support. This is very important since Service is very vital in this business. Sometimes, we need their support when we never get it :-)
6) Finally, it is important that the broker has a good reputation in the market. A seasoned Brokerage House is much more advised compared to a new one. This is because, there have been instances in the past where Brokerage Houses which are functional suddenly disappear. Today, the chances are less since SEBI ensures that these kind of things do not happen. Everything is more secure and transparent.

Please remember that a Brokerage which is extremely cheap might not be the Best. Do your homework well.

So what you are you waiting for... Pick the RIGHT Stock Broker and open your Demat Account now. Get in to the wonderful World of Investing and Wealth Creation :-)

If you already are registered with a broker, it is worth to see if it covers all the points mentioned above. If not, see if you can move to a more user friendly broker.

Wish you all the very best my friends. Enjoy your Sunday.

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Good luck and keep learning,
Fundamental Investor


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